Hayekian Insights on Economic Development

On Wednesday the CATO Institute hosted an event on Hayekian Insights on Economic Development. The presenters’ were the well known economic development expert William Easterly and Arvind Subramanian. Drawing insights from Nobel Prize winning Economist Friedrich Hayak’s work, the two presented differing views on paths to economic development. Easterly and Subramanian focused the majority of their remarks on the clarifying the nature and role of government in economic development.

Easterly’s work is widely known and his discussion at CATO followed his recent writings (in the White Man’s Burden for example). He reiterated his opposition to the role of governments in seeking to direct economic development and in providing foreign assistance. He spoke in favor of decentralized decision-making to discover what works best in the market and in public policy; and the need to rely on dispersed and local knowledge, rather than government planning, for poor countries to achieve growth. Drawing from Hayak’s view of free market, Easterly highlighted the helpful observation that there is no secret to development and attempts to locate a secret to development will remain fruitless. Freedom (to act, to explore, to fail) was the watchword of his remarks.   

Subramanian presented a different perspective, agreeing in part with Easterly and disagreeing in part. Where the two have agreement is on the general utility of foreign assistance. Where the two differ is on the role of government in development. Subramanian argued a somewhat more nuanced position based on his many years of experience at the IMF. Markets alone will not work to end poverty in developing countries, Subramanian argued, and sometimes government intervention is needed. He pointed out that country’s that have reformed the most (with the tacit assertion that reform=more freedom) have not had the most economic success. India a country whose banking sector is still dominated by the private sector, whose labor laws remain highly regulated, and whose trade and foreign capital controls remain tight, has faired better than the more reformed economies of Latin America and Africa. Subramanian adds that this and other examples indicate that it is not just about opportunities created by markets and reforms but may be also other forces that make development work.

Easterly’s rejection of a role for the state and Subramian’s only partial defense was not satisfying for a room full of government officials, development experts, international organization representatives and organizations like Bread for the World who work daily towards bringing sustainable development in developing countries.

One thing that stuck in my mind at the end of the presentation is Easterly’s suggestion that each country faces a unique set of conditions and trial and error remains an important means of judging good ideas against bad. I think both the market and government have a role to play in this puzzle of bringing economic development in poor countries.

Comments

[Meaza Z. Demissie]

From Easterly’s presentation it was clear that he was not supporting any form of foreign aid as he concluded that more focus should be given to freedom, invention…etc..(similar to Hayek’s view) with and he also suggested that those who want to be part of creating a better world should:

o Use the power of Ideas, spread the idea of individual freedom, its intuition and its poverty-ending force

o Oppose ideas that seek collective expert directions of development because they will create under-development

On the other hand Subramanian suggests the followings as a policy agenda:

o Get everything right, including expanding the laundry list of reforms (something like enhanced Washington Consensus)

o Get a few things right

And he ended with a note that successful developers have the capacity to figure these things for themselves. Subramanian clearly identified market failure as you have suggested but the debate or discussion didn’t focus on this, except few examples supporting both arguments. If interested, you can watch or listen to the entire presentation here (http://www.cato.org/event.php?eventid=4525).

[Pierre]

I'd be interested to know if either/both of them distinguished between the role of government as aid donor vs. recipient.

I didn't get a sense from the post to what extent they opposed overseas aid; in that context, a Hayekian might object to strings being attached, but not object to aid as such.

In the developing country itself, like in any country, there will always be a tension over central planning vs. laissez faire. I would imagine that the nub of the debate will be over dealing with market failures, rather than over whether markets are helpful when (assuming competitive).