Down and Out in Paris and London and elsewhere

Vulnerable groupsMonika Queisser, Social Policy Division, OECD Employment, Labour and Social Affairs Directorate

In Down and Out in Paris and London, George Orwell recalls his experiences in the 1920s living on the margins of society in the two European capitals. Orwell joined the “tramps”, as they were called, the army of people, mostly male, without stable housing, moving around between cheap hotels, shelters and often prison, occasionally finding casual jobs, pawning their few belongings to buy food, and living with the constant threat of hunger, illness and violence. Orwell was struck by how people were caught in a vicious and futile circle of homelessness, inability to work and poverty:

“There must be at the least several tens of thousands of tramps in England. Each day they expend innumerable foot-pounds of energy (…) in mere useless walking. Each day they waste between them possibly ten years of time staring at cell walls. They cost the country at least a pound a week a man, and give nothing in return for it. They go round and round, on an endless game of post, which is of no use, and not even meant to be of any use to any person whatever. The law keeps this process going, and we have got so accustomed to it that we are not even surprised.”

Almost a century later, there are almost 30 000 homeless people in Paris, 4000 of them sleeping rough, i.e. living in the streets, according to the national statistical office INSEE. In London, government data show that the number of people sleeping on the streets has risen by over one-third in the past year. Not only Paris and London are facing this problem. In Seoul, Korea the homeless population increased by 67% in two years; the number of children in homeless shelters in New York grew by 24% from 2011 to 2012.

While most of us associate homeless people with the image of solitary rough sleepers, homelessness is a much bigger issue. It includes people who use emergency homelessness services, people who live in inadequate housing, those who temporarily camp on the couch of friends, and people who live in severely overcrowded dwellings. In most OECD countries, homelessness affects between one and eight people in every 1 000 each year. Depending on the definitions, which vary widely across countries, as many as one-third of the homeless population can be sleeping rough.

Who are the homeless and how do they end up in this situation? Often, they are persons with complex needs and conditions, such as mental and physical illness or substance abuse problems. But losing one’s job, being evicted from affordable housing, and the breakdown of a relationship can also lead to homelessness. Lone parents and single women can become homeless due to domestic violence, and young people transitioning from social care often have nowhere to live. The same is true for migrants who are also at high risk of living without a stable home.

Many of the chronically homeless end up shuttling back and forth between the streets and hospitals, racking up very high health care costs. The most famous case is that of Angelo Solis in California, also called the Million Dollar Patient. Mr Solis, a homeless alcoholic with diabetes and heart disease, passed out and got picked up regularly by the police, was brought to the nearest emergency room, treated and then released back into the street, only to repeat the same cycle over and over again.

The cost to public services of caring for the chronically homeless can be up to seven times higher than average per capita social spending, and three times higher than care services that are provided in the home for the same individual. Preventing homelessness can be very cost-effective; estimates suggest that treating a homeless person with complex mental health needs is 18 times more expensive than providing preventative at-home service support.

All governments are committed to providing protection against hardship, including homelessness. But how effective and efficient are their efforts? As Orwell observes, what is needed for the homeless is “to depauperise him, and this can only be done by finding him work – not work for the sake of working but work of which he can enjoy the benefit.” But how realistic is it to expect that a person without a stable home and address will ever find and keep a job?

A new report from the OECD on Integrating Social Services for Vulnerable Groups examines the needs of the homeless and other vulnerable groups and the best policies to address these needs. It finds that strategies to house the homeless first, and then provide integrated employment, health and social care support are relatively effective in helping people exit from chronic homelessness. A major obstacle to effective support for the most vulnerable is the lack of integration and coordination of the various social services. Integrating housing support, employment services, and health care and making them easy to access will reduce the likelihood of duplicating services and spending. Integration, with one interlocutor who will assist in putting together the best package of services can generate economies of scale and help ensure that the people with the highest needs receive the services they need at the right time and in the right order.

