Economic Development and Growth - Literature review Example

Literature Review on Economic Development and Growth The most common challenge in economics is to explain the nature and cause ofeconomic development. Anyway, what is there that exactly needs explanation? Are there facts? One of the most striking fact is historical-the rapid growth in the rate of economic evolution since the beginning of 1800c. Second is geographical- the immense discrepancy in the stages of economic growth across different regions of the world today. The arising questions include; why did economic progress take place? Why was it not global? In this research, the questions have been addressed by different experts from the overall field of economics. Economic history has highlighted the question of change in comparison to time while economic development has focused on the question of modern differences within states (Alexander, 2007, p.12). Ricardian theory has been very resourceful in guiding works in the three studies until recently. The theory deals with economic development in terms of production size within an economy. It assumes an economy is some kind of a machine that changes input such as natural resources, capital and labor to output (Edward, 2004, p.45). The size of production and technology in machines are determinants of output. In case there is a rapid escalation in output, it could be a result of large input or lack of incorporation of technology (Clark, 2007, p. 37). Robert Merton Solow famous for his theory of economic growth depicted that an advance in physical inputs should explain just a small section of monitored changes in output. Ricardian theory primarily focuses on the non-physical influences such as technological changes and human resources (knowledge and expertise) in explaining growth. This theory has been interestingly wanting both by development economists as well as economic historians (Baumeister, 2005, p.104). The challenge with this theory is that it does not offer an explanation for increase of human capital and technological growth in the West since 1800c as compared to other parts of the world. According to another economist, Pomeranz (2000) this was purely caused by new resources such as coalfield in England and technology in America. Nevertheless, none of these theories has received total acceptance. The challenge for development economics, which is an extensive field, is that the Ricardian theory has proved to be untrustworthy guide to policy. Several decades after the WWII, development economists supported a number of dirigiste guidelines for Less Developed Countries with an aim of making up distinguished shortages in technology and resources. The results were very disappointing. The failing of this theory has made economists to focus further in the field for explanations of growth and development (Shirley, 2005). Particularly, it is possible to realize the full potential of an economy by measuring its technology and resources. To many development economists, this is a far-fetched assumption. They are convinced that the problem of the Less Developed Countries has nothing to do with lack of potential but rather helplessness in achieving the potential (Pomeranz, 2000, p.89). The obstacles in their development are not lack of technology and resources, but unsuccessful attempts to exploit the available resources and technologies. Both in development economics and historic economics, attention has been focused on how and what economies do to realize their potential. Economists are not looking at technology and resources only; their interests have expanded to institutions such as political and social frameworks that enable or hinder productive economic activities. This brings in the review of the third paper. To be specific, economic and political developments are closely related (Alexander, 2007, p.200). This revitalization of interest in the two institutions was started by economic historians North and Thomas. However, other contributions from others have been important for example McNeil and Tullock. In view of this study, economic development and institutions emerged from two basic questions. How do different institutional arrangements affect economic growth and progression? And how and why do ‘good’ institutions emerge? To tackle these questions, economists have depended on major methods of contemporary economics-mathematical theory and econometrics (statistical). Development economics immensely focused on econometrics (Douglas et al, 2007, p.127). Basically, it analyzes country level data in terms of GDP in addition to legal, financial and political institutions with an aim of revealing which institutions contribute to economic growth. Although it is simple to establish such institutions, challenges arise when determining the specific institutions in addition to proving growth results from good institutions and not the opposite (Douglas et al 2007, 134). In tandem, the quality of data poses a challenge in what can be learnt: there is a lot of information in cumulative data at the national level across all countries. Also, institutions don’t lend themselves to quantification; therefore the numerical measures used are always problematical (Edward, 2004, p.39). Nevertheless, this literature is faced by a deeper weakness. It does not and cannot shed any light on the effects of dissimilar institutions on economic growth. This work is significantly theoretical since it is not supported by any theory on the functioning of economies and institutions and their correlations. In fact, such an understanding would be useless because data at this level of aggregation fails to shed any light on the mechanism (Kohn, 2006, p.108). These are micro influences that cannot be handled with micro data. Even as the development economics takes a macro and econometric plan to institutions, economic history has immensely preferred micro and theoretical views which it refers to as New Institutional Economics that has emerged