Peter Boettke and Christopher J. Coyne of GMU have this nice paper on the topic. It also has some advice for current and wannabe econ advisers for government on development issues.
They review the history of dev econ in brief and show why there is no holy grail for development. The factors for development have varied from investment to innovation to human capital and now to instis. The authors show why all these ideas have failed broadly. I am skipping all this..
On instis, they say development eco does not include (read model) the role of informal, indigenous institutions. They point to the concept of metis:
As discussed above, the development community currently emphasizes the role of exogenous institutions while overlooking the critical role played by indigenous institutions. Achieving an understanding of indigenous institutions not only requires a comprehension of institutional change, but also a theory of why certain institutions are accepted or rejected. The anthropologist, James Scott (1998, pp. 6–7), has revived the Greek word metis which will serve as the foundation for our understanding of indigenous institutions.
Metis includes skills, culture, norms and conventions that are shaped by the experiences of the individual. This concept applies to both interactions between people (i.e., interpreting the gestures and actions of others) and between people and the physical environment (i.e., learning to ride a bike). The notion of metis is not one that can be written down neatly as a systematic set of instructions, but rather evolves through experience and practice. In terms of a concrete example, think of metis as the set of informal practices and expectations that allow ethnic groups to construct successful trade networks. For instance, orthodox Jews dominate the diamond trade in New York City (and many other locales), using a complex set of signals, cues, and bonding mechanisms to lower the cost of trading (Bernstein 1992). The trade would not function nearly as well if we simply dropped random traders into the same setting; that difference can be ascribed to metis.
Metis is not static in nature. Obtaining and acting on knowledge should be viewed as a changing process over time. As knowledge travels between groups and international borders, new metis is created and old metis fades away and loses relevance. Therefore, a key problem in economic development is whether metis has adapted to the new and changing circumstances. As we will see, if the underlying metis does not align with reforms and formal institutions, these institutions will fail to sustain and be effective even if they are growth-inducing institutions.10 It should also be noted that all societies have metis of some nature and its mere existence does not guarantee successful economic development. If metis aligns with institutions that are growth retarding, economic development will not be achieved.
They then question the role of economist in development. Despite repeated failures, the conventional econ roles continue:
The science of economics provides us with true laws of the world. The role of the economic theorist is: (1) to identify and elaborate on these laws and (2) to use them to explain complex economic facts. When attempting to predict future events, the economist is no longer a theorist or historian, but rather assumes the role of forecaster. This forecasting can take two forms—qualitative or quantitative. A qualitative forecast relies on economic laws to explain a causal relationship while a quantitative forecast places a numerical value on some future occurrence. It is often forgotten that economic laws, by their very nature, are qualitative rather then quantitative. When the forecaster engages in quantitative predictions, he has gone beyond the knowledge that the science of economics is able to provide.
To illustrate, the laws provided by the science of economics tell us that ceteris paribus when price increases, quantity demanded decreases (a qualitative forecast). It fails to tell us that an $X increase in price leads to a Y percent decrease in demand (a quantitative forecast). This is a critical realization because all of the development organizations—the World Bank, IMF, WTO, etc.—rely heavily on quantitative forecasts for their various programs as well as their analysis of economic development in general.15 In short, the economist’s comparative advantage is not in forecasting but in understanding economic laws and the specific situations where they are applicable.
The active role of the development agencies provides insight into why the conventional role of the economist persists. This persistence is grounded in a fundamental misunderstanding of the nature of economics and, hence, the role of the economist. It is our contention that the emphasis on government intervention and scientific management has led economists to seek to accomplish tasks which they cannot possibly achieve.
Based on these two roles we have econ as a student and as a savior:
when analyzing the pure market in which the government plays a passive role, the economist is left only to understand and explain the workings of the economy. In other words, the economist is a “Student” of the economy. The economist is able to explain the consequential chain for some occurrence—if X occurs, then Y, then Z, etc. In the context of development conomics, the economist as a “Student” is primarily concerned with understanding how the indigenous institutions of a particular country evolved to meet certain social needs and how they function within the unique cultural context of the country in question to coordinate economic activity.
