William Easterly warns that the global crisis may have long-lasting, damaging effects through scholarly and policy choices:

[T]he risk of a backlash against individual freedom is far more dangerous than the direct damage to poor countries caused by a global recession, falling commodity prices, or shrinking capital flows. We’re already seeing this dangerous trend in Latin America…

A spreading fire of statism would find plenty of kindling already stacked in the Middle East, the former Soviet Union, Africa, and Asia. And there are many Western “development” experts who would eagerly fan the flames with their woolly, paternalistic thinking.

To Jeffrey Sachs, perhaps the foremost of these experts, the crash is an opportunity to gain support for the hopelessly utopian Millennium Development Goals of reducing poverty, achieving gender equality, and improving the general state of the planet through a centrally planned, government-led Big Push…

[A]fter a long and scary Great Depression, democratic capitalism did survive. And the U.S. economy returned to exactly the same long-run trend path it was on before the Depression.

We also know that, for another important part of the world, democratic capitalism did not hold up so well. In many ways, that failure stemmed from a misguided overreaction on the part of a new, influential field of economics that was highly skeptical of capitalism, was deeply traumatized by economic calamity, and considered much of the world “underdeveloped.” Born in the aftermath of the Depression, “development economics” grew on a foundation of bizarre misconceptions and dangerous assumptions…

First, seeing Depression-style unemployment in every part of the world led these economists to assume that poor countries simply had too many people who were literally producing nothing… Second, these thinkers lost faith in bottom-up economic development that was “spontaneous, as in the classical capitalist pattern” (as a later history put it), preferring instead development “consciously achieved through state planning.”… Third, these economists grew to believe that the most important factor in reducing poverty was the amount of money invested in the tools to do so. After all, if there were simply too many people, they reasoned, the binding constraint on growth must be the lack of physical equipment… Fourth, the collapse of international trade during the Depression made development economists skeptical about trade as an engine of growth.

Abhijit Banerjee isn’t too keen on macroeconomics and the emphasis on growth as a means to alleviate poverty:

The problem with this comes down to basic economics: The one thing that everyone learns in their first economics class is that it all comes down to where your marginal product is highest. Even if growth were the best way to reduce poverty, we economists might want to focus on poverty reduction through other means if we think that is where we have the highest marginal product…

[T]he illusion of commensurability: Big questions must have big answers. Growth is surely the biggest question that we economists tackle. Hence the evidence that can inform growth policy must be evidence about big things…

There are at least two senses in which this is misleading: First suppose the conclusion from the macro evidence is that reducing corruption is vital for promoting growth. But reducing corruption how? And what form of corruption are the most worth fighting?…

In the end, details matter too much for it to be possible to do effective growth policy without experimental/quasi-experimental data…

It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control. Maybe all that happens is that something goes right for once (privatized agriculture raises incomes in rural China) and then that sparks growth somewhere else in economy, and so on. Perhaps, we will never learn where it will start or what will make it continue. The best we can do in that world is to hold the fort till that initial spark arrives: make sure that there is not too much human misery, maintain the social equilibrium, try to make sure that there is enough human capital around to take advantage of the spark when it arrives. Social policy may be the best thing that we can do for growth to happen and micro-evidence on how to do it well, may turn out to be the key to growth success.

If you’re overconfident about development, Bill Easterly pokes holes in your arguments. And if you’re modest, he makes fun of you.

The report of the World Bank Growth Commission, led by Nobel laureate Michael Spence, was published last week. After two years of work by the commission of 21 world leaders and experts, an 11- member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.

This conclusion is fleshed out with statements such as: “It is hard to know how the economy will respond to a policy, and the right answer in the present moment may not apply in the future.” Growth should be directed by markets, except when it should be directed by governments.

My students at New York University would have been happy to supply statements like these to the World Bank for a lot less than $4m.

Of course, Easterly also has a serious point to make:

What to do in a world of such unpredictability? There are some general principles and they do not require experts. Another Nobel laureate gave the crucial insight a long time ago – the answer is freedom for multitudinous individuals to figure out their own answers. Friedrich Hayek said: “Liberty is essential to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realising many of our aims. It is because every individual knows so little and … because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

The evidence for this vision is not found in those baffling fluctuations of growth rates, it is in the levels of development attained in the long run. Confirming Hayek, systems that give more liberty to individuals – featuring both more economic and political freedoms – are associated with much less poverty. The evidence for this comes from both history (for example old, despotic, poor Europe compared with modern, free, rich Europe) and cross-country comparisons (for example South Korea compared with North Korea, former West Germany compared with East, New Zealand compared with Zimbabwe). This alternative paradigm has a much smaller role for experts, because experts cannot direct or impose freedom from the top down (or else it would not be freedom).

