Some economists argue that as the incomes of developing countries rise and the methodologies of mainstream economics ostensibly converge with development studies, the distinctiveness of development economics has diminished, which could bring its end. Such a perspective contends that the field no longer requires a separate existence. However, such arguments overlook the role of imperialism and the consequent entrenched structural inequalities that are engendered within developing countries and between developed and developing countries. Development economics is far from irrelevant; it is crucial in addressing the deep-rooted issues that mainstream economics tends to overlook. Let’s see how.

The role of imperialism

Colonialism gave rise to the modern distinction between developed countries (colonizers) and developing countries (colonies). These came with several facets: In settler colonies, the indigenous populations faced genocide and were replaced by Europeans, bringing the settlements under the aegis of capital. Colonial empires of each colonizing country became sources of minerals and farm produce (obtained via a drain of surplus) and served as reserve markets for manufactured commodities produced in the colonizing countries — this led to colonial de-industrialization while Britain banned import of manufactured commodities between the 18th and 19th centuries. Semi-colonies were jointly oppressed by more than one colonizing country. Colonies also provided slaves and indentured workers to work in colonial mines and plantations.

Investment during the colonial period proceeded differently in the colonizing and colonized countries. In the colonies, investment was principally in mines, plantations and transport infrastructure, which in tandem enabled colonies to export crops and minerals while importing manufactured commodities from the colonizing countries. The drain of surplus from the colonies not only allowed 19th century Britain to open its domestic market for consumer goods exports from other colonizing countries (United States, Germany, France etc.), but also export capital to these other colonizing countries (Japan, United States etc.).

The other colonizing countries deployed industrial policy whereby they initially imported capital goods from Britain but gradually ascended the technological ladder. By the 20th century, they had surpassed Britain technologically. The income deflation that British capital enforced on its colonies eventually caused the drain of surplus to diminish. Japanese competition negatively impacted colonies’ ability to be reserve markets for British capital. Consequently, British capital tended to emphasize finance to the detriment of enterprise (relative to other colonizing countries) that cemented its technological lag.

After 1914, World War I disrupted the world economy. British hegemony declined, and limited industrialization took place in some colonies, such as India. But that was also influenced by British policy designated defense procurement at the lower reaches of the technological ladder. On the other hand, increasing conflict among the colonizing powers allowed some policy space for limited industrialization in some Latin American countries.

When a wave of decolonization began in the middle of the 20th century, there existed several differences between the developed and the developing countries. First, there was a significant difference in average per capita income between developed and developing countries. Second, economic activities in the developing countries were principally located in the lower reaches of the technological ladder, especially production of minerals and farm produce, while the opposite was the case in the developed countries. Third, there existed a large labor surplus in the developing countries who were either unemployed, underemployed or engaged in petty production.

How has the picture changed since then? It is indisputable that the per capita income gap between developed countries and a few hitherto developing countries has declined. This group includes two types of countries.

The first is countries or territories that have small geography and populations, such as Singapore, Taiwan, South Korea and Hong Kong. Thanks to the Soviet Union’s existence, these countries were able to form special political relationships with the US based on industrial policy after 1945. The policies ensured both market access for exports and relevant technology transfer. These countries were able to selectively ascend the technological ladder and achieve per capita income levels comparable to developed countries. Some of these gains decelerated after the 1997–1998 Asian Crisis when these US political compulsions declined following the Soviet Union’s dissolution in 1991.

Second, there are some oil exporting countries who have achieved high levels of per capita income. Like the first group, they have a special political relationship with the US. They have constituted themselves into the Organization of Petroleum Exporting Countries. The industrial structure of this second group is even less diversified than countries and territories in the first group.

The development experience of both these types evidently cannot be replicated in other countries. After all, the US is incapable of having a special political relationship with all developing countries.