However, the role of the economist changes drastically when we introduce development agencies (the World Bank, IMF, etc.) whose goal is to influence the operation of the market. Given that their aim is to actively intervene in the economy, the consequences of these acts are far more widespread and intricate than a simple causal connection (if X, then Y, etc.). Given the longer chains of reasoning needed to determine the impacts of various policies, the economist becomes even more important to the decision makers who take on an active role in intervening in the economic order.
In this context, the economist becomes a “Savior.” As a “Savior,” the economist is guided more by his, and his employer’s, desire to effect successful change than his ability to actually do so. The economist as “Savior” is overly ambitious regarding the effectiveness of his policy recommendations. These recommendations are not only limited to how government may be able to better enforce existing rules, but also are primarily concerned with what new institutional arrangements should be imposed to replace “inefficient” indigenous ones. What this means is that as government becomes increasingly interventionist, it requires economists to act as “Saviors” in order to provide recommendations as to how the government should intervene.
Explains very neatly why econs stop being econs as they join govt or these policy places.
They go onto show a matrix where these the two roles of econ – student vs saviour are analyses with govt as a referee vs. player. Needless to say the combi works the best when govt is a referee and econ is a student. When govt is a player and econ is a saviour we get mostly pathetic economic poliicies..
In the equilibrium depicted in the upper left box of the matrix, government is a “Player” and the economist is a “Savior.” This equilibrium represents the current situation in development economics as well as reform attempts by the development community over the past half a century.
In this equilibrium, the economist designs a new institutional order ignorant of existing indigenous, endogenously emerged arrangements and the government imposes this order. As long as the state is a “Player” in the economic game, savior-oriented economists will be required to formulate its various interventions and to provide credibility for these interventions to the populace. Section 2 provided an overview of the failure of this approach, which emphasizes only the “right” exogenous institutional mix to be imposed on underdeveloped economies.
There are 2 reasons why this player-saviour combo has remained despite failures:
The first relates to the discussion in this section regarding the perversion of what the discipline of economics can realistically accomplish. Clearly, a misunderstanding of the nature of the discipline is part of the reason that the role of the economist has become distorted in the context of economic development. Not only have economists been called on to provide recommendations for initial interventions, but they have also been called on to continue to provide advice as those initial interventions produce unintended consequences and fail to achieve the desired results.17
The second reason for the persistence of the conventional role of the economist is the perverse incentives faced by both those both in the development community and those in government positions in developing countries. Although the stated goal of the development community is to eradicate poverty and social ills, there is a strong incentive for those involved to fail in achieving this goal. Indeed, if the ultimate goal were in fact accomplished, those in the international development community would eradicate their own source of employment.
Proper role of econ is to remain a student and try and understand laws of economic development:
Given the nature of the science of economics, there is clearly a role for the economist both in situations where he must explain the causal chain—the pure market—and where he is called upon to analyze actions that influence market activity—the results of policy. The economist is first and foremost a student of the economic order. He not only needs to understand economic theory, but must also study both formal and informal institutions to understand their economic implications. Part of the study of the economic order involves understanding the metis that enables individual economic agents to coordinate their activities.
A full understanding of metis involves moving beyond the standard methods of looking at aggregate data and instead engaging in on-the-ground fieldwork to construct an analytical narrative (Boettke et al. 2005). This fieldwork entails detailed case studies and ethnographic data intertwined in a narrative to understand the everyday life of those in developing and transition countries. Through the use of surveys, directed interviews and participant-observer behavior, one can offer key insights into how individuals within a specific setting “get things done.”21 Given that policies and exogenous institutions that fail to align with the underlying metis will fail to be effective, this type of research is critical.
In addition to being a student, the economist can also engage in the role of educator in which he explains the workings of the market to the general public as well as those involved in policy. In this role, the economist plays a critical role in shaping public opinion and ideology which, as indicated by Mises, are critical for social change to take place.
A superb paper. I used to earlier believe that in the saviour role. But given the large-scale failure of several such saviours and limited understanding of ground realities has made me think otherwise. I mean the day any top econ joins the govt., you start seeing inconsistent ideas and thoughts from what was once a fairly consistent mind. He/she stops being an economist really.
On forecasting business I have nothing to say. We have increasingly become forecasters given the media hype around all this. It is a pity to see top names getting into this business when they are not really required to…