Every society has vulnerable people; people who need support of different kinds to address personal challenges like extreme poverty, poor physical or mental health and addictions, low education and skills, and precarious work arrangements. Homelessness and instable housing conditions often lead to social exclusion, health problems, poor educational outcomes and long-term unemployment and inactivity. Every vulnerable person represents a social challenge, a moral responsibility, and a life that can be better lived. The way governments make social policy and deliver services needs to live up to this challenge.

Useful links

OECD Social Expenditure Database

Financing for development? Show me the money!

Click to see the draft Addis Ababa Action Agenda
Click to see the draft Addis Ababa Action Agenda

Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20

In 2009, Zambian economist Dambisa Moyo published her book, “Dead Aid”which shocked much of the international development community by claiming that ‘traditional’ systems of official development assistance (ODA) to Africa were not delivering, and arguing why we must find alternatives.

These conclusions triggered many stark reactions. That aid may have fallen short of its targets, and in some cases even run counter to them, is certainly a valid point; but to conclude that all forms of aid are therefore “dead”, and of no future use to developing countries, is quite a stretch. First, ODA spending is still alive and well: the OECD estimates that development aid flows hit an all-time high in 2013, at a record $135.1 billion; and while it has remained stable in 2014, overall ODA has increased by 66% in real terms since 2000, when the Millennium Development Goals (MDGs) were agreed to. To the credit of donor countries, these trends occurred when the world economy was being hit by the worst international financial crisis of our time. They were also the source of deep reflections on how to focus on development outcomes and impact, instead of only looking at the level of aid.

In this sense, the mainstream development co-operation debate is putting a lot of effort and innovation into how to use ODA flows more effectively – moving beyond traditional forms of aid and using it in more creative ways, through a wider range of partners and financing mechanisms, and performing more of a catalytic role. Indeed, ODA is increasingly being used as a lever to help countries attract other, complementary forms of financing that will be necessary to meet their development objectives. These other forms of financing include tax revenue and foreign as well as domestic investment. In 2015, the Sustainable Development Goals (SDGs) are being negotiated as successors to the MDGs – and to finance these goals, donors and developing countries alike fully agree on the crucial need for ODA to take on this leveraging role.

Indeed, aid alone (whether in its traditional or its more innovative forms) will not suffice for meeting the SDGs. In just one example, the resources needed every year to achieve the SDGs are estimated to be at least ten times greater than current levels of ODA. This leaves a vast space to be filled. First by donor countries delivering on their commitments to increase their support for financing for development. But also by mobilising private flows and investment that rely on ODA to fill the gap. For the first time in 2012, the share of global foreign direct investment (FDI) inflows going to developing countries exceeded that going to developed countries, making FDI by far the biggest source of capital flows to developing countries.

This said, the overall picture is not rosy: after passing $2 trillion in 2007, global FDI flows fell by 40% during the first two years of the global financial crisis. Six years later, in 2013, they were still down by 30%; in Europe investment outflows are down by as much as 80% since the crisis, with implications that stretch far beyond the Eurozone. The legacies of the crisis are still with us in the form of low investment, low growth and high unemployment. And even when we look beyond this immediate economic context, most developing countries continue to have particularly low levels of investment relative to GDP. In most African countries for instance, investment to GDP ratios struggle to reach 20%, well below the levels of most other developing and emerging regions. This relatively poor investment performance mainly results from a lack of adequate framework conditions through which countries can successfully attract and retain investment.

Developing countries therefore have a challenging task ahead if they hope to stimulate investment flows and make them work for development. To help governments rise to this task and enhance the necessary framework conditions, in June 2015 OECD Ministers plus partner countries that include developing and emerging economies, endorsed a comprehensive policy tool: the Policy Framework for Investment (PFI). Updated by a global taskforce in 2015 led by Myamar and Finland and composed by over 70 countries, the PFI is precisely aimed at addressing the structural conditions for investment in a coherent manner. This includes guidance for attracting investment in specific economic sectors, such as infrastructure, where ODA and private finance can work hand-in-hand particularly well. Based on the PFI, since 2006 the OECD Investment Policy Review process has been used by over 25 developing and emerging economies to assess and reform their investment environment so as to enhance private finance for development.

