Development Economics: From the Poverty to the Wealth of Nations by Yujiro Hayami, Clarendon Press, Oxford, 1997.
by Michael Kevane
Instructors of undergraduate development economics can stop searching for a basic text. This remarkable book offers a unified, coherent and optimistic overview of the discipline. I am tempted to compare it to a ripe papaya; the reader is rewarded with subtle tastes and textures. The book surpasses the usual amalgam of micro and macro models.
Professor Hayami's thesis is that poor countries can structure their institutions, such as state, market and community, so as to bring about rapid development through the borrowing of technologies. The virtue of the book is in the wealth of empirical and theoretical material Hayami brings to bear on this central theme. The book is divided into two parts: the first explores the logic and experience of technology-borrowing; the second deals with the structuring of institutions.
While the technology borrowing approach may seem a truism, Hayami nicely contrasts it with a popular alternative: rapid growth through capital accumulation. The problem with the capital accumulation approach, discussed at length in Hayami’s review of the classic growth models of Smith, Ricardo, Marx, Lewis and Harrod-Domar, is that it cannot escape the 'Ricardian trap'. Eventually, growth falters rather than accelerates. As more resources are devoted to creating industrial capital, the terms of trade turn against the industrial sector, profitability falls, and investment declines. The trap is especially acute in very poor economies where the vast majority of the population works with a fixed natural resources base (i.e., peasant farmers). Rapid population growth caused by extension of advanced medical technologies exacerbates the trap. The trap is also implicit in discussions of the ‘Asian Miracle,’ such as Paul Krugman’s famous piece in Foreign Affairs where he argues that growth through accumulation has its limits.
In presenting the technology-borrowing alternative, Hayami has occasion to review recent ideas of induced-innovation (whether of the Schumpeterian variety or more mechanical 'necessity as mother of invention' variety), and newer conjectures about multiple, path-dependant equilibria. The reviews are clear and concise, and the graphs that accompany them are just the right level for teaching undergraduates: befuddled students (isoquants again, but now in a strange context) will be impressed by their professor's explanatory powers (since for us strange contexts are just changes in labels).
Hayami has some keen observations on why technological change becomes more important than capital accumulation as incomes rise (even if capital accumulation is accompanied by across-the-board productivity growth, including in agriculture). He believes wealthier consumers prefer variety, and that the ability to innovate along the variety vector requires considerable human rather than physical capital investment. He also argues that profits from the systematic application of ‘invisible’ technology (emerging from scientific understanding of chemistry, physics, etc.) quickly surpass those profits from tinkering and trial-and-error with industrial machinery. These considerations make technology evolution much more important for sustained growth. The idea is somewhat like the 'Ricardian trap'; the terms of trade turn against Model-T Fords once most of the population already has one. Growing economies foster the development of new varieties to satisfy new wants, and enable engineers who understand combustion to develop, or borrow from abroad, new engines.
Hayami’s lengthy review of the empirical record establishes the eventual necessity of structuring institutions for technology transfer and innovation. Growth accounting, paired comparisons (Indonesia and Nigeria), extreme-case analysis (the collapse of the centrally planned economies), and several cogent discussions of the Asian experience all support the notion that capital-building may succeed temporarily, but rapid growth really depends on technology borrowing and innovation.
The second half of the book turns towards current concerns about how institutions foster and enable these developments. Hayami covers all the bases, with short sections on the Prisoner’s Dilemma, social capital, optimality of market equilibrium, market and government failure, rent-seeking, policy endogeneity, and many of the micro models of rural organization. In the end, the reader emerges with a comprehensive overview of the issues.
On the possibility of deliberate restructuring of social institutions Hayami strikes an optimistic note, and this raises a tough question. The typical African villager, if she could read, might be pleased with Hayami's optimistic stance. But she also might wonder sceptically whether the optimism is misplaced. Hayami clearly appreciates the challenges, but his language is that of the technocrat, redolent of policy activism and social engineering, blended with hints of endogeneity. Perhaps the papaya is a bit overripe? For a villager the technocrat is like the imam of the mosque in being both correct and mistaken at the same time: if all acted according to plan all would be fine, but no one is actually acting according to plan. Especially at the top; the dictators and elites of most developing countries, and especially of the 'non-developing' countries of sub-Saharan Africa, are unlikely to heed the well-intentioned and appropriate 'benevolent developmentalism' proferred.
At the end of the day, then, one is left a little frustrated that Hayami is unwilling treat seriously what are sometimes called ‘post-modern’ theories of development. These theories emphasize understanding the social construction of what Hayami terms ‘value systems’. I am more and more inclined to take these theories seriously. As I read this book I was doing fieldwork in West Africa with a team of local economics students. The spent the long, dark evenings telling tales of magic and sorcery and arguing (quite vehemently) that I could not understand the reality of those problems because I was a ‘European’. The economist in me listened, and interpreted the talk as anecdotal evidence of the lack of what the institutionalists call ‘generalized morality’. Hayami has a few sentences about this, and an interesting paragraph on the Western ‘culture of sin’ versus the Eastern ‘culture of shame’. But he does not undertake the job of understanding how societies become trapped in vicious circles of mutual suspicion. That requires insights into the deliberate manipulation of the full range of communicative acts, not just economic policy-making. I hope in the near future Hayami considers bringing his unique understanding of the Asian experience into a critical appraisal of the conscious transforming of rhetorical institutions into ones more conducive to longer and more fulfilling lives.
That caveat aside, it is worth repeating that this is the most readable and coherent development text to come along in a long time. It will undoubtedly be appreciated by students and professors alike.