Keynesian Development Economics

Summary

Post WW2 development economics focused on structural change towards modern advanced industries through government intervention.

Assumptions

  • Structural change is key to economic development.
  • Keynesian macroeconomic foundation.
  • Dirigiste dogma.
  • Rosenstein-Rodan (1943) suggested modern methods only > traditional at scale o/w not worth paying higher wages. Scale itself depended upon on size of market therefore if countries didn't develop at scale they could be trapped in poverty.
  • Worsening terms-of-trade from exporting primary commodities to manufacturing economies
  • Failure to develop capital industries is exogenously determined by structural rigidities (monopolies), labour's perverse response to price signals and or the immobility of factors.

Theory/Model

Government intervention to facilitate structural change through import substitution by: 

  • Exchange controls
  • Quantitative restrictions on imports

Application

According to Yifu Lin Comparative Advantage Defying (CAD) development and the protection of nonviable industries typically lead to:

  1. Increase in the price of imports and import-substituting goods relative to the world price and distortions in incentives and economically inefficient consumption.
  2. Fragmentation of markets and therefore too many small-scale goods.
  3. Decreased competition from foreign firms and support for the monopoly power of domestic firms - which were run by politically well connected owners
  4. Opportunities for rents and corruption which raised input and transaction costs.

Predictions

Evidence

  • Justin Yifu Lin argues that other schools of economic development have failed because 2/3 of low income countries in 1960 failed to reach middle income in 2009 and those in middle income have stayed the same or regressed.
  • Keynesian theories decline with stagflation, Latin American debt crisis and collapse of the socialist planning systems in the 1980s

Evaluation