When they endorsed the updated PFI, Ministers encouraged countries to use the tool as a reference for development co-operation, and particularly as a path towards the SDGs. Exactly how different countries and regions can make the most use of the PFI, so as to attract investment that can complement ODA and tax in financing the SDGs, will be the topic of discussions at the Third International Conference on Financing for Development being held in Addis-Ababa next week. This could be a good opportunity for developing country governments as well as donors to move beyond traditional aid together, and towards more innovative and complementary forms of ODA and investment.

Useful links

OSAA-OECD high-level event on leveraging pension funds for financing infrastructure development in Africa

OECD project on institutional investors and long term investment

Dear Coal: it’s not you, it’s me…

End of the line?
End of the line?

Ariana Mozafari, OECD Environment Directorate

The OECD is calling it quits with an era of coal.

On 3 July, Secretary-General Angel Gurría gave a lecture at the London School of Economics entitled, “Climate: what’s changed, what hasn’t, and what we can do about it – six months to COP21”. He discussed the usual mitigation tactics that royal family members and celebrities are jumping onto: rewiring the economy, an end to fossil fuel subsidies, financing investments in green infrastructure, and aligning contradictory policies to complement the climate effort.

He also, however, discussed one issue in unprecedentedly stark terms for an international body: Gurría said governments need to be seriously skeptical about new coal, which is a primary energy source that many OECD members rely upon.

The Secretary-General pointed his finger at unabated coal power generation as one of the biggest challenges to reducing global emissions to stay within a 2°C target, the agreed climate change threshold to avoid potentially dangerous consequences. Gurría said that coal was usually the least heavily taxed of all fossil fuels, and yet, looking at the way we’re going through coal right now, will result in more than 500 billion tonnes of carbon dioxide released into the atmosphere between now and 2050. That’s around half of the remaining carbon budget to stay within our 2°C target.

“The IEA expects global demand for coal to continue to grow in the near term, which would result in a disastrous 4°C plus trajectory,” said an impassioned Gurría. “We cannot continue building coal-fired plants simply because we have been doing so for the last 150 years.”

Coal is also an attractive energy source for developing countries that perhaps don’t have natural gas reserves waiting to be harvested or the financial and technical means to develop renewable sources of energy. But Gurría argued that coal is not cheap if you count all the costs it causes such as land disturbance, contamination of water sources, air pollution, damage to ecosystems and impacts on the health and life expectancy of miners. In the case of developing countries, Gurria called on the support of richer nations: “If the only thing separating coal from cleaner alternatives is a purely financial gap then we need to mobilise climate finance to bridge it.”

Media outlets buzzed over Gurría’s strong words on coal. Alex Kirby from Climate News Network said that Gurría was an “unlikely source” to make a case against coal, as he is the head of an organisation “representing wealthy nations that relied on coal for 32 per cent of electricity generation last year.”

Other media outlets praised the head of the OECD for going beyond the role of a “club” for the world’s richest countries to making firm recommendations against this particular energy source.

However, some are criticizing the OECD’s failure to crack down on all fossil fuels that contribute to climate change. “What about gas?” asked Tristan Edis from Climate Spectator. Fiona Harvey from The Guardian also cited the U.S.’s recent boom in shale gas as the reason coal is more tempting than ever with its lower prices.

This strong stance on coal is complementary to the huge media attention climate change has been attracting recently, due to support from high-profile figures from the entertainment industry, non-profit sector and international organisations. The buzz seems to only keep growing as the UN’s 21st Conference of Parties in Paris (#COP21) nears, where countries are expected to come up with new agreements to reduce emissions and keep our planet’s temperature within the 2°C target.

