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DEVELOPMENT TRENDS FOR 2016

Trends

January is now over but this is typically the month when all human beings driven by a sense of renewal felt compelled to set priorities, evaluate progress and define a vision of the future. As this feeling gets usually diluted throughout the year, let`s not lose momentum and take this opportunity to analyse what are the development trends and prospects for 2016.  I will start the year with a set of posts on future trends.

This is not an easy task. For those fascinated with economic development as it is my case we need to have a thorough understanding of what stands for this concept to then identify patterns and forecast future trends. Its complexity comes from the fact that it is an intricate process of interrelated variables combined into a secret formula that no one knows. But let´s simplify: to make it basic, economic development in its essence is the process through which a community creates material wealth and uses it to improve the well-being of its members. Sounds simple, but trust me it isn´t. First it is so wide that it becomes vague, it includes all we have in the universe of a country: Governments, Policies, Private sector, NGOs, DFIs, common people and the generally poor resulting in an elusive and unpredictable mixture. Second, as all of us, it is shaped by time, theories of development have evolved creating distinct models generally influenced by politics, ideology or just plain pure history. Third albeit these eclectic bundle of subjects truth is that it all melts down into the specifics: no matter how hard we formulate a framework or a theory it will always be a bouquet of a unique combination of variables that cannot be reproduced in time or place, and that´s exactly what makes it so fascinating.

The only way is Wisdom.

A good way to foresee trends and anticipate what´s next is to rigorously analyse the wisdom that has been accumulated up to now. Indeed a long path has been crossed and we are very far away from President´s Truman speech in 1949 that for the first time recognised poverty as an handicap and clearly stated the need for development. But it is important to understand that the development landscape emerged from this post-war optimism in which the West had a sense of development-bringing mission. This new role of sharing the benefits of the Western´s scientific advances for the improvement and growth of underdeveloped areas was called the Modernisation Theory. The then recently founded Development Financial Institutions, such as the Bretton Woods Organisations were shaped by this theory and in their early actions advocated that development should be achieved through industrialization mostly driven by the state that eventually should lead to a catch up with the rest of the West. The idea of linear models of progress including Rostow´s Take-Off Model was influential up to the 60´s and it materialized on large-scale top-down programs in mostly infrastructure mega-projects. It established economic growth as the main driver of development in which the benefits would trickle down to people through job creation increasing people`s incomes and consequently government revenues. This idea still resonates today as one of several fundamental debates on development, but it´s application has raised (and still does) several criticisms. Indeed some infrastructure Mega-projects such as large dams were disaccredited due to hazardous ecological impacts and resettlement problems, but it was the one-linear route in a one-size fits all fashion that was more difficult to accommodate to the wide diversity of LDCs. The supply –side model based on capital accumulation soon has failed to show the expected trickle-down effects to all. In addition it was slowly perceived mostly as a Western vision that in a biased approach was unrealistic and struggled to understand the specific challenges of a variety of developing countries.

As a reaction to these limitations the Dependency theory tried to switch from the western tone and focus on underdevelopment, but albeit the urge to reject the neoclassical paradigm it ended up mainly criticizing the theory of comparative advantage. It contradicted the principle that expansion of primary exports should promote industrialization and advances in productivity and eventually reduce the price of primary and manufactured goods. Prebish has shown instead with the example of Latin America that prices in the West that should go down due to increases in productivity, instead maintained as they were absorbed by higher wages and profits. On the other hand the prices of primary goods in periphery went slowly downward according to the theory deteriorating the terms of trade of Latin American countries. The reason for that was the great technological gap between both groups or according to Furtado the LDCs had endogenous structural challenges associated to traditional societies such as land tenure, institutions, supply rigidities, lack of foreign exchange, etc that dampened the development of peripheral countries. The novelty of this approach was the homegrown national industries through a strategy that became famous and was called Import Substitution Industrialisation (ISI). Mostly based on an ideological battle the new theory focused mainly on macroeconomic issues related with the balance of payments namely the chronic lack of foreign exchanges of Latin America countries. At a first glance its major concern was the integration in the international trade system and indeed it has highly contributed to the work of today´s World Trade Organisation. Disappointingly reality has shown that ISI was not as successful as expected. In some places it led to isolation creating other internal macroeconomic unbalances and reality was that most countries turned to a combination of national industrial investments combined with integration in global economy and export markets, such as South Korea, Singapure and Hong Kong that progressed from satellites towards metropolis. Adding up to these limitations the theory is more successful in describing post-colonial relations than providing a wide approach to modern development theory. However it was crucial to identify the dependent and drainage relationship between metropolis and periphery and in my view its main breakthrough was the shift of gravity from the West towards developing countries, a trend that remains up today.  .

