Friday
Apr062012

The Big Mis-forecast

Back in the 1950s development economists viewed poor countries as being stuck in various types of “poverty traps”. The basic idea was that poverty tends to breed poverty. And poor countries just happened to be poor and trapped in poverty. The most popular version emphasized the availability of capital. Poverty made saving and capital accumulation impossible, according to this view, and as a result, it persisted — come to think of it, there are still some who subscribe to this view, but we are digressing….

One of the most famous versions of this thesis was Paul Rosenstein-Rodan’s “Big Push” thesis. Rosenstein-Rodan’s argument was similar to what many others in the 1950s and 60s formulated: development was about moving people from “backward” to more productive “modern” sectors of the economy. And this could only happen if everyone coordinated their behavior and increased their investments — so the Big Push required a big push in capital accumulation.

One thing that all of these theories had in common— and, digressing again a little bit, one thing they share with several current theories of economic development — was that they were only about economics. Politics and institutions didn’t matter; only “economic fundamentals” mattered. The ones Rosenstein-Rodan emphasized were how much a society saved and how much foreign aid they got (which in the 1950s and 1960s was assumed to simply add to capital accumulation).

How successful was this approach to development? Here’s one way to see. In 1961 Rosenstein-Rodan did something that no social scientist usually has the nerve to do (in this paper); based on his theory (and the available data he had on “economic fundamentals”), he made forecasts of how rapidly different parts of the world were going to grow over the next 15 years. The next table summarizes his forecasts together with the actual (per capita) growth rates for several countries.

As you can see from the table, he got it almost completely wrong. Let’s look at some of the numbers. In Asia, according to Rosenstein-Rodan, income per capita in India is set to grow at over 3% per year between 1961 and 76. Afghanistan and Pakistan are also predicted to grow at more than 2% a year, all of these faster than South Korea, Taiwan, Thailand and even Singapore. In Africa, Angola, Ghana, Kenya, Nigeria and Uganda were going to grow at about 2%, and Liberia wasn’t far behind with about 1.5% per year growth. All of these were supposed to grow faster than Mauritius, which was predicted to grow at less than 1% per year on average (Botswana did not even make the list, being still counted as a British protectorate at the time). In the Americas, Argentina and  Haiti were set to grow much faster than Costa Rica, the Dominican Republic and Panama.

Of course, things didn’t quite work out that way. In fact, many of the economies about which Rosenstein-Rodan was bullish are not much richer today than they were in 1961. Liberia and Haiti’s economies contracted since then. Angola, Kenya, Nigeria and Uganda haven’t done so well either. We of course know that Afghanistan, India and Pakistan grew more slowly than South Korea, Taiwan, Thailand and Singapore. Argentina and Haiti were no match for Costa Rica, the Dominican Republic and Panama.

The main reason why Rosenstein-Rodan got it so wrong is because he completely ignored the role of institutions and politics.

Now the thing is that, though most economists today would espouse more sophisticated theories than those of Rosenstein-Rodan, much of development economics — especially when it comes to the practice of development — still ignores institutions and politics.

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