If there’s one thing that the biggest oil companies in the world and the smallest startup NGO’s seem to agree on, it’s that coal is out. Although it’s not the only fossil fuel that we need to become independent from for a sustainable future, it’s finally looking like humanity is serious about cutting ties with that inconspicuous little black rock that’s causing immense damage to our planet.

Useful links

Fast facts on coal from the IEA:

  • Coal supplied 1520 mtoe of the 3292 mtoe of additional global primary energy supply from 2000 to 2012. That’s 46% of added energy.
  • 200 MW/day of new coal generation capacity was commissioned in the world in 2010-14.

Taxing Energy Use 2015 Just published by the OECD

OECD work on climate change

The OECD’s Employment Outlook argues that time is running out to help workers move up the jobs ladder

Employment Outlook 2015Paul Swaim, Senior Economist in the OECD Employment, Labour and Social Affairs Directorate and Editor of the OECD Employment Outlook

The recovery is underway, but millions of workers risk being trapped at the bottom of the economic ladder. While unemployment is on a downward trajectory in most countries, about one-half of the crisis-related increase in joblessness in the OECD area still persists more than seven years after the crisis began. Around 42 million persons were without work in May 2015 across the OECD, 10 million more than just before the crisis. Long-term unemployment is a particular concern. The number of persons who have been unemployed for a year or longer is 77% higher than then it was just before the crisis struck in 2007. Young people in the OECD are twice as likely to be unemployed as prime-age workers. More than 40 million 15-29 year-olds (or 1 in 6 youth) across OECD countries are neither employed nor in education or training, the so-called NEETs. More than half of all NEETs –27 million young people – have dropped off the radar completely. They have literally disappeared from their country’s education, social, and labour market systems. Whatever their age, the long-term jobless can become demoralised and are sometimes stigmatised by potential employers, so there is a real risk that some members of this group will become permanently disengaged from the labour market.

Not only is the labour market recovery still far from complete, but the OECD Employment Outlook 2015, released today, argues that time is running out to prevent millions of workers from being left trapped at the bottom of the economic ladder. Many of the youth who finished their schooling during the crisis years and have struggled to gain a secure toe-hold in the labour market may be approaching the “make or break” point so far as being able to ascend the career ladder. Indeed, one of the striking findings in this edition of the OECD Employment Outlook is that long-term career prospects are largely determined in the first ten years of working life. Some of the experienced workers who have lost their jobs during the crisis are also having a difficult time putting their careers back on track. For example, a number of those who lost jobs in the manufacturing or construction sectors will need to make a career switch to growing service industries and often to adapt their skills if they are to avoid becoming trapped on the margins of the labour market.

The scarring effects of the crisis on the hardest hit groups are compounded by longer-run trends that are making it more difficult for low-skilled workers to move out of precarious, low-paid jobs into jobs that offer opportunities for career advancement. If the missing rungs are not put back into the jobs ladder, the legacy of the crisis is likely to include a further permanent increase in economic inequality above the already record high levels that had been reached before the crisis in many OECD countries. Governments need to take action now if they are to avoid a permanent increase in the number of workers stuck in chronic unemployment or cycling between unemployment and low-paid jobs.

Polices to support upward mobility in the labour market are a priority

The Employment Outlook underlies the high social costs resulting from earnings inequality by showing that a substantial portion of the persons who are unemployed or in low-paid jobs at one point in time are at a high risk of becoming trapped at the bottom of the earnings ladder. Policy makers should thus place a high priority on assuring that the crisis does not leave additional workers permanently excluded from work or trapped in low-paying and insecure jobs, thereby ratcheting inequality up another notch.

