On economic theories & Bangladesh development miracle
Books by two prominent Bangladeshi economists have been published simultaneously and both by renowned international publishers. But their resemblances are superficial and end there as the books' content are as different as apple is from orange, their taxonomy notwithstanding.
Professor Wahiduddin Mahmud's book Markets, Morals and Development, published by Routledge (2022), looks at, among others, economic theories as they work their way in market economies, with a view to finding their adequacy or lack of it in explaining the same. The essays in the slim collection, written for public and academic lectures in recent years, also has penetrating analyses on markets and morals, reappraisal of Amartya Sen's ideas on development, particularly of Bangladesh, scrutiny of institutions impacting on market for good and ill and attempt at theorising the new fangled subject of social business. The market is often taken for what it is, and not as it ought to be, though expectations of the normative are implicit. The book, in other words, does not aspire to be a blue print for a new economic order for developing countries ( Bangladesh, India etc.) to which references have been made as and when deemed fit by the author in his analysis. It is an academic's engagement with the reality of economics in the market place (microeconomics) and occasionally forays into the realm of policy making (macroeconomics), refreshingly blending the two. As Professor Kaushik Basu, a former chief economist of the World Bank, has said by way of a valedictory comment, the book is a 'survey and critique of modern economics --- using the developing country as a template'.
The book begins, adhering to time-tested conventions, with an introduction, tempting reviewers to rephrase it and make short shrift of their work. But what is new and not repeated subsequently is a thumbnail description of the lingering distrust of 'the dismal science', the epithet by which economics has been derided, firstly because of its dire predictions made about the future of humanity in a world of widespread impoverishment; secondly because of the inadequacies of the discipline to address the 'discontent of globalisation' and finally, for 'seeming to lend legitimacy to the market system that lacks compassion'.
In short, economic theories have been faulted for making wrong forecast in their descriptions and little or no prescription for correcting market imperfections. In respect of the last, Mahmud finds it an irony that Joseph Stiglitz received the Nobel Prize for theorising the problem of providing credit to the poor wrongly citing the case of Grameen Bank as a case study of moral hazard. This is just one instance where economic theory does not sit well with ground realities mentioned by Mahmud. Other examples mentioned by him include the demand- supply model (cobweb model) used in text book for explaining high annual price fluctuations in agricultural markets that is more applicable in the case of high-value minor crops than for major crops like cereals.
Some of the ideas and views that are conveyed in the introductory section find their place selectively in the five chapters of the book that follow, with the overarching theme of relation between economic theories and experiences of individuals, firms, sectors ( eg. agriculture) and countries (particularly developing ones), running through these as a leitmotif, enlivened by references to literature of the fictional vintage. It is a fascinating journey through the less frequented realm of microeconomics, relatively ignored in the more fashionable public discourse on macroeconomics. The reward is as stimulating as it is challenging to both conventional and received wisdoms.
The first chapter entitled 'Thinking like an economist' begins with a preface to the study and practice of economics, and quotes John Maynard Keynes in stressing two aspects that should be kept in mind while studying economics: (a) economic issues may be very complex and because of that (b) useful economics is necessarily eclectic. Proceeding from these two premises Mahmud argues that there is no evidence of at least any long-term damage to ethical values from thinking like an economist, implying the potential skill of economic profession for both unravelling the complex issues with multi- disciplinary tools of analysis, including ethical ones and making that accessible to lay public. He then suggests that use of an economic model (theory) can often be much more helpful in understanding complex economic issues than gathering incoherent ideas from vast amount of general reading. Thus a case is made out for 'a highly abstract simplified version of the real- life situations'. Applying this tool (model/ theory) for analysing impact of a policy intervention he considers the effectiveness of using randomised control trials, ala Abhijit Esther duo, and rejects it on ground of its unreliability for capturing the counterfactual as contrasted with the actual. Instead, an alternative for assessing the counterfactual is conceived through administering a questionnaire that involves a speculation on the part of respondents. Capturing the counterfactual (what would have happened if actual did not occur) is important to test the accuracy of a theory in representing the outcome, real or imagined. Mahmud cautions that answers by respondents may be biased as they may not behave rationally, deviating from the cardinal assumption made in economic theory. He then points out that modern field of behavioural science is helping economists to understand this bias (instinctive thinking) to improve upon a particular theory.