China, a large developing country both in terms of population and land area, has experienced rapid growth. As a result, it has established a diversified industrial structure that is historically unprecedented and an ascent of the technological ladder that is now at least equal to the US. But China’s per capita income level is well below that of developed countries.

As far as the other developing countries are concerned (which comprise a majority of the world’s population), their per capita income levels are either low or middle income. They still operate at the relatively lower reaches of the technological ladder and are characterized by a large labor surplus.

Therefore, the claim that the world economies are merely different in income levels but their internal functioning involves the same set of principles is empirically untenable. These differences between the developed and developing countries may be due to international (external) factors, domestic (internal) factors or some combination of both. 

In all three cases, development economics remains relevant. Let’s examine some of these themes after addressing some methodological points.

Institutions and economic development

It is being argued that the rise in per capita income levels of some developing countries and the increasing methodological convergence with mainstream economics have blurred the lines between development economics and other branches of economics. It is implied that as some countries have moved from low- to middle-income status, the unique characteristics of development economics — focused on addressing the problems of poor countries — are becoming obsolete.

Economists argue that institutions have played a key role in economic development. Our arguments in the previous section may be seen as positing the role of international institutions (imperialism) in determining the extent of diffusion of economic development.

Other economists, such as Daron Acemoglu and Simon Johnson, have argued that inclusive political and economic institutions are critical for long-term sustainable development, whereas extractive institutions can stunt growth and create entrenched inequalities. Even countries with rising incomes can face stagnation or regression if their institutions remain or become weak or serve only the interests of existing elites. These views have been critiqued from alternative perspectives.

Moreover, rising incomes can mask deeper structural issues such as decline or stagnation in life expectancy trends, inequality and deceleration in innovation. Without addressing these institutional deficiencies, some countries can easily revert to underdevelopment, political instability and systemic economic crises.

Therefore, development economics retains its distinctiveness by offering insights into how historical, social and political structures shape economic outcomes that differ across countries.

Development microeconomics and development macroeconomics

Ravi Kanbur  claims  that “in the realm of theory and conceptualisation, many of the ‘old’ development economics perspectives on departure of individual choice behaviour from textbook rational choice theory, or of market failure, are now seen as very much part of mainstream economics debates.”

Two factors are relevant here. First, this quotation is about microeconomics. It’s true that some mainstream economists recognize that individual behavior departs from neoclassical tenets. This is the case in both developed and developing countries.

Second, the macroeconomic setting within which behavior of individuals unfolds is quite different in developed and developing countries. Eminent economists Utsa and Prabhat Patnaik argue that imperialism involves a set up where the production pattern of developing countries is decisively influenced by developed countries by constraining them to be open to specific types of international trade and capital flows. Consequently, farm produce and minerals, which are primarily produced in developing countries, are exported to developed countries by squeezing incomes of non-elites in developing countries. As long as this is valid, macroeconomic models of developed countries need not explicitly take into account the sector producing farm produce and minerals. Therefore, macroeconomic models of developing countries do take into account the sector producing farm produce and minerals (often denoted as the agricultural sector in such models).

Similarly, in a world where the US dollar is the reserve currency, it does not follow that all other countries face identical external constraints. For instance, the interest rate differential between the US and other developed countries on average significantly falls short of the average interest rate differential between the US and developing countries. Consequently, the contours of international debt trends vary between developed and developing countries.

Neoliberal globalization and inequality

The wave of neoliberal globalization that began in the 1970s involved the following aspects: First, there’s the emergence of international financial capital, centered in the US but mobile across countries. This emergence has attenuated the effectiveness of policy interventions contradictory to international finance capital’s interests. Second, there’s limited mobility of enterprise capital (involved largely in economic activities at the relatively lower reaches of the technological ladder) in areas that are principally in and around China, on account of labor arbitrage. Third, due to the first and second factors, the share of wages in output in developed and developing countries has declined, leading to a decelerating tendency of world demand. The wage gap between the developed and developing countries has not declined to such an extent (taking into account other elements of cost and demand) that labor arbitrage could result in a worldwide transfer of production capacity, at all levels of the technological ladder, from the developed to the developing countries.