Concerns about a possible increase in inequality are heightened by the fact that most OECD economies had already become significantly more unequal in the distribution of income during the decades preceding the crisis, reflecting a large rise in earnings inequality. It follows that the challenge to promote upward mobility at the bottom of the jobs ladder is much more than a cyclical issue related to the global crisis. It is also a key to helping all workers to participate successfully in a rapidly evolving economy. Technological change and the digital revolution in particular have been important drivers of this trend by skewing job demands towards high-level skills and putting downward pressure on the pay of less skilled workers. These structural changes in the economy are part of a continuous process of adaptation to new technologies and processes, as well as globalisation. In this context, workers must have the opportunity to build the skills needed by employers, but also to adapt them to changes in labour demand and to use their skills fully on the job. This is of crucial importance to ensure human capital plays its expected role in boosting innovation and productivity, but also to make growth inclusive.

Governments need to begin restoring the missing rungs back in the jobs ladder and help workers to climb them

The Employment Outlook analyses in detail three types of policy measures that are particularly important for improving the labour market prospects of the workers who are currently stuck at the bottom of the economic ladder. First, effective activation measures are needed that connect jobseekers with suitable jobs. Second, skill deficits in the workforce must be addressed since one of the strongest predictors of poor career outcomes is a low level of skills. Finally, direct measures to raise job quality have an essential role to play, especially in shoring up the earnings of low-paid workers. The importance of these types of measures has long been apparent, but their importance has been magnified by the crisis and by the increase prevalence of temporary and other atypical jobs in a number of countries. Career advancement opportunities are often limited for workers in these types of jobs.

Turning the recovery into an opportunity to promote inclusive growth

Going forward, the most general lesson for labour market policy makers is that more attention should be paid not only to the number of job opportunities available, but also to the quality of these jobs and who requires targeted assistance to access them. In order to promote full recovery from the crisis and help workers to thrive in an ever-changing economy, governments must take action to foster stronger employment growth and improve workers’ access to productive and rewarding jobs. Doing so will help to repair the broken rungs of the jobs ladder and reverse the long-run increase in inequality. It will also strengthen the sustainability of economic growth, another key requirement for promoting inclusive growth.

Useful links

OECD work on employment

OECD work on youth employment and unemployment

OECD employment database

Transforming policy, changing lives with statistics and knowledge

statistics forumOECD Statistics Directorate

For over a decade now, the OECD has been spearheading work on well-being measurement and policy, in line with its mission of promoting “Better Policies for Better Lives”. Many individuals and organisations around the world have also been part of a global call for better measures and policies for progress “beyond GDP”. The OECD Forums on Statistics, Knowledge and Policy have been important drivers of this agenda, providing a space for all kinds of practitioners to take stock of experiences, to learn from best practices, and to gain inspiration for further change.

Gradually, this work has led to a paradigm shift, one that puts people at the centre of public policies and collective action. In the process, the key question has evolved from “How do we measure progress?” to “How do we best put those measures into practice for policies aimed at improving lives?” At the 4th World Forum on Statistics, Knowledge and Policy in New Delhi in 2012, OECD Secretary-General put it like this: “We want to transform our notion of well-being from an implicit to an explicit goal that can be assessed across the whole spectrum of government policies, business strategies and individuals’ decisions.”

The 5th OECD World Forum, “Transforming Policy, Changing Lives”, will provide an opportunity to reflect and debate on actually achieving a people-centred, planet-sensitive agenda. It will also be an occasion to showcase concrete examples of the impact of policies, frameworks and institutions that are using new well-being measures around the world, and will explore how this accumulated experience can contribute to country-level action in the pursuit of a new set of universal Sustainable Development Goals (SDGs) that are now being discussed in the UN setting.

The Forum will take place in Guadalajara, Mexico, and we would like to encourage all people with an interest in well-being and sustainability to take part. It will bring together hundreds of experts from various backgrounds including government, international organisations, official statistical offices, civil society, business, and academia, to present successful practices and address a number of topics relevant to the SDG agenda.