The problem of rational versus instinctive behaviour and its implications for economic theory is further explored in the context of comparative advantage used in the theory of international trade and with regard to the concept of sunk cost. Just as most non- economists tend instinctively to think in terms of absolute advantage instead of comparative advantage, recent psychological studies suggest that irrational decisions may be made by people who are not trained to think in terms of the economic logic of the sunk cost.
Behavioural economics is pressed into service, once again, to explain the saving difficulties of the poor, using the time-inconsistency factor which refers to altered preferences between two points of time.
The Keynesian model of macroeconomic model receives a good deal of attention from the writer as he explains how the theory underpinning the model can be viewed from different perspectives in the context of developed vs less developed countries. He argues, once the contrast is explained, that one can proceed to show how the Keynesian model applies only obliquely after suitable modification to less developed economies having unemployment because of surplus labour.
The in applicability of standardised theory to functioning of markets in the context of variety of socio-economic institutions and markets with information asymmetry once again bring up the need to apply tool-kits from other disciplines, particularly behavioural science for adequate explanation. The section on agricultural markets, on the other hand, explains why the standard supply-demand market model( cobweb model) is applicable only in the case of high- value crops and not to staples like rice.
The focus of the first chapter has been, as the caption suggests, on the inadequacy or in applicability of using text book theories in economics to real life situations. Examples given are wide ranging, from international trade to micro-finance and developed countries to least developed ones. For a better understanding and explanation of ground level realities by economic theories, multi-discipline perspectives have been suggested. In the event, psychological behaviour of both consumers and producers have received almost exclusive attention, with tempering of theories by empirical studies receiving second place. Whether improvement of traditional text book theories, incorporating ideas from other disciplines is possible has not been explored at length. Invoking Keynes' suggestion that useful economics is necessarily eclectic does not absolve the discipline for remaining self-contained. Fragmentation of economics into quasi disciplines renders economic theories weak and inadequate as an explanatory and diagnostic system.
ETHICS IN ECONOMICS: Compared to the foregoing chapter, the second one captioned 'The ethical basis of economic theory and practice' is less rambling and more focussed, relieved as it is from giving an almost exhaustive illustrations from diverse fields. Since morality and ethics are frequently used interchangeably, delineation of their distinctive meaning and role is called for. Ethics refers to norms of behaviour and code of conduct that guide or is expected to guide a particular profession or group of people bound by common interests. Morality, on the other hand, involves certain universal standards and principles of behaviour to be followed by people in general, all over the world. As transferred epithets, both can be applied to institutions as well. For a perceptively analytical book, as the one under discussion is, the blurring of distinctions between the two appears surprising. The purpose of the second chapter, according to the introduction, 'is to review and rethink how and to what extent ethical considerations and the precepts of moral philosophy affect the theory and practice of economics'.
Mahmud starts his query with two questions: (i) can the profit motive alone explain the working of markets ;(ii) are all self-serving market transactions welfare-enhancing? In his response to the first, he cites a few instances where profit motive cannot explain working of certain markets (blood donation) or consumer/producer behaviour (campaign for conservation and corporate social responsibility). Based on these examples he argues that desire for material satisfaction or animal spirit needs to be distinguished from greed. If the dominant role of the 'invisible hand' is accepted as the driving force in laissez faire market, then profit motive comes to the fore. On the other hand, his second question leads to the conclusion that various market imperfections call into question the Smithian assumption of welfare-enhancing role of market. But it is the inability of economic theory, particularly of neo-classical vintage, that aspires to scientific 'objectivism' that is held responsible by Mahmud for the indifference to ethical issues, which are relegated to the policy makers domain. Here he rightly wonders at the paradox of neoclassical economics, designated as 'welfare economics' rubbing shoulder with the core theory of the discipline, devoid of making any value judgement, such as about fairness and justice. He finds this offshoot of neoclassical economics as limited to the concepts of ' efficiency (Pareto Optimality) which provides no basis for making a judgement when there is a trade-off between the welfare of one individual with that of another.