But it was only in the 70´s with WB´s President Robert Mcnamara (1968-81) that we moved away from the focus on development as economic growth and definitely recognized that the benefits of large scale projects were not trickling down to households and individuals. It was the first acknowledgement that albeit good growth performance poor people remained poor and attention was given to the increasing gap between the rich and poor. The 70`s was an exciting decade when several ideas flourished namely the Human Development approach that reflected that people were at the center of policies. It was the first attempt to categorized people´s socio-economic conditions according to the basic needs concept such as health, housing, sanitation or education that still today supports social progress index and most poverty analysis. Influential authors such as Robert Chambers and Amartya Sen have contributed with trends that are still pillars of development. Chamber´s work changed the focus of development: to look at the poorest first rather than last while Sen led studies where development was tackled in an innovative way: as an issue of entitlements and the capacity to choose or act. Both these approaches were the basis for the first Human Development Report released later in 1990 that presented for the first time development as a process of enlarging people´s choices. The Human Development still today very influential with its populist approach has also triggered the rhetoric around participation and empowerment that supports up today most of the NGO´s actions.

In the 80`s we witnessed to the revival of neoliberalism pursued by Thatcher and Reagan with the famous Structural Adjustment Reforms (SAR). It emphasized the importance of markets that should be let alone to sort out prices instead of the distorting influence of the state. Advocating privatization, liberalization of financial markets and reduction of government spending in developing countries it materialized in programs that led to radical alterations to the way developing governments were organized and how budgets were allocated. The rational seemed apparently quite reasonable and simple: increasing the efficiency of resources allocation by opening the economy to competition would produce growth in the long run. However it became disappointingly known by causing instead massive unemployment, social unrest and general chaos and disorganization. Indeed these reforms perceived as ruthlessly painful were associated to this dark-age that according to some was entitled the lost decade of development. But in the face of darkness we can always light a candle. If it is true that SARs reactions were so negative that it became almost indefensible, it is also true that negative things take 7 times more to process in our brain, precisely because we need to always analyse what went wrong. So with the objective to review history instead of demonizing eras let`s try to find a positive contribution to add to the basket of development knowledge by asking what lessons can we learn from it?

First lesson is: too much sacrifice destroyed convergence. Albeit technically well founded one of its fundamental assumptions failed: the miracle of growth convergence to potential growth was elusive because the negative costs at the short-run were so large that discouraged governments and disengaged public opinion from the pursuit of these reforms. Working as a faith trap, by planting doubt the fear of not accomplishing the reward of the expected long-run growth after so much sacrifice worked as a self-fulfilling prophecy failing the model to converge and discrediting the success of reforms after so much pain.

Second, we all agree on the need of reforms, but reforms are difficult to perform. Even the struturalists on the other side of the ideological trench, consensually agreed on the need of structural reforms to dissolve endogenous inefficiencies such as land tenure, institutions, lack of technology or output composition. But structural reforms are difficult regardless of its nature due to the dismantling of power, re-affection of resources and reformulation of administrative structures that are supported by the political establishment and patronage systems. In developing countries highly dependent of the public sector as the main economic provider and characterised by monopolies and incipient private companies the withdrawal of government spending along with the de-regulation of professions, privatization of state enterprises and production rationalization seemed to ruin the very few institutional frameworks in place and felt more like an aggressive destruction rather than an adjustment.

Third, a good reform should never act as a shock.  Structural reforms in a short timeframe and tight sequencing acted more as a painful punch rather than a consistent transformation. We need time to accommodate change as much as we need the right sequencing to pick up the priorities that are most strategic and will lead to an enduring structural modification. The broad and economy wide approach within a strict schedule of SAR`s type may be too aggressive while instead promoting a targeted and selective removal of key obstacles organized in a wider timeframe is easier to accommodate.

So albeit the negativity, not all was lost: hopefully it was an interesting exercise to understand reforms and extract some interesting insights from it. Additionally by far its main contribution was the sound principles of macroeconomic management and public financial management, that still rules IMF actions up today namely the idea that macroeconomic stability is a pre-condition for development to prosper in developing countries. Furthermore the withdrawal of the state from several areas made the 80´s the decade when a plethora of NGOs emerged filling up the gap left by the state, a contribution that added diversity to the development landscape.

After the structural reforms there was a strong reaction towards alternative development strategies. Shachs along with Escobar and Esteva rejected the view of western domination building up a discourse of development as an universal aspiration and goal. The 90´s Post-development was a strong shift to the local people´s vision making the individual action the main priority. It rejects grand theories or narratives that were accused of serving more the expectation of the developed world than of developing countries. It argued interestingly that everything was socially constructed and was the basis of what we know as participatory approaches that intend to listen and learn from below. Up today they are still used to incorporate people´s wisdom, view and knowledge into the identification, planning and implementation of development programs performing as an important tool to empower the poor.

The trends for today still engulf this accumulated knowledge of history, as the sand of incoming waves builds up a rock.

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