Contextual Development Economics: A Holistic Approach to the Understanding of Economic Activity in Low-Income Countries (The European Heritage in Economics and the Social Sciences Book 8)

Poverty still persists in today’s low-income countries despite decades of international aid, and extensive research on the determinants of growth and development. The book argues that meeting this challenge requires a holistic understanding of the context-specific factors that influence economic behavior and structures in poor countries. __Contextual Development Economics__ approaches this task by offering a methodology that allows analysing the dynamic interrelations between economic, cultural and historical determinants of economic life in low-income countries. The book starts with an empirical inquiry into the economic characteristics of low-income countries that create the context by which the specific forms of organising economic activity in these countries are determined. It then looks at how different generations of development economists sought to explain economic realities in low-income countries from the 1940s through today. The book finally synthesises the results from this empirical and methodological analysis with insights from an inquiry into contributions of the German Historical School, from which it borrows the concept of the economic style as a methodological alternative to the universal and hence often irrelevant models of mainstream development economics. This book offers a promising perspective for the future of development economics that will be of interest to researchers and development practitioners alike. It will also be relevant for academics and students with an interest in applications of the method and concepts of the Historical School to contemporary problems. "Altmann writes with uncommon insight about the economic style of low-income countries and the prospects of development assistance to become more effective and sustainable by delivering context-specific solutions that build on the needs and ingenuity of the poor." --Wolfgang Schmitt, former head of Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ--German Technical Cooperation) Cover 1 The European Heritage in Economics and the Social Sciences 3 Contextual Development Economics 4 ISBN 9781441972309 5 Acknowledgements 8 Contents 12 List of Figures 18 List of Tables 20 Chapter 1: Introduction 22 1.1 The Need for a Contextual Approach to Development Economics 23 1.2 Premises of Research 26 1.3 Structure and Method of the Study 27 Part I: Economic Characteristics of Low-Income Countries 30 Chapter 2: Poverty 34 2.1 The Multiple Dimensions of Poverty 37 2.1.1 Income and Consumption Pattern 37 2.1.2 Health and Education 41 2.1.3 Social Exclusion 42 2.1.4 Insecurity 43 2.2 The Problem of Measuring Poverty 44 Chapter 3: Transaction Costs 50 3.1 Transaction Costs and the Organisation of Economic Activity 51 3.2 Transaction Costs and the Institutional Environment 52 3.3 Definition and Measurement of Transaction Costs 55 3.3.1 The Cost of Regulation 57 3.3.2 Infrastructure Costs 59 3.3.3 Informal Institutional Determinants of Transaction Costs 61 3.3.4 Historical Determinants of Transaction Costs 61 Chapter 4: Private Governance 64 4.1 Foundations of Private Economic Governance 67 4.1.1 Morality 68 4.1.2 Personal Trust 70 4.1.3 Reputation 71 4.2 Alternative Institutions for Contract Enforcement 73 4.2.1 Group Structure 73 4.2.2 Contractual Structure 77 4.2.3 Coordinated Arrangements and Private Third Parties 79 4.3 Alternative Institutions for Property Rights Protection 83 4.3.1 The Definition of Property Rights 83 4.3.2 Sources of Property Rights Violations 84 4.3.3 Private Protection of Property Rights 86 4.4 The Scope and Limits of Informal Enforcement Institutions 87 4.4.1 The Relationship Between Informal Enforcement and the Scope of Exchange 87 4.4.2 Natural Limits of Private Governance Mechanisms 89 4.4.3 Natural Advantages of Private Governance Mechanisms 90 Chapter 5: Informal Economic Activity 94 5.1 Defining and Measuring the Informal Economy 95 5.1.1 The Size and Growth of the Informal Economy and How It Can Be Estimated 98 5.2 Private Support Institutions for Informal Firms 104 5.3 The Role and Implications of Informality for Economic Development 107 5.3.1 Different Interpretations of Informal Economic Activity and the Merits of Formalisation 108 Part II: Development Economics: The Past 70 Years 112 Chapter 6: The First Generation of Development Economists 114 6.1 Modernisation Theories 116 6.1.1 Paul Rosenstein–Rodan: Industrialisation and the “Big Push” 116 6.1.2 Arthur Lewis: The Dual Sector Model 117 6.1.3 Ragnar Nurkse: Balanced Growth, Capital Formation and the Primacy of Domestic Action 118 6.1.4 The Analysis of Typical Growth Paths by Clark, Kuznets, Rostow and Gerschenkron 121 6.2 Structuralist Approaches to Development Economics 122 6.2.1 Albert O. Hirschman: The Strategy of Unbalanced Growth 123 6.2.2 Gunnar Myrdal: Development as a Cumulative Process of Circular Causation 125 6.2.3 