The end of the “development expert” paradigm does not mean the end of hope for development. Development is al ready gradually ending poverty (global poverty rates have fallen by more than half in the past three decades) – not because of development experts such as those who wrote the World Bank Growth Commission report – but thanks to more freedom for more of the 6.7bn individual development experts alive today.

Sabrina provided a link to a 1997 New Internationalist article discussing the well-known episode in which threatening Bangladeshi garment manufacturers with an import ban resulted in thousands of child laborers losing their jobs and turning to even worse sources of income such as prostitution. Though the case is frequently mentioned in pro-globalization books and articles, the presentation in NI is much richer:

No photographs. Saleha is scared. Many a time she has hidden under tables, been locked up in the toilet, or been sent to the roof in the scorching sun for two or three hours. It happens whenever foreign buyers enter the factory. She knows she is under-age, and doesn’t want photographers messing things up – she needs the job. The whole industry has suddenly become sensitive. Owners want their factories open. The workers want their jobs. The special schools for former child labourers want aid money. No photographs…

The child workers themselves find it particularly hard to interpret the US approach as one of ‘humanitarian concern’. When asked why the buyers have been exerting such pressure against child labour, Moyna, a ten-year-old orphan who has just lost her job, comments: ‘They loathe us, don’t they? We are poor and not well educated, so they simply despise us. That is why they shut the factories down.’ Moyna’s job had supported her and her grandmother but now they must both depend on relatives…

The notion that a garment employer might be helping children by allowing them to work may seem very strange to people in the West. But in a country where the majority of people live in villages where children work in the home and the fields as part of growing up, there are no romantic notions of childhood as an age of innocence. Though children are cared for, childhood is seen as a period for learning employable skills. Children have always helped out with family duties. When this evolves into a paid job in the city neither children nor their families see it as anything unusual. In poor families it is simply understood that everyone has to work.

Simon Johnson on development strategies:

Michael Spence is in favor of an manufactured export-led strategy. Larry Summers points out that it would be hard for all countries in the world to do this at the same time. And Robert Rubin emphasizes good governance.

Here’s a potential way to put it all together. If your governance is good, you can sustain rapid growth even based on primary commodities — Botswana would be the leading example (but if you want to go back in time, I would suggest Norway and Sweden were mostly commodity producers at key early phases of their development). But if your governance is problematic, then commodities may be more tricky for political reasons; it’s just too tempting to try to grab power and get all those “rents”.

If your governance is an issue, then a strategy based on manufactured exports may make more sense. Why? After all, manufacturing is more footloose than mining (which is obviously tied to mineral deposits). It’s the footloose nature of manufacturing that makes this approach work. If you expropriate some factories, the rest will leave. So you can build an equilibrium in which entrepreneurs believe they will have reasonably good protection for their property rights, even though the laws on the books or the courts or something else about the political environment is not ideal.

And it is striking that almost all countries that have grown fast for the past 30 or so years have done so with manufactured exports as a major focus. It’s also encouraging that exporters of commodities more recently have moved to diversify their exports — this is a key point from chapter 5 of the WEO.

I highly recommend listening to the podcast of this event at the Cato Institute from about a month ago. William Easterly delivers a blistering attack on efforts to plan and organize development, calling for us “to oppose ideas that seek collective expert direction of development… basically any effort by the United Nations, IMF, or World Bank.” He acerbically notes that “there are all these poor people that have the nerve to achieve development anyway in spite of the lack of our expert advice,” and “I don’t think anyone has run around saying, ‘oh thank god, egypt has shown us the way; the secret is to export bathroom ceramics to Italy'” (30% of Egyptian export manufacturing revenues come from bathroom ceramics sold to Italy).

But Easterly’s very critical remarks are born from humility, from the Hayekian insights that “nobody knows anything” and that “to plan or organize progress is a contradiction in terms.” Moreover, he has bad news for those who think that the failures of planning mean we just need to preach free markets and follow a Washington Consensus-style recipe. Free market and liberal democratic institutions are endogenously produced by economic and political entrepreneurs.

Of course, Arvind Subramanian has to remind Easterly of the merits of the conventional wisdom. First, policymakers in developing economies do have to make decisions, and the position that economic development is unpredictable and unknowable isn’t very helpful to those who have to work on these kinds of questions. Second, the fact that the average effect of a policy or endowment is zero does not make it irrelevant — we want to tease out the difference between the above-average and below-average cases, if we can.

The ensuing back-and-forth between Easterly and Subramanian as they try to resolve their disagreements is very enjoyable and offers some great food for future thought.

A very interesting QJE article: Mobile phones massively improve fish market arbitrage in Kerala, India, leading to lower price variability, fewer wasted fish, lower average price and greater profits.