Understanding the Mechanisms of Economic Development

Volume : (13), Issue : 205, January - 2019

Abstract :

Economic  development  differs  from   most  fields  in  economics  because the  study  of low-income economies, and  of people living in  low-income economies, draws on  all branches  of economics. The particular study of economic growth is perhaps closest to being a field like labor or health economics, but what is currently referred to as development economics is broader, so although my examples  involve important issues in economic development, my conclusions apply  more  broadly  to  other areas  of applied economics. In  an  earlier  paper, I have argued that learning about  development requires us to investigate mechanisms (Deaton, 2010a). Finding  out  about  how people in low-income countries can and do escape from poverty is unlikely to come from the empirical evaluation of actual projects or programs, whether through randomized trials or econometric methods that are designed to   extract defensible causal inferences, unless such analysis tries to discover  why projects  work rather than whether they work—however  important the  latter  might  be  for  purposes of auditing. By contrast, investigation,  testing, and  modification of mechanisms that  can  be widely applied, at least potentially, allows the integration of disparate empirical findings  and comprises  a progressive empirical research strategy.

In this paper, I discuss three lines of work that  have elucidated mechanisms that are relevant for development: 1) connections between saving and growth; 2) the determinants of commodity prices,  which  are  a key source  of income for  many developing countries; and  3) some  unexpected puzzles that  arise in considerin the  linkages  between  income and  food consumption. In each  case, my discussion illustrates  what Cartwright (2007) calls the positivist approach to the hypothetico deductive method. In  this approach, mechanisms are  proposed, key predictions derived  and  tested,  and  if falsified, the  mechanisms are  rejected or modified. If the predictions of a mechanism are confirmed, if they are sufficiently specific, and if they  are  hard  to  explain  in  other ways, we attach  additional credence to  the mechanism, albeit provisionally since later evidence  may undermine it. Sometimes the  falsifications  can  be  repaired by changing supplementary assumptions, and sometimes they involve long steps backwards where the  model  is abandoned; and often there is disagreement about  which is the correct response. But the end result is an accumulation of useful knowledge  and understanding.

Article: Download PDF Journal DOI : 301/704

Cite This Article:

Article No : 10045

Number of Downloads : 102

References :

