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Back | Programme Area: Special Events (2000 - 2009)

Some Thoughts on the Implications of Increasing Returns for Economic Development (Draft)

This paper argues that the economics of increasing returns has shed important light on our understanding of various aspects of development. What it has not done so far, however, is generate a list of prescriptive remedies parallel to those advanced by the proponents of neo-liberalism. The paper suggests that this is in part because the effectiveness of its analysis depends on its being place and time specific and contingent on a range of institutional and cultural factors. This, it is argued, should not be allowed to prevent a fuller consideration of its implications for policy. However, given that simple rule based intervention is likely to be inappropriate, it is important to think of ways in which collective action can be organised so as to economize on entrepreneurial and organisational ability.

A quick glance through some recent issues of Finance and Development uncovers much advice recommending openness, greater reliance on the private sector and a restricted role for the state in developing countries. On closer scrutiny, the advice does not always stack up. For example, in an article on adjustment and growth in Sub-Saharan Africa, Calimitsis (March 1999:p. 6) argues for the promotion of private investment on the ground that has a larger impact on growth than public investment. However, he immediately goes on to acknowledge that, in much of Sub-Saharan Africa, the growth of private investment is constrained by high transactions costs as well as high levels of uncertainty. In similar vein, in an article on private capital flows and growth published in the June 2001 issue, Mishra, Mody and Murshed make the point that when a country is poor and saves little, additional capital from outside the country can help it realize investment opportunities. However, they go on to acknowledge that ‘little foreign investment is directed to Africa and that is largely limited to a few countries with significant natural resources’ (p.3). These are just two of the many examples one can find in which positive assessments of the contribution of private capital to development are qualified by an acknowledgement that conditions of underdevelopment do not provide an attractive environment as far as private capital is concerned. It is usual in these circumstances to acknowledge a role for ‘careful but limited government activism’ as long as this addresses failures in the working of markets especially co-ordination failures.The notion that underdeveloped economies provide an unattractive environment for private investment comes as a surprise only if the implicit vision of the economic process is one in which diminishing rather than increasing returns are the norm. In the older classical vision of the economic process, the emphasis was on increasing returns. Growth was seen as being driven by the division of labour which itself was regarded as a function of development that had already been achieved. This way of thinking about the division of labour and development in turn implied that, in certain circumstances, growth would be self-reinforcing.

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