Economic development doesn’t have just one model in a complex world

Andrew Sheng says institutions such as the World Bank have embraced a diversity of strategies for development, grounded in the idea of life-improving outcomes

PUBLISHED : Friday, 08 December, 2017, 12:38pm
UPDATED : Friday, 08 December, 2017, 6:15pm

Given massive social divisions and the disruptions from technology, what is the new development model?

As the newly formed Commission for Global Economic Transformation, co-chaired by Nobel laureates Joseph Stiglitz and Michael Spence, gets down to work, we should reflect on whether emerging markets are able to formulate a new development model that works.

The World Bank is the world’s premier development funding agency and its World Development Report is an opinion shaper on the subject. The bank is part of the economics establishment, since it hires what it considers the best and brightest economists from the top universities. But if the economics profession is blind to its own blindness, then the bank also suffers the same fate.

A recent blog review of the last five reports, however, suggests that a new Washington consensus is emerging.

Gone are the idealist models of free markets. Instead, the bank has embraced complexity, context, learning by doing, politics and ideas – all major reviews of the economic profession since the global financial crisis.

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In 2010, the report presciently pointed out that climate change would hurt emerging markets more, requiring urgent attention to climate mitigation. The next report looked at conflict and security as fragile states continue to fail because weak institutions cannot cope with the combined stresses of conflict, security, corruption, justice and jobs.

In 2012, the bank addressed the issue of gender in development. It seems common sense that higher proportions of women in the active labour force, with equal pay, would increase growth in incomes. But women face different forms of discrimination that deter development.

In 2013, the bank tackled jobs, finding unemployment and job expectations among youth to be the most urgent policy priority. In the past two years, this has emerged as one of the top political concerns arising from the impact of robotics, 3D printing and artificial intelligence.

After looking at risk management in 2014, which was clearly overlooked in the run-up to the global financial crisis, the bank took an unusual step in looking at mind, culture and behaviour. Moving out of the comfort zone of economics into psychology and other social sciences, the report team used the three principles of human decision-making: thinking automatically, socially and with mental models to argue that policymakers can advance development by thinking beyond economics.

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This report never got the serious attention it deserved, because it was outside the reductionist mental model of mainstream economics.

In the past three years, the bank has tackled the issues of digitisation, governance and the law and, most recently, learning. The issue of using technology to accelerate development is not new, and how innovation and technology are making old ideas and work processes obsolete is becoming more and more obvious.

On the issue on governance, bank president Jim Yong Kim asked the right question: what makes policies work to produce life-improving outcomes? By moving out of a purely technical analysis of development into the political economy of how to arrive at the right choices and implement them effectively, the bank has finally accepted that the world is a complex system.

The latest report on learning lies at the heart of development. Yet education and learning is defective in many societies, keep large numbers in poverty. Many countries spend huge fortunes on education, but the results are not always ideal. This report, led by the bank’s chief economist, Paul Romer, was marred by the controversy over the bank’s writing style.

My quarrel with bank reports is similar: they are too long, too technical and try to sanitise everything. Practitioners in development know that most governments are lucky to implement three major initiatives in their four-to-five-year terms. They need to focus and prioritise.

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Indeed, the elite have lost the people’s trust by promising too much but not delivering enough. The populist revolts basically reflect their sentiment that current thinking perpetuates 1 per cent interests. The verbiage in the bank reports disguise the truism that member countries are having serious problems delivering for the 99 per cent. But this cannot be done as long as the bank’s resources run short, since it is also losing money (a net loss of US$237 million in fiscal 2017) without sufficient capital increases from its shareholders. This is problematic at exactly the time when sound analysis and advice is necessary in a confusing development world.

In the past, all roads led to Rome. Today, you don’t have to go to Washington to find development ideas. That itself means the path of development thinking has changed profoundly.

Andrew Sheng writes on global issues from an Asian perspective