Hans W. Singer: The International Distribution of Gains from Trade and Investment 126 6.2.4 Raú Prebisch: Import Substitution as Strategy for Development 129 6.2.5 Excursus: Friedrich List and the German Zollverein 133 6.2.6 Peter T. Bauer: A Class of His Own 135 Chapter 7: The Second Generation: Return to the Mainstream 138 7.1 Neoclassical Development Economics 138 7.2 Methodological Considerations 142 7.3 Neoclassical Welfare Economics and Methods of Project Appraisal 146 7.3.1 Social Cost: Benefit Analysis 146 7.3.2 Shadow Pricing 147 7.3.3 Time Discounting 148 7.3.4 Choice of the Time Horizon 149 7.3.5 Implications of Neoclassical Welfare Economics 150 7.4 Development Policies and the “Washington Consensus” 153 Box 7.1 Welfare criteria from Ordinal Utility Theory 151 Chapter 8: The Third Generation: Institutional Turn and the “New Development Economics” 156 8.1 Imperfect Information and the “New Development Economics” 157 8.2 The New Institutional Economics and Development 159 8.2.1 The Concept of Transaction Costs in Institutional Theory 160 8.2.2 The Process of Institutional Change 161 8.2.3 Institution-Building and Policy Reform 162 8.3 Empirical Literature on Institutions and Growth 164 8.4 The Good Governance Agenda 167 Chapter 9: Conclusions from the Past and the Agenda for a New Generation of Development Economics 170 9.1 The Challenge of Igniting Growth in Low-Income Countries 170 9.2 Why Context Matters 172 9.2.1 Operational Guidance to Policymakers: An Often Neglected Objective of Development Research 175 9.2.2 The Balance and Sequence of Empirical and Theoretical Analysis in Development Economics 179 9.3 The Danger of Bureaucratic Failure in the Administration of Development Assistance 184 9.3.1 Problems of Accountability and Feedback 186 9.3.2 Adverse Behaviour of Aid Bureaucrats 187 9.3.3 Informational and Motivational Problems Associated with the Provision of Aid 189 9.4 Summary of Conclusions from the Review of Development Economics 192 Part III: In Search of an Analytical Framework for the Study of Low-Income Countries: The Style-Economic Approach 195 Chapter 10: Emerging New Directions in Development Economics 198 10.1 Confessions of Humility and Ignorance 199 10.2 Planners vs. Searchers 201 10.3 Behavioural Development Economics 205 10.4 Trends at the Level of Research Methods and Analytical Techniques 208 10.4.1 Analytic Narratives 209 10.4.2 Growth Diagnostics 211 10.4.3 Experimental Methods 213 Chapter 11: German Historical Economics as Development Economics 216 11.1 Scope and Scientific Method of the German Historical School 217 Chapter 12: From Stage Theories to the Concept of Economic Styles 224 12.1 Stage Theories and the Idea of Economic Systems 224 12.1.1 Historical Stage Theories 224 12.1.2 Werner Sombart and the Concept of Economic Systems 226 12.2 Spiethoff’s Concept of the Economic Style 227 12.2.1 Methodological and Theoretical Foundations of Spiethoff’s Economic Styles 231 12.2.1.1 Pure Theory vs. Economic Gestalt Theory 232 12.2.1.2 “Real Type” and “Ideal Type” Models 234 12.2.1.3 Historical vs. Nonhistorical Theory 235 12.3 The Concept of Economic Styles in the Literature Since Spiethoff 237 12.3.1 Evaluation and Critique by Eucken 237 12.3.2 The Concept of Economic Styles in the Contemporary Literature 241 12.4 Parallel Contributions of the “Old” Institutional School of Economics 243 Chapter 13: The Relevance of the Historical School for the Study of Low-Income Countries 246 13.1 Methodological Contributions 248 13.1.1 Inductive and Deductive Reasoning 249 13.1.2 Positive and Normative Research 249 13.1.3 Nature and Scope of Research 250 13.1.4 Models of Man and Behavioural Assumptions 251 13.2 The Style-Based Approach to the Understanding of Economic Activity in Low-Income Countries 254 13.2.1 Culture and Style in Economic Analysis 256 13.2.2 Economic Style and Institutional Diversity 263 13.2.3 Some Applications and Fields for Further Research 266 Chapter 14: Conclusions 270 Bibliography 276 Author Index 296 Subject Index 302 1441972307,9781441972309 Springer Front Matter....Pages i-xix Front Matter....Pages 9-12 Introduction....Pages 1-8 Front Matter....Pages 9-12 Poverty....Pages 13-27 Transaction Costs....Pages 29-41 Private Governance....Pages 43-71 Informal Economic Activity....Pages 73-90 Front Matter....Pages 91-92 The First Generation of Development Economists....Pages 93-116 The Second Generation: Return to the Mainstream....Pages 117-133 The Third Generation: Institutional Turn and the “New Development Economics”....Pages 135-148 Conclusions from the Past and the Agenda for a New Generation of Development Economics....Pages 149-173 Front Matter....Pages 175-176 Emerging New Directions in Development Economics....Pages 177-194 German Historical Economics as Development Economics....Pages 195-201 From Stage Theories to the Concept of Economic Styles....Pages 203-224 The Relevance of the Historical School for the Study of Low-Income Countries....Pages 225-247 Conclusions....Pages 249-253 Back Matter....Pages 255-287