ARE THE POOR DIFFERENT ?

Developing countries have their own branch of economics. It is far from obvious that they need it.

Michel Camdessus, the manag­ing director of the IMF, calls it the “silent revolution”. Wall Street financiers talk of the “emerging market era”. Other commentators refer more sourly to the “triumph of free-market economics”. They are all describing the same phenom­enon: the dramatic shift in economic pol­icy that has swept the developing world in the past few years.

The individual prescriptions are, by now, familiar: dismantle trade barriers, tighten fiscal policy, privatise state-owned firms, attack inflation, and so forth. Underlying them all, however, is an implicit assumption that the basic premises of prudent economic manage­ment are the same whether you are in Bra­zil, Benin or Belgium.

But is this assumption right? Three de­cades ago most economists would have answered, No. Spawned by the end of the colonial era in the 1950s and 1960s, a whole branch of economic theory grew up around the question of how to pro­mote economic development in poor countries. The proposition on which “development economics” was built was that poor countries were intrinsically dif­ferent from rich ones, and so needed their own set of economic models.

Some development economists ar­gued, for instance, that the self-inter­ested, rational individual (the basic actor in most economists’ models since Adam Smith’s time), did not exist in “tradi­tional” tribal societies. And they claimed that because many poor countries had large agricultural populations and were often dependent on a few commodity ex­ports for foreign-exchange earnings, eco­nomic policies that suited rich nations would not be appropriate for them.

With hindsight, much of this was mis­guided, and policies based on it had di­sastrous effects. Development economists believed that the state had to play a big role in fostering modernisation. But this led to huge, corrupt and inefficient bureaucracies, massive budget deficits and, indirectly, to rampant inflation. Much of the “silent revolution” of the past decade has consisted of correcting these mistakes.

So what, if anything, is left of develop­ment economics? Pierre-Richard Agenor, an economist at the IMF, argues that while the ba­sic microeconomic assumptions about how people behave are similar for all countries, developing economies still dif­fer “structurally” from rich ones, and therefore demand different models.

To support their case, the author lists the traits that he reckons “typical” devel­oping countries still share. They tend to be more open than richer ones (that is to say, trade contributes a bigger fraction of national income), and to depend more on foreign capital. They tend to have fixed exchange rates and, often, exchange con­trols. Their financial markets are rudi­mentary and often distorted by heavy government regulation. The public sector plays a bigger role than in rich countries, particularly in directing the pattern of investment.

One obvious difficulty with this ap­proach is that there is, in fact, no such thing as a “typical” developing country. Remember that the official “developing world” includes the fast-growing Asian ti­gers, the volatile economies of Latin America and the poorest nations in Af­rica. While some countries may share a number of the traits that the authors out­line, few share them all.

A second objection is that many of the “structural differences”   are, in fact, the relics of old policies inspired bydevelopment economics. Exchange controls are an example. As countries begin their re­form process, these have been quickly lifted. Ditto for some of the restrictions on local financial markets.

Moreover, other apparent differences such as the importance of trade and capital flows in emerg­ing markets - are nothing of the sort. They apply equally to many industrialised countries. This does have an implication for macroeconomics, but for the field in general, not just for the poor world. For simplicity’s sake, most traditional main­stream macroeconomic models assumed that an economy was closed (ie, that it had no relations with the rest of the world). In an increasingly integrated global econ­omy, this assumption makes little sense. Macroeconomics, in rich and poor coun­tries alike, must take the rest of the world into account.

That said, certain specific policy is­sues do seem to matter more in develop­ing countries than in rich ones. Few de­veloped countries, for example, have to contend with inflation rates of 20-30% a year; none has to worry about taming hyperinflation. In poorer countries, this problem is still high on the economic-pol­icy agenda. In less developed economies, policymakers have a smaller range of fi­nancial tools at their disposal. Conduct­ing monetary policy in an African coun­try where domestic bond markets barely exist is clearly different from influencing interest rates in, say, France.

Behind the times

In the early 1990’s stabilising high inflation and the aftermath of the 1980s debt crisis preoccupied many goverments.

Nowadays, the problems of coping with rapid swings in capital flows are more pressing - a fact that was high­lighted by Mexico’s financial crisis, 1998. As poor countries continue to free their markets and to curb the role of the state, many of the remaining “structural differences” with rich ones will disap­pear. Sooner rather than later, there will only be two types of macroeconomic pol­icy: good and bad.

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