1. Atkinson, Anthony B. 1969.  “On  the  Times- cale of Economic Models: How Long is the Long Run?” Review of Economic Studies, 36(2): 137–52.
2. Bosworth,  Barry, Gary Burtless,  and  John Sabelhaus. 1991.  “The  Decline  in  Saving: Evidence  from  Household Surveys.” Brookings Papers on Economic Activity, no. 1, pp, 183–241.
3. Carroll, Christopher  D.,  and  Lawrence H. Summers. 1991. “Consumption Growth Parallels Income Growth:  Some New Evidence.”  Chap.  10 in National Saving and Economic Performance, ed. B. Douglas Bernheim and John B. Shoven. Chicago, IL: Chicago University Press.
4. Carroll, Christopher D., and David N. Weil. 19 “Saving and Growth: A Reinterpretation.” Carnegie-Rochester Conference Series on Public Policy, vol. 40, pp. 133–92.
5. Cartwright, Nancy. 2007. “Are RCTs the Gold Standard?”  BioSocieties, 2(1): 11–20.
6. Clark,  Gregory,  Michael  Huberman,  and Peter  Lindert.  1992.  “A British  Food  Puzzle,1770–1850.”    Economic  History  Review,    48(2): 215–37.
7. Deaton, Angus. 1997. Understanding Consumption. Oxford. Clarendon Press.
8. Deaton, Angus, 1999. “Commodity  Prices and Growth in Africa.” Journal of Economic Perspectives, 13(3): 23–40.
9. Deaton,  Angus.  2005.  “Measuring   Poverty in  a Growing  World  (or Measuring Growth  in a Poor  World). Review of Economics and Statistics, 87(1): 1–19.
10. Deaton,  Angus. 2007.  “Height,   Health, and Development.” Proceedings of the National Academies of Science, August 14, 104(33): 13232–37.
11. Deaton, Angus. 2010 a. “Instruments, Randomization, and Learning about  Development.” Journal of Economic Literature, 48(2): 424–55.
12. Deaton, Angus. 2010 b. “Price Indexes, Inequality, and the Measurement of World Poverty.” American Economic Review, 100(1): 5–34.
13. Deaton, Angus, and Jean Drèze. 2009. “Food and   Nutrition  in  India:   Facts  and   Interpretations.” Economic and Political Weekly, February  14, pp. 42–65.
14. Deaton, Angus, and Alan Heston.  Forth- coming.  “Understanding PPPs and PPP-based National Accounts.” American Economic Journal: Macroeconomics. http://www.princeton.edu/~deaton /dow nloads/Underst anding_ PPPs _complete _with_abstract_14nov08.pdf.
15. Deaton, Angus, and Guy Laroque. 1992. “On the Behavior of Commodity Prices.” Review of Economic Studies, 59(1): 1–23.
16. Deaton, Angus, and Guy Laroque. 1996. “Competitive  Storage and Commodity Price Dynamics.”  Journal  of Political Economy,  104(5):896–923.
17. Deaton, Angus, and Christina Paxson. 1998. “Economies   of  Scale,  Household Size, and  the Demand for  Food.”  Journal  of Political Economy,106(5): 897–930.
18. Deaton, Angus, and Christina Paxson. 2000. “Growth and Saving among  Individuals and Households.”  Review  of Economics  and  Statistics, 82(2): 212–25.
19. Du, Shufa, Bing Lu, Fenying Zhai, and Barry M. Popkin. 2002. “A New Stage in the  Nutrition Transition  in   China.”   Public  Health   Nutrition, 5(1A): 169–74.
20. Dvir, Eyal, and Kenneth S. Rogoff. 2009. “Three Epochs of Oil.” NBER Working Paper 14927.
21. Gourinchas, Pierre-Olivier, and Jonathan A. Parker. 2002. “Consumption over the Life Cycle.” Econometrica, 70(1): 47–89.
22. Gustafson, Robert L. 1958. Carryover Levels for Grains. Technical Bulletin 1178, U.S. Department of Agriculture.
23. Houthakker, Hendrik S. 1965. “On Some Determinants of Saving in Developed and Underdeveloped Countries.” Chap. 10 in Problems in Economic Development, ed.  E. A. G. Robinson. London: Macmillan.
24. Hsieh, Chang-tai, and Peter J. K lenow. 2007. “Relative Prices and Relative Prosperity.” American Economic Review, 97(3): 562–85.
25. Issawi, Charles, ed. 1966. The Economic History of the Middle  East 1800–1914:  A Book of Readings. Chicago: Chicago University Press.
26. Johnson, Simon, William Larson, Chris Papageorgiou,  and Arvind Subramanian. 2009. “Is Newer  Better?  Penn   World  Table  Revisions and Their Impact on Growth Estimates.” NBER Working Paper 15455.
27. Kotlikoff, Laurence, and Lawrence H. Summers. 1981. “The  Role of Intergenerational Transfers in Aggregate Capital Accumulation.” Journal of Political Economy, 89(4): 706–32.
28. Kuznets, Simon. 1976. “Demographic Aspects of the  Size Distribution of Income: An Exploratory  Essay.” Economic Development  and  Cultural Change, 25(1): 1–94.
29. Lewis, Arthur. 1954. “Economic  Development with Unlimited Supplies of Labor.” Manchester School of Economics and Social Studies, 22(May), 139–91.
30. Modigliani, Franco. 1966. “The Life-Cycle Hypothesis  of Saving, the  Demand for  Wealth, and  the  Supply of Capital.  Social Research, 33(2):160–217.
31. Modigliani, Franco. 1970. “The Life-Cycle Hypothesis  and  Intercountry Differences  in the Saving  Ratio.”  In  Induction,  Growth, and  Trade: Essays in Honour of Sir Roy Harrod, ed. W. A. Elltis, M. F. Scott,  and  J. N. Wolfe,  197–225.  Oxford.Oxford  University Press.
32. Modigliani, Franco, and Richard H. Brumberg. 1954a. “Utility Analysis and  the Consumption Function: An Interpretation of the Cross-Section Data.” In  Post-Keynesian Economics, ed. Kenneth K. Kurihara, 388–436. New Brunswick: Rutgers University Press.
33. Modigliani, Franco, and Richard H. Brumberg. 1954b  [1990]. “Utility Analysis and Aggregate  Consumption Functions: An Attempt at Integration.” In  The Collected Papers of Franco Modigliani: Volume 2: The Life-Cycle Theory of Saving, ed. Andrew Abel, 128–97. Cambridge, MA: MIT Press.
34. Parker, Jonathan. 2000. “Spendthrift in America:  Two  Decades   of  Decline   in  the  U.S. Saving Rate.” Chap. 6 in NBER Macroeconomics Annual  1999, ed. Ben Bernanke and  Julio Rotemberg.
35. Paxson, Christina. 1996. “Saving and Growth: Evidence  from  Micro  Data.”  European Economic Review, 40(2): 255–88.
36. Patnaik, Utsa. 2007. “Neoliberalism and Rural Poverty  in  India.”  Economic  and  Political  Weekly, July 28, pp, 3132–50.
37. Powell,  Andrew. 1991.  “Options  to  Alleviate the  Costs  of  Uncertainty and  Stability:  A Case Study of Zambia.” Chap. 3 in Commodities, Futures, and Financial Markets, ed. Louis Phlips.  Dordect: Kluwer.
38. Rao,  C.  H.  Hanumantha. 2000.  “Declining Demand for Foodgrains in Rural  India:  Causes and  Implications.” Economic  and  Political  Weekly, January 3, pp. 201–6.
39. Rao, C. H. Hanumantha. 2005. Agriculture, Food Security, Poverty, and Environment: Essays on Post- Reform India. New Delhi: Oxford University Press.
40. Schultze, Charles, and Christopher Mackie. 2002. At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: National Research Counci
41. Solow, Robert M. 1956. “A Contribution to the Theory  of Economic Growth.” Quarterly Journal of Economics, 70(1): 65–94.