New Political Economy: History affects Development Policy
by Benjamin on April 27, 2009
“Listen up Economists: Why might history matter for Development Policy?” begins Prof. Ravi Kanbur‘s brief note on how history and, more importantly, a country’s perception of their own history has a significant effect on policy outcomes and policy making in developing countries, (and developed countries as well). Kanbur poses his argument within the framework of ‘new political economy’, where the old subject area – political economy – which includes history/politics/economy/economics is superimosed on the standard micro-economic model by way of a top layer of equations, so that “for those of us in the new political economy school, we might also try to endogenize the policy choice itself, by in turn modeling the policy and political process, the incentives of the different players (interest groups)”.
He criticisies policy models for not including political response, especially when theoretical work on this has moved forward, so “paradoxically, therefore, where it matters most we tend to ignore politics in the policy prescription, although these days our research papers are replete with models of rational choice politics” meaning that understanding the politics of the present and the influence of the past upon it, is very important for any development economist. Crucially,
It is the embedding of the past in the present’s perception of policy that is the transmission mechanism linking history to today’s development policy.
So history matters, politics matters, perceptions of the economy matter, all in-so-far as they can be incorporated into the typical micro economic model through a set of appropriate equations. This might be the achilles heel of the approach – at least for the moment – as we seem to be adding a rational optimising politician to the rational optimising agent. Can history then be worked into the agents utility function to make the politican redundant? Is that what the more ‘traditional’ micro-economist would argue? Either way, I guess people interested in institutions would encourage the seperation…
New Political Economy might not have the richness of Political Economy, but it does include the beginnings of a reply from microeconomics to the criticism of being a-historical and a-social, and therefore not very useful in the formulation of policy. I am not sure that it should be thought of as a ‘new’ political economy, but it is definetly a step in a new(ish) direction.
The social phenomena political economy and economics aspire to explain and predict have from the beginning of speculation about these subject presented two aspects. On the one hand it is clear from our daily experience that economic phenomena (prices, production, consumption, and so forth) arise from individual actions (going to the store and buying something, contracting for the construction of a building and the like). On the other hand, these individual actions always present themselves as aggregate, statistical phenomena (the market price, gross domestic product, etc.) A peculiarity of economics is that the very phenomena it studies take a quantitative form (market transactions, accounts) produced directly from the phenomena. The profit and loss of a company, or the net worth of a household, are quantities that are inherent in the existence of the company of the household. The economist may have to take some trouble to collect this data and organize it, but is not required, like the physicist or biologist, to devise instruments to represent the phenomenon studied (the behavior of the electron or the cell, for example) in a quantitative form.