The aid community should stop pretending to know the answers and start asking the right questions.

Frans Lammersen and Jorge Moreira da Silva (Director) OECD Development Co-operation Directorate – DCD-DAC

In  The Wealth of Nations, Adam Smith wrote that: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by natural course of things.” Others were less optimistic. They argued that nations are rich or poor because of differences in religion, culture, endowments, and/or geography.

Modern economic development theories originate from thinking about how to reconstruct Europe in the aftermath of World War II. The European Recovery Program – or the Marshall plan – was based on the notion that economic growth can be stifled by local institutions and social attitudes, especially if these influence the domestic savings and investments rate. According to this linear growth model, a correctly-designed massive injection of capital coupled with public sector intervention to address market failures would ultimately lead to industrialisation and economic development. Many other economic development theories have since followed, but none have been able to explain convincingly why some countries experience rapid economic growth and others not.

The development community has continued its quest for the missing ingredient to ignite economic growth. Candidates have included capital, technology, policies, institutions, better politics, and market integration. Every time we think we have identified what’s missing, we find that it is actually not something which can be provided from outside, but turns out to be an endogenous characteristic of the system itself. Traditionally, development assistance has been rooted in a type of engineering, mass production, conveyor belt mentality, with agencies promoting “silver bullet” solutions for such complex problems as eradicating malaria, reducing vulnerability, improving resilience, strengthening connectivity etc. Unfortunately, piecemeal or one step at a time development programmes often failed to deliver.

Increasingly, complexity thinking – a way of understanding how elements of systems interact and change over time – has found its way into the development discourse. After all, what could be more complex than promoting development, sustainability, human rights, peace, and governance? We should think of the economy and society as being composed of a rich set of interactions between large numbers of adaptive agents, all of which are coevolving. Based on this approach development is not just an increase in outputs, but the emergence of an interlinked system of economic, financial, legal, social and political institutions, firms, products and technologies. Together these elements and their interaction provide citizens with the capabilities to live happy, healthy and fulfilling lives.

Once we look at development as the outcome of a complex adaptive system instead of the sum of what happens to the people and firms, we will get better insights into how we can help accelerate and shape development. We would be more effective if we assess development challenges through this prism of complex adaptive systems. This could yield important insights about how best to prioritise, design and deliver holistic development programmes for achieving the multiple goals of inclusiveness, sustainability and economic growth that underpin the 2030 Sustainable Development Agenda. There is increasing support in aid agencies for the idea that solutions to complex problems must evolve, through trial and error – and that successful programmes are likely to be different for each local context, with its particular history, natural resources and webs of social relations. The key for anyone engaged in the aid business is to put their own preconceived ideas aside and first observe, map, and listen carefully to identify the areas where change for the better is already happening and then try to encourage and nurture that change further.

Complexity matters particularly when the knowledge and capacities required for tackling problems are spread across actors without strong, formalised institutional links. Inherent to many complex problems are divergent interests, conflicting goals or competing narratives. Moreover, it is often unclear how to achieve a given objective in a specific context, or change processes that involve significant, unpredictable forces. At the same time, it is important to emphasise that the counsel of complexity should not be taken as a counsel of despair for development. There has been immense social and economic progress, and development assistance has found to be helpful overall. Development co-operation has contributed to achieving economic objectives by helping developing countries connect their firms to international markets; to achieving social objectives by making globalisation pro-poor and reducing inequalities; and to environmental objectives by adapting to climate change while exploiting comparative advantages.

Not all development challenges are inherently complex though. For those that are, complexity should not be used as an excuse for fatalism and inertia. Instead we should strive to promote innovation, experimentation and renewal. We should build partnerships to learn about the past, allowing us to shape approaches that are more likely to work and that are owned by the people we are trying to help. They will tell us what is working and what is not. Together we should build a narrative for change involving many different voices and perspectives. We should also be modest and realise that it might better to start small and learn and adapt as we go along in iterative processes of dialogue. We should keep looking for change, scanning widely for new factors emerging in the wider world; listen to a wide range of opinions to be better able to anticipate and adapt and seize opportunities.

Embracing complexity where it matters will allow us to contribute more effectively to the 2030 Sustainable Development Agenda.

Useful links

The OECD and the Sustainable Development Goals

The OECD organised a Workshop on Complexity and Policy, 29-30 September 2016, at OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning29/09 afternoon30/09 morning

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