This is the first time the OECD World Forum will be held in Latin America, an ideal choice for an event primarily focused on policy innovation and transformation, given the immense change the region has seen in recent decades. It will be co-organised with the Mexican National Statistical Institute (INEGI), which has played a vital role in the development of new measures of well-being.

In addition to the main programme, the Forum will also include an Exhibition space with the opportunity for NGO’s, governments, international organisations, researchers and the private sector to showcase their work. There may also be the possibility for selected projects from the Exhibition to be presented at special sessions during the Forum.

Useful links

You can view the preliminary agenda and other information at the Forum website: www.oecd-5wf.mx

Participation in the Forum is by invitation only and at your expense. You can request an invitation by writing to [email protected], giving your name, email address, title/role, and organisation, along with 200 words explaining why you are interested in attending the Forum.

Win a paid trip to Guadalajara to attend the 5th OECD World Forum by entering the Wikiprogress Data Viz competition. Deadline is 24 August.

Down in the dumps

Yulas dream
“strikingly visceral and plaintively moving”

Maroussia Klep, OECD Environment Directorate

There’s an old saying that “you can’t really understand someone else’s experience until you’ve walked a mile in their shoes”. Personally, I am not sure that you can ever truly understand what it is like to be that person, but you can make every effort to consider his or her perspective. Such efforts are ever more essential for policymakers in governments and international organisations, whose everyday work may impact the lives of thousands of people.

Last week, officials and experts from OECD member countries and OECD staff working on waste issues had the opportunity to plunge into the reality of a landfill during a 90 minute documentary, Something Better to Come.. And it wasn’t any old landfill: at the time of filming, the Svalka was the largest garbage dump in Europe, located 20 kilometres outside the centre of Moscow and covering an area of 500,000 square meters. On this huge mountain of trash, which was recently shut down, lived hundreds of people in a lawless society, drinking vodka to survive cold winters and worked to the bone by the mafia that ran the dump’s illegal recycling centres.

In 2000, Oscar-nominee Hanna Polak, the Polish director of the movie, was working on a project on homeless kids living in Moscow’s railway stations when she first heard of the existence of the Svalka. She managed to sneak inside despite the guards posted to keep intruders away. The misery she discovered, and the terrible human and environmental conditions, made her determined to come back and make a film in order to raise awareness of the situation. For almost ten years, she “broke in” to this enclosed area from which many others wanted to break out, to follow the lives of the deprived people living on the dump. Amidst the garbage, the young Yula, a beautiful girl with a head full of dreams and determination, slowly becomes the heroine of the movie and a symbol of hope.

The screening of the documentary at the OECD had a visibly strong impact on the audience. The director was flooded with questions at the end: How did such a situation arise? Which policies do you think would be most useful to address it? How could informal recyclers be integrated into the formal economy? What happened to Yula? How were you psychologically and morally strong enough to withstand all this…?

Even though the movie takes place in Russia, similar situations exist (or have existed) in many places around the world. For policymakers from OECD member states, where informal recyclers have been largely integrated into the formal economy in recent decades, experiencing the life of these people from so close was an eye-opener. It also created a sense of urgency to collaborate further with emerging and developing countries still confronted with these issues.

The situation on the Svalka, which was eventually closed in 2007, shows the intricate link between environmental and social issues. When Hanna started making the film, each Russian produced around 350 kilograms of waste a year on average. That figure is now approaching 600 kilograms, and it all has to be treated. Simply shutting down landfills to reduce pollution without considering the impacts on informal workers who depend on it for their livelihood may be devastating for those people. In addition, it fails to take into account the valuable work they accomplish by providing garbage collection services almost for free.

Building on this idea, a colleague in the audience shared an inspiring story: La Chureca in Nicaragua was the largest landfill in Central America and used to be home to about 1000 people living in extreme poverty. They suffered terrible health conditions, doing arduous, yet very important work as informal recyclers. In 2012, thanks to support from the Spanish Agency for International Cooperation and Development (AECID), the dump site was sealed to create a new energy generation plant, which would help provide stable and decent jobs as well as subsidised housing to the families who were living and working on the dump.