Commenting on an early attempt to extend the scope of welfare economics with the help of 'social welfare functions' aggregating individual preferences into social preferences, Mahmud points out its helplessness in the face of social choice theory which shows that it can lead to illogical preference ordering among alternative social chices. He agrees with Amartya Sen that this pessimistic result is due to 'informational crisis' of economics in measuring and comparing individual preferences and can be solved by 'public reasoning' by stakeholders. Without naming it explicitly, the visible hand of government, mediated by consensus reached through discussion, is seen as the saviour of public welfare by both Sen and Mahmud.
The section is concluded with the observation: The need for interdisciplinary approaches in policy analyses and for making moral judgements may become more compelling as society and economy evolve. One is tempted to ask: why can't welfare issues, including income inequality, be dealt with using economic arguments of efficiency? When people remain poor and unemployed there is less of demand and less than optimum use of resources (labour). Policy intervention by a government (an important actor in the market) to address this may not, and need not invoke moral arguments at all.
There is some overlap between the second and third chapters in as much as in both morality norms have been the major point of reference, the main distinction being whereas in the former theory of market takes the front seat, here in the third, it is all types of institutions ( co-operative, government) that receive the spotlight. Discussion on the evolution of markets from traditional to modern, with changing norms of behaviour, particularly co-operation, giving grassroots-level examples is both original and enlightening. But the next topic that is taken up, measuring development (GDP), does not follow sequentially, as is the case with topics that follow afterwards. These are loosely connected themes and their relevance for the main topic of morality is not very clearly spelt out in the concerned sections (GDP growth and decline in morality is mentioned only in the conclusion of the chapter). Discussion on governance is narrowed by emphasing its regulatory roles, downplaying the developmental one.
EXAMINING SEN & YUNUS: The fifth chapter captioned ' Amartya Sen's ideas and the story of Bangladesh' is a retelling of the observations made by the Nobel laureate off and on in recent years but is worth going through to refresh the memory. As has been observed by Wahiduddin Mahmud, the case study of Bangladesh is of particular interest to test some of Sen's ideas on subjects like famine, human development, social welfare, poverty alleviation etc. By extension the chapter also examines the relevance of these ideas in other developing countries having nearly similar socio- economic institutional contexts.
The sixth chapter titled 'Is there an economics of social business?' is an attempt at conceptualising the idea of social business with a view to making it compatible with the mainstream theory of economics. It also explores the possibilities of this innovative enterprise as a counterweight to the purely profit- motivated market economy. While dealing with the analytical aspects of the concept of social business the article in the final chapter also examines some of the risks involved in the implementation of the novel business idea.
Professor Wahiduddin Mahmud has written a slim book that is heavy in reading, requiring close attention of readers. Unfortunately this excellent book is not meant for non-economists, being very much academic in nature. Perhaps he is the first Bangladeshi economist to write on economic theories, giving references to a large number of economists, from the classical school to the modern, going through the neoclassical and Keynesians. To enliven the writing he has liberally quoted fiction writers like Oscar Wilde, John Le Carre, Jane Austen and has not been squeamish about mentioning Shabana Azmi. It is delightful to go through a book of such an intellectual depth and aesthetic breadth.
RE-TELLING SUCCESS STORY OF BANGLADESH: Dr KAS Murshid's book The Odds Revisited: Political Economy of Development of Bangladesh' published by Cambridge University (2022) is a re-telling of the success story of Bangladesh economy. The story has been told by others but it can legitimately claim to have been written from a different perspective .Explaining the rationale behind writing this book Murshid has said: 'While interesting insights have emerged, these studies have tended to be too narrowly focused. In other words, a thorough, more comprehensive, well-integrated analysis of Bangladesh's development story remains to be told. I was determined to try and fill this gap as best as I could.'
