Defining Development Economics


Trying to precisely define an area of study is impossible, but thinking through the definition of ``development economics'' is an interesting diversion. As with most fields, the definition is tied closely to the people doing research in that area. So today, ``development economics'' is the kind of research done by people like Esther Duflo, Ted Miguel, Michael Kremer, and a group of other very smart people who I will offend by not mentioning here. This kind of development economics has several key features. (1) It very consciously takes place in developing countries. These researchers are out collecting surveys or doing studies ``in the field''. Perhaps the best way to define a development economist today is as someone whose presentation includes a picture of the village they worked in to collect data. (2) It is intensely concerned with identification of causal effects. Thus this field aspires to do randomized control trials (RCTs) to identify the causal effect of some ${X}$ (e.g. de-worming treatments) on some ${Y}$ (e.g. school attendance), as in Kremer and Miguel (2004). Failing that, some kind of natural experiment that features quasi-random treatment effects is examined. (3) It tends to be a-theoretical. The RCTs are showing reduced-form empirical effects of some kind of treatment on some kind of outcome. The de-worming paper of Kremer and Miguel is purely empirical, for example. This isn't generally true, as there are papers that explicitly are testing some theory, but the dominant portion of the literature is purely empirical.

Through some historical inertia in the profession, we call this research ``development economics''. But I think that this type of research is more properly called ``poverty economics'', the study of individuals living in particularly poor, under-developed countries. Duflo and Banerjee's 2011 book is actually called Poor Economics, and the tag-line is A Radical Rethinking of the Way to Fight Global Poverty. The focus is on alleviating the conditions of extreme poverty: poor health, poor nutrition, and low education. The RCTs are evaluations of interventions that aim to improve health, or nutrition, or educational attainment. By going out into these developing countries, these researchers are acutely aware of the constraints facing poor people, and are studying ways to alleviate those constraints.

This is all valuable research. It is perhaps more admirable in its motivations than other sub-fields of economics (*cough* finance *cough*). But it is not about ``development''.

Economic development is about the transition of whole economies from low-productivity, poor places into high-productivity industrial economies. This transition encompasses several aspects: a move out of agriculture and into manufacturing or services, urbanization, declining fertility rates, integration with global markets. Current research in development economics - the RCTs and their like - does not study the transition. ``What will make these people better off today?'' is a different question than ``What will make this economy develop?''.

If you go back far enough in the development literature, you'll find that the second question is the dominant one. Lewis, Nurske, Rosenstein-Rodan, Boserup, Gerschenkron, Hirschman all were concerned with what drove the transition to high-productivity industrial economies. But while they focused on this broader question, their work also contained assumptions that steered the profession away towards ``poverty economics''. An (often unspoken) assumption of much of this early development work was that rural peasants were irrational. That is, they did not respond to prices or incentives the way that people in modern economies did. They were tradition-bound, stuck in their ways. Development meant breaking this resistance to change and educating them to operate in a market-based economy.

The reaction to this, most notably associated with T. W. Schultz's 1964 book on Transforming Traditional Agriculture, was that peasants were in fact rational, but faced a unique set of constraints. If they stuck to traditional means for organizing production, then that is because those traditions were solving some concrete problem. Perhaps the best example is share-cropping, which even Alfred Marshall critiqued for being inefficient. It seems that by share-cropping, the marginal return for the peasant of more labor or capital is lowered, and hence less effort or investment is put forth. To the early development economists, share-cropping was an example of a traditional institution that prevented higher output. Except that once you appreciate the uncertainty involved in family farming, it is possible that share-cropping is the optimal contract to pick because it shares risk between the land-owner and farmer.

This led development economists on a different heading. The hunt was on for reasonable explanations of the observed behavior in these underdeveloped villages. What were the constraints or conditions that prevented these peasants from making more investments, or adopting better technology? This led to all kinds of seminal insights. Joseph Stiglitz, as one example, cites his time in Kenya in the late 60's as pivotal for developing his ideas on the economics of information.

However, in pursuing this line of thinking, development economics got so deep into the details of optimizing behavior in under-developed villages that it lost track of the larger question: ``What will make this economy develop?''. The study of the nuances of under-developed markets became an end in itself. A concrete example is the survey by Otsuka, Chuma, and Hayami (1992, JEL, sorry no link) on ``Land and Labor Contracts in Agrarian Economies''. They say, ``Through a critical review of the existing studies of agrarian contracts, this essay points towards building a `general model' in which land tenancy, labor employment, and owner cultivation are modeled together as substitutes along a continuous spectrum of contract choice.''. And it is a very nice synthesis of the literature in this area to that point. But what implications does it have for development? What does this general model tell us about how or why a country will make the transition into an industrial economy? Knowing that peasants are rational rather than irrational is great, but I still would like to know how those peasants' kids or grandkids will (or will not) end up as machinists or office workers living in city one day.

This is where development economics started turning into poverty economics. The focus became purely on understanding the constraints facing poor people in under-developed countries. As these constraints were dire, and led to such bad outcomes (poor health, low education, etc..), alleviating those constraints became the first-order concern. And let's be clear, it is very much a first-order concern. Millions of people dying from an easily preventable disease is a travesty. Running RCTs to establish the best way to distribute that treatment is incredibly valuable research.

Despite that, current development economics doesn't address the broader questions, the older questions, of what drives development in the long-run. The field of growth economics has essentially adopted this set of questions as part of its own research agenda. One of the things that this ``macro-development'' research does is establish the aggregate impact of micro-level features of under-developed economies. Does a given micro-level distortion or constraint incur such costs that it is a material reason for why a country remains relatively poor? Two recent examples are Hsieh and Klenow's 2009 paper on the aggregate effects of misallocations across firms in China and India, or Lagakos and Waugh's 2013 model of selection and cross-country income differences.

This doesn't make the growth/macro-development approach better or worse than poverty economics. The two fields are just looking at different questions, with different implications. It's worth keeping that in mind when evaluating the research in the two fields. In particular, it is not helpful to criticize one literature with the tools of the other (e.g. ``But how do you plan on getting identification of this effect?'' or ``But who cares about the reduced form effect? What's the mechanism you think is at work here?''). Different questions, different approaches, different techniques.

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