The U.S. economic model might not work here.

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How Should Developing Nations Grow?

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Lant Pritchett is a development economist, which means that he studies why countries make (or fail to make) the transition from poor to rich. He teaches at Harvard’s Kennedy School of Government, which makes him pretty elite. I, on the other hand, have never even studied development economics. So when I say that I think Pritchett’s four criteria for determinants of development are almost entirely wrong, you should take it with several grains of salt. 

Pritchett laid them out in a recent blog post about women’s self-help groups in West Bengal, which the World Bank financed as a development initiative. Pritchett said that these groups didn’t pass his “smell test.” Alex Tabarrok, writing at Marginal Revolution, summarized the four key requirements of Pritchett’s smell test in quite a pithy manner. Here they are:

1. More developed countries must have more X than less developed countries.

2. The developed countries must have more X than when they were less developed.

3. Recent development successes must have more X than development failures.

4. Countries that are developing rapidly must have more rapid growth of X than those that are developing slowly.

I think that three of these are flat-out wrong. I don’t mean that good development characteristics will never pass these tests, only that they fairly obviously don’t have to. 

Let’s take item  No. 1. Pritchett says that if something is good for development, more developed countries will have more of it. What if we make an analogy to human development? Breastfeeding is good for babies’ growth. Is it good for adults? Let’s hope not! 

We send 5-year-olds to kindergarten to play with blocks and learn the alphabet. Should we do this for successful 40-year-olds? I predict many will protest. 

I am not trying to condescend to poor countries or label them as “children.” I’m just pointing out that the things that cause early-stage growth often don’t stick around after growth is complete. Another analogy would be startup companies. Do we see General Electric taking venture capital money? No, because it no longer needs it. 

So what kind of things might be good for developing nations but not for advanced nations? How about spending on basic research? Does it make sense for Burma to devote large percentages of its gross domestic product to develop stem-cell therapy? No, because Burmese resources won't add significantly to the global effort to develop stem-cell therapy; those resources could be much better spent building infrastructure. 

How about infrastructure spending, for that matter? A country with few roads needs to build a lot of them in order to have an advanced economy. But a rich country -- unless its roads are in a state of disrepair, as the U.S.’s are at the moment -- doesn’t need to splurge on road-building. If it does, it could end up wasting a lot of money, as Japan did in the 1990s. 

Another example might be intellectual property protection. It makes sense for advanced countries, at the technological frontier, to have some form of IP protection, in order to encourage and reward technological progress. But for a developing country, this doesn’t necessarily make sense. It’s faster and easier to simply copy technologies from the rich countries. This is what the U.S. did when it copied British technologies in the 1800s. It’s what China did when it copied U.S. technologies in the 1990s and 2000s. If these developing countries had enacted strict IP protections, it would have slowed their growth without doing much to boost innovation. 

I could keep going. But the point is clear -- what is appropriate for a rich country isn't always appropriate for a developing country, and vice versa. This also covers Pritchett’s item No. 2. 

It also covers Pritchett’s item No. 4. Pritchett claims that if X is good for development, fast-growing countries should have a faster rate of increase of X than slow-growing countries. But if something is good for developing countries and not for rich countries, we’d expect that thing to decrease faster as countries grow faster. In other words, we’d expect countries to grow out of it. For example, take infrastructure spending, as described above. We should expect it to decrease at a greater rate for countries with faster growth, because they’re growing out of it at a more rapid clip. 

In other words, poor countries shouldn’t necessarily just imitate rich countries. This may have been the problem with the Washington Consensus, the development prescriptions that U.S. economists dished out to poor countries in the 1990s. That advice is largely perceived to have been a failure. The political institutions of the poor countries might simply not have been able to handle the instabilities caused by the economic disruptions that resulted from following the advice. 

So although I’m no development economist, it seems obvious to me that we need better development economics, and that simply having poor countries copy rich countries isn't necessarily going to get the job done. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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