As the Nicaragua story reveals, terrible situations such as the ones witnessed in the movie can be improved with efforts and a genuine willingness to make change happen. By bringing reality inside the walls of the OECD, Hanna’s documentary has made a powerful contribution to raising awareness on the issue – hopefully for “something better to come”.

We’d like to thank Unico van Kooten and the Dutch Waste Management Association who supported the organisation of the screening and visit of the director to the OECD.

Useful links

OECD work on waste

Popes, miracles and development theory

Full proceedings in French and English
Full proceedings in French and English

Professor K. Vela Velupillai of Trento University and The New School, New York

Pope Francis has been in the news recently with his encyclical on climate change, but did you know that the Catholic Church helped to shape modern economic theory? When the Second Vatican Council was reconvened in September 1963 following the death of Pope John XXIII, it was asked to “start a dialogue with the contemporary world”. In October, the Pontifical Academy of Science invited 17 experts to “gather together the latest results of a new branch of science, econometry, and to present them to political economists in order to aid them in formulating those plans for a more stable security and for greater development which can contribute so much to the well-being and peace of nations.” Seven of the 17 would go on to become Nobel Laureates, and during that study week at the Vatican one of them, Tjalling Koopmans, outlined the mathematical foundations for the kind of economic growth theory that still dominates current orthodoxy.

Unfortunately, although Koopmans had revived a tradition underpinned by ethical and political considerations of intergenerational issues, initiated by Frank Ramsey in 1928, growth theory became formal and narrowly technical. By cutting itself adrift from the moral sciences, it became devoid of philosophical, epistemological and ontological significance. Hence, to the extent that any theory of development was underpinned by growth theory, it shared these deficiencies. More importantly, from an epistemological point of view – and, perhaps, also methodological – the uncertain, undecidable, complex, incomplete, unsolvable dimensions of development theory and policy were short-circuited by a reliance on trivially applicable mathematics, wholly without significance for the monumental issues that have to be tackled in the messy world of development. Above all, the element of humility that accompanies uncertain, tentative, undecidable, complex, incomplete, indeterminate dimensions, was pawned to a trivial dynamic formalization.

In some ways, this was a reaction to what Paul Krugman termed the “high development theory (HDT)” that flourished in the 1950s. At the 1992 World Bank Annual Conference on Development Economics (where incidentally future OECD Secretary-General Gurría gave the keynote address) Krugman argued that the core economic concepts of the HDT theorists- were not formulated and formalised in a language intelligible to the increasingly mathematised conventional economist. These concepts included increasing returns to scale, complementarity, extent of the market, and multiple equilibria with low-level equilibrium traps in poverty. Therefore, in a counter-revolution, the rich content of the HDT theorist was thrown away with the proverbial bathwater, prompting Krugman to call for a “counter-counterrevolution”.

Responding to Krugman at the same conference, Joseph Stiglitz was not entirely convinced, and in addition to questioning Krugman’s assumptions, raised two points that reflect what became known as the “Washington Consensus”: balanced budgets; relative price corrections (principally a competitive exchange rate); liberalisation of trade and foreign investment; privatisation; and domestic market deregulation. For Stiglitz, “the same currents that led to the dominance of free market ideology in the United Kingdom and the United States were reflected – at least in the United States – in the dominance of those ideas in certain intellectual circles. […] Krugman takes far too narrow a view of the development process and of what is wrong with both the standard neoclassical and the planning paradigms. […] If the central problems were those of externalities and increasing returns, the planning process would have been an appropriate remedy. But that assumption ignored informational problems, which are now regarded to be central.”