More broadly, Amit Bhaduri points out that globalization has not only widened the gap between rich and poor on a global scale, but has exacerbated inequalities within both developed and developing countries. A.K. Dutt argues that an export-led growth model tends to confine developing countries to the lower reaches of the technological ladder, unless there is investment that furthers technological change and market access remains intact. It also results in developing countries being dependent on developed countries for commodities that are at the upper reaches of the technological ladder. The model makes developing countries more vulnerable to external shocks even if they are sector-specific, as long as this sector is key to the exports of a particular developing country.

It is worth reiterating that all countries in the world cannot engage in export-led growth since world exports identically equal world imports. Besides, if all developing countries seek to push out exports of commodities that are produced at the lower reaches of the technological ladder then that would only contribute to the stabilization of inflation in developed countries. Bhaduri’s commentary illustrates the relevance of development economics by giving rise to a critique of export-led growth in developing countries and making the case for a domestic, demand-driven approach to economic development. Only through an industrial policy that nurtures local industries and domestic living standards can developing countries seek to attain meaningful strategic autonomy.

Since the 1970s, economic policy has been dominated by neoliberalism and has pressed working people the world over. As a result, inequality has risen, as identified by Pranab Bardhan. The rise in equality has principally involved capital gaining at the expense of labor. Moreover, there has been a further squeeze in the magnitude and composition of public welfare (or social wage including education, healthcare, infrastructure etc.). But this squeeze has been more pronounced in developing countries where besides the unemployed, petty producers and the underemployed a new category of a precariat has emerged. These people are poor in spite of working full time — workers in the gig economy are an example.

Using a critical examination of neoliberalism, A.K. Dutt also seeks to highlight a need for development strategies centered on redistribution and active state intervention in developing countries. Dutt argues that the fundamental inadequacies of neoliberal policies, by design, neglect issues of social welfare and equity. Neoliberalism places profits of firms (primarily in the developed countries) over people, failing to address the structural issues that keep developing countries trapped in poverty and inequality.

By emphasizing the importance of non-neoliberal state intervention, Dutt challenges the neoliberal orthodoxy. He goes on to propose that governments in developing countries take an active role in regulating markets, redistributing wealth and investing in public goods such as education, healthcare and infrastructure. These measures promote equitable growth and lay the foundation for more resilient economies in developing countries.

The need for context-specific development strategies

Leading economist, Dani Rodrik’s critique of mainstream economics underscores the critical role of development economics in making a case for inclusive development. Mainstream economic models often adopt a one-size-fits-all approach, assuming both developed and developing economies are homogeneous. This view overlooks the unique historical, institutional and social contexts of each country. This oversight is particularly harmful in the Global South, where policies grounded in such untenable generalizations have exacerbated inequality and failed to address the needs of marginalized people.

Rodrik points to the failures of neoliberal policies, such as the Structural Adjustment Programs of the 1980s and 1990s, which prioritized austerity and market liberalization without considering local realities and, arguably, their rationale. These programs often deepened poverty and eroded state capacities, demonstrating the limitations of mainstream economics. In contrast, development economics fills this gap by advocating for context-specific economic strategies.

Nobel laureate Amartya Sen emphasizes the need for an inclusive approach to development. He argues that it should be measured not merely by economic growth, but by improvements in human well-being and freedom. Sen’s Capability Approach aligns with the principles of development economics, which prioritizes the expansion of human freedoms, access to education, healthcare and other social goods as central to development — issues especially relevant in developing countries.

Joseph Stiglitz, also a Nobel laureate  critiques the failures of neoliberal policies in fostering sustainable development. He argues that laissez-faire alone cannot solve deep-rooted issues like inequality and that state intervention is crucial in providing public goods and ensuring less inequitable outcomes. Like Rodrik, Stiglitz asserts that development strategies must be context-specific, acknowledging that different countries face different barriers to growth.