from rediscovery of institutions (Kenneth, 2007, p.29). New as used here sets itself apart from the school of institutional economics that predated statistical and mathematical rebellions in economics in the 40s and 50s. Economics of the old institutions immensely rejected formal theoretical evaluations, but the new institutions embrace it. Therefore, practitioners of New Institutional Economics try to explicate the subsistence and purpose of economic and political institutions in reference to rational behaviors, sometimes with the help of mathematical models (Kohn, 2006, p.40). For example, a modern book by Greif combines his influential work about medieval institutions. He defines his approach as an ‘analytical narrative’. His interest is focused on specific historical institutions such as Maghbiri business men in medieval Egypt and the political organization of the Genoese Republic in context with game theoretical investigation of the question at hand (Beinhocker, 2006, p.89). Greif provides significant insight concerning the microeconomics of the institutions by extension investigations. However, the method of analytical narrative does mandate him to directly tackle the two questions posed in this part three of this review (How do different institutional arrangements affect economic growth and progression? How and why do ‘good’ institutions emerge)? Another book by North, Wallis and Weingast does not focus on these questions. It is more extensive in it coverage as well as its aims-it does not present any definition of the whole development of human history (Alexander, 2007, p.61). It also does not look at micro but rather macro influences, and does not use any unambiguous mathematical modeling. They argued that economic and political organizations are interdependent and further, there exist two sections of an organic organizational total for tackling a single basic problem, as in coordination of activities within many people. The motivation for accomplishing such coordination is higher productivity at last (Alexander, 2007, 64). Political organization in an institution is responsible for possible conditions of economic organization. To be more specific, it is more concerned with preventing violence which is the main hindrance of economic productivity. The major vehicle of political organization is the country, and the development of a country is therefore the core of economical and political development (Douglas et al 2007, p.130). This work is very useful in understanding the political and economical development although it shares two basic faults with NIE program. The model of human behavior whereby NIE rest is atomistic rational individual. In the latest review, Field, another economic genius brought substantiation from psychology, anthropology and behavioral economics that rebuffed the model. His argument was human developed as social and cultural beings with an inborn trend of cooperativeness (Douglas et al 2007, p.131). This model challenges that of North, Wallis and Weingast and not Hobbesian understanding of significant responsibility of the state in controlling cruel and self-centered human nature. Naturally, human are cooperative and are able to develop a viable social situation in the absence of a coercive state (Kohn, 2006, p.43). He further doubted the importance of ‘analytical’ analytical narrative as a method of understanding institutions. Additionally, the rational model of human behavior is a common overview that presented Ricardian with a workable groundwork. Nevertheless, it does not serve as sufficient foundation for institutional studies. Another weakness facing the North, Wallis and Weingast view is their treatment of the economy. Their contribution towards economic development is very minimal. It is hard to understand how the economy is affected by institutions and verse versa without knowing how the economy functions. North, Wallis and Weingast and NIE totally reject Ricardian theory (technology and resources) and introduce social technology of the institutions (Edward, et al, 2003, p. 78). So far, the big question is, where does this leave us in the pursuit of understanding the nature and roots of economic growth? It is obvious a lot more will be expected from this line of research. Economic history has focused on micro and theoretical methods. The outcome has shed some substantial light on the work of institutions. However, less attention has been paid to the nature of the general economic progression which institutions are set. This has constrained the input of this line of research in dealing with the wider questions of economic development. Still this aspect of research holds a lot of significance in furthering our understanding if the weaknesses are addressed. References Alexander, J. F. (2007). "Beyond foraging: behavioral science and the future of institutional economics," Journal of Institutional Economics 1 (22), 89-92. Baumeister, R.F. (2005). The cultural animal: human nature, meaning, and social life. Oxford: NewYork. Beinhocker, K. (2006). The origin of wealth: evolution, complexity, and the radical remaking of economics. Boston: Mass. Clark,G. (2007). "A Review of Avner Greifs Institutions and the Path to the Modern Economy: Lessons from Medieval Trade, "Journal of Economic Literature (45) 142-56. Douglas, C., North, J., Wallis, J. & Weingast, B.R. (2007). “A conceptual framework for interpreting human history," Harvard Institute for Quantitative Social Science. 126-145. Edward, L. G. (2004). "Do Institutions Cause Growth? “Journal of Economic Growth (9), 56-64. Kohn,M. (2006). "Value and exchange, "Cato Journal. For a discussion of these two very different views of the economy and for references to work that takes the second view. Pomeranz, K. (2000). The great divergence. Europe, China, and the making of the modern world economy. N.J. Princeton. (5) 87-92. Shirley,M. (2005). Institutions and development," Handbook of new institutional economics. (79) 3 34-51. Read More