Little, Big: Two Ideas About Fighting Global Poverty


Pranab Bardhan reviews some recent books on development in The Boston Review:

The classical economists, from William Petty and Adam Smith to John Stuart Mill, were all development economists. They offered general theories of markets and growth and wrote about a particular developing country (typically Britain) going through a process of industrial transformation.

Then, for more than a century, development shifted from the economic and intellectual core to the periphery. Debates about development focused on controversies over Soviet industrialization and on the need for protectionist policies to defend infant industries in places—such as the United States, Germany, Eastern Europe, Australia, and India—trying to “catch up” with England.

After the Second World War, as a large number of countries became independent (or “liberated,” as in China), development economics blossomed but remained at the intellectual margins of the economics discipline. Underdevelopment was conventionally understood as the product of market and institutional failures. In the prevailing paradigm, such failures were regarded as exotic exceptions or as the remediable results of bad policies instituted by new governments.

The challenges of persistent poverty and underdevelopment eventually undercut this intellectual marginalization. In the last three decades of the 20th century, economists recognized that standard market-equilibrium models—with their smoothly functioning invisible hands—break down in the context of information failures and dysfunctional institutions in all economies. So economists started paying more attention to rumblings from the periphery. As Joseph Stiglitz put the problem in a 1989 essay:

A study of less developed countries is to economics what the study of pathology is to medicine; by understanding what happens when things do not work well, we gain insight into how they work when they do function as designed. The difference is that in economics, pathology is the rule: less than a quarter of mankind lives in the developed economies.

In the past decade, development economics has grown to extraordinary prominence, not just in academia but also in the public arena. This new development economics has moved in two strikingly different directions. The first focuses on micro-level policy interventions. It uses the tools of field experiments and randomized controlled trials (RCT) to evaluate focused strategies for alleviating persistent poverty. The second trend focuses on macro institutions: the structures of democracy, autocracy, centralized and diffused power, and legal protections of property and contracts that organize politics and markets. Drawing ideas from the burgeoning field of institutional economics, this second stream of work has addressed grand, old historical questions such as why some countries have succeeded in the march to prosperity while others have languished.