In short, Krugman says that HDT is dead and should be resurrected; Stiglitz thinks it never died, but lived on in other guises; and the Washington Consensus, simply ignored HDT. But despite their differences, they all attribute to the content of HDT a common set of characteristics predicated upon one or another form of competitive equilibrium theory.

In 1977, fifteen years before the World Bank conference, Graham Pyatt and Alan Roe highlighted another problem with development planning, one that had nothing to do with mathematical formalism or economic theory: “It is quite clear that many development plans are written with the sole objective of qualifying for foreign aid and that their existence implies absolutely nothing about a commitment to plan in any normally accepted sense of the word”.

Around the same time, Harry Johnson from the anti-Keynesian “Chicago School” identified the two theoretical culprits for the failure of multisectoral planning: “The Harrod-Domar equation […] automatically involved the same error as the ‘disguised unemployment’ concept, through its emphasis on physical investment and implicit disregard of the availability of labour, especially skilled and technical and scientific labour, to work with the material capital created by investment.” The solution was to enrich the growth models with human capital; underpin the generation of human capital with appropriate methods and frameworks for the generation of skilled, scientific and technical human capital; remove the mechanisms that would generate monopoly privileges; and decentralise the investment decision processes that lie at the basis of growth.

This was the basis on which the path towards “New Development Economics” was carved, via an “interregnum” with general equilibrium models for development policy. By the early 1990s, the time was ripe for miracles, and the clear message from analyses of the East Asian miracle was that a formula existed to replace poverty and misery with prosperity and plenty. Technology was the deus ex machina; competitive markets would provide the institutional setting in which decentralised decisions were implemented; the invisible hand replaced the dirigent’s fist; and efficiency was resurrected. But in this vision technology was wholly divorced from science and its institutionalisation. And so a rich vein of traditions and dilemmas that the early policymakers in Meiji Japan and the Nehru-era planners in India had grappled with when they were devising policies and visions of development was ignored.

Apart from the emergence of the Asian Tigers, two other facts of professional economics and economic life characterise this period: the “sudden” completion of the UN-ICP program on internationally comparative national income data, in the form of the Penn World Tables; and the emergence of New – endogenous – Growth Theory, going beyond the early Neo-classical models of (optimal) economic growth.

I do not find it credible to believe that the three great events listed above have anything to do with each other – either as a matter of fact, history or theory.

First, has there ever been the slightest investigation of the methods, sources, consistency and theory of the construction of the data that comes out of the Penn World Table stables? When I investigated the mathematical foundations of the construction of the index numbers that underpin the Penn World Table data, I was appalled to find that in the practical construction of the numbers that are used in international growth comparisons, the theoretical criteria are violated, which suggests that the actual numbers are unanchored in theory. (The Penn exercises and growth theory are analysed here.)

Second, there is very little evidence that any of the Tigers emerged as powerful economies following the policy precepts of New Growth Theory (and certainly not Japan in its transition from Tokugawa Feudalism to the Meiji Restoration and, then, through the Taisho and Showa eras). In other words, any underpinning of development theory on New Growth Theory is empirically meaningless.

Ultimately, there can be no theoretically closed system of development theory that can be encapsulated in a formal, mathematical, dynamic model with determinate solutions. But indeterminacy, undecidability and incompleteness can be formalised in algorithmic mathematics. I advocate such an approach to the formal study of development dynamics in the sense of Schumpeter and Paul Rosenstein-Rodan. No one would want to advocate an anarchistic theory of development; but it is entirely possible to advocate a mathematical formalism for development dynamics that suggests something like a formalisation of anarchy, however paradoxical this may sound.

Useful links

We would like to thank Professor Alberto Quadrio Curzio, Editor-in-Chief of Economia Politica, who graciously accepted our request to base this article on Development Economics without Growth Theory, in Economia Politica, 1/2010, aprile.

OECD work on the evaluation of development programmes

Perspectives on global development from the OECD Development Centre

Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University, discusses the Asian Tigers on the Insights blog here and Japan here