These economists collectively reinforce the centrality of development economics in creating inclusive development strategies that recognize the complexities of each country’s unique difficulties. Their work emphasizes the need for economic policies that go beyond growth and efficiency, focusing instead on equity, human welfare and sustainable, context-sensitive development. By addressing these dimensions, development economics remains essential in designing pathways to more inclusive economic growth.

The case for industrial policy

Influential economist and author known for his critiques of neoliberalism and advocacy of industrial policy, Ha-Joon Chang mentions that developed countries advocate that developing countries must adopt laissez-faire policies. Yet as previously explained, they themselves have used industrial policies to attain the status of developed countries. These trends have been well documented, though US policy makers have gone to great lengths to disguise their use of industrial policy.

Chang’s critique reveals that industrial policy remains crucial for countries at every stage of economic development. Faced with the strategic challenge from China, developed countries — the US most of all — are explicitly resorting to import bans, tariffs, subsidies, export controls etc. Neoliberalism, which denies developing countries these tools, perpetuates the very structural inequalities that imperialism engenders.

Chang’s insights are particularly relevant today as many developing countries still operate in the relatively lower reaches of the technological ladder. If it challenges neoliberalism, development economics could provide a framework for promoting industrial policies that can support the long-term structural transformation these countries need for economic development.

The persistence of underdevelopment and the fallacy of convergence

Kanbur’s argument fails to account for the persistent structural barriers to convergence between rich and poor countries. According to mainstream growth models, developing countries should grow faster than developed countries if they have similar levels of technology and institutional quality. Yet convergence remains elusive for a number of reasons. First, technological levels are never the same between both sets of countries, not least because of technology controls instituted by developed countries. Second, institutional quality does vary among developed and developing countries — weak, non-participative institutions and deficits in infrastructure exist in developing countries. Mancur Olson’s work on institutional inefficiencies shows how these barriers prevent convergence.

More generally, convergence between developed and developing countries transpires if four conditions are met. First, there must be full mobility of enterprise capital across countries. Second, there must be full mobility of workers across countries. Third, exports of developing countries to developed countries must be adequately large. Fourth, consumption, especially of elites, in developing countries and composition of capital goods that constitute investment must be sufficiently elastic with respect to the relative price of domestically produced commodities vis-à-vis commodities produced in the developed countries.

Evidently, the second and fourth conditions are not satisfied. The first and third are also not satisfied despite China’s role in the world economy. This is because the share of other developing countries in world exports and greenfield foreign direct investment isn’t high enough to sufficiently narrow the development gap.

Development economics as a field of resistance

Development economics remains not only relevant but essential, as developed and developing countries are linked but dissimilar. Its focus on industrial policy and context-specific policies offers the tools necessary to resist the status quo and grapple with economic development challenges in a world with no convergence.

By focusing on the structural difficulties that perpetuate poverty and inequality, development economics serves as a field of resistance, pushing back against neoliberal orthodoxy.

Needless to say, development economics is pluralist by definition. We have highlighted several diverse perspectives here, even ones we do not necessarily agree with.

The assertion that development economics has lost its distinctiveness is not just misguided, it’s reductionist. It overlooks that development economics comprises development microeconomics, development macroeconomics and related fields like international economics. Kanbur’s proposition involves the conflation of development microeconomics with the whole of development economics.

It is true that per capita income levels in some developing countries have risen. However, the gap between the average per capita income levels of both sets of countries tends to be large. Moreover, even some mainstream economists have argued that developing countries face a middle income trap. No matter how this middle income trap is theorized, it is the case that this is a challenge only for developing countries.

This narrow focus solely on per capita income overlooks the pervasive structural inequalities, historically persistent divergences and the adverse impact of neoliberalism that continue to shape the world economy. Far from obsolete, development economics remains indispensable in addressing these multifaceted issues.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.