Murshid began writing the book in 2016 and plodded through the manuscript up to 2019 and then what he calls the 'big push' came in 2020 with the lockdown of the Covid pandemic, making it possible to complete the first draft by 2021. So, his journey in writing this book has been no less spectacular than the fairy tale journey of Bangladesh economy. His act of hard work and perseverance is simply exemplary.
The book, being one among many, of course will be judged by what is new in it and whether he has succeeded in filling the 'gap' that initially triggered his desire and later sustained the will to continue writing. To find this out a discerning reader could do worse than go through the page of content. The first two chapters are de rigueur, standard practice while writing a book on Bangladesh economy and as such does not reveal anything extraordinary. Murshid starts' filling the gap' when he takes up 'The Food Security Challenge' as the topic of the third chapter. This is the breakthrough moment of the book just as it was in the struggle of Bangladesh to transit through the 'basket case' phase. By selecting food production through Green Revolution (GR,) Murshid hit the jackpot, overwhelming many of his predecessors. It was the GR that laid the foundation of Bangladesh economy when it was fledgling and vulnerable to food shortages soon after independence. Unless this is highlighted the story of Bangladesh's economic miracle has not begun to be told.
Once the foundation was laid, for this book as well as the Bangladesh economy, the components in the superstructure fell into their places, one by one, as if by the logic of natural selection. A crucial factor is the supportive role of the rice market which is taken up for detailed discussion in chapter three, following the one on GR. On the back of GR came migration of workers, blazing a new trial for rural-urban movement of people that earned much needed foreign exchange through remittances and this is discussed in chapter five. Green Revolution also led to the development of the rural non-farm (RNF) sector. The RNF sector's contribution in terms of wages, employment, poverty reduction and growth soon outpaced that of the farm sector.
In explaining the economic breakthrough the rise of readymade garments (RMG) has been invariably mentioned by analysts and Murshid too, gives this sector its due importance in his scheme of things. But he goes beyond what is apparent i.e. growth of RMG and points out the bigger picture that was painted on this sector's growth viz. the emergence of an indigenous capitalist class. This is discussed in chapter 10 in the context of Dhaka's emergence as a mega city.
In chapter 9 Murshid has highlighted the changes in the social sector that contributed to the overall development momentum through activities of NGOs, women' empowerment, fertility decline through adoption of family planning and promotion of public health. In his introduction to the book Murshid wrote: 'A true, much more nuanced understanding of of the story of Bangladesh can only emerge if we adopt a far more fundamental, disaggregated stance, where we look for key turning points in our development history'.
After going through the book there will be little doubt that he has been able to do exactly that, redeeming his desire to fill up a 'gap' in writing a comprehensive analysis of the economic miracle of Bangladesh
END NOTE: What is missing in this otherwise excellent empirical work, using secondary and perhaps primary data (the author having been in a research organisation; he served as the director general of Bangladesh Institute of Development Studies or BIDS), is an attempt at theorising or conceptualising the development strategy and model, implicit and explicit, to find out if it has been unique and one of a kind or a replicable one.
The classic problem of development for an underdeveloped economy is how to bridge the saving-investment and foreign exchange-investment gap with which it is hobbled. For Bangladesh in the early years this problem was not acute as it received generous foreign aid and loans from bilateral and multilateral sources that bankrolled the Green revolution under a planned economy. Later, when RMG spearheaded the industrialisation drive in a free market, foreign capital in the form of machinery and raw materials from buyers took care of the foreign exchange requirements. The third factor behind the 'development miracle' of Bangladesh, migrant workers, also did not use domestic savings as they mostly sold their assets to go abroad. Through a combination of these methods and means Bangladesh circumvented the crisis of domestic savings and insufficient foreign exchange earnings, making Harrod-Domar model irrelevant in this instance. What becomes apparent from the development experience of Bangladesh is the invalidity of the 'one size fits all' dictum.