Taking Stock
This chapter provided a large number of models focusing on various aspects of the structural transformation accompanying economic development. As emphasized in the previous section, there is no single framework unifying all these distinct aspects, even though there are many common themes across these models.
The previous section was an attempt to bring out these common themes. Instead of repeating these commonalities, I would like to conclude by pointing out that many of the topics covered in this chapter are at the frontier of current research and much still remains to be done. Economic development is intimately linked to economic growth, but it may require different, even specialized, models that do not just focus on balanced growth and the orderly growth behavior captured by the neoclassical and endogenous technology models. These models may also need to take market failures and how these market failures might change over time more seriously. This view stems from the recognition that the essence of economic development is the process of structural transformation, including financial development, the demographic transition, migration, urbanization, organizational change and other social changes. Another important aspect of economic development, again less prominent in the neoclassical growth models, is the possibility that the inefficiencies in the organization of production, credit markets and product markets may culminate in potential development traps. These inefficiencies may stem from lack of coordination in the presence of aggregate demand externalities or from the interaction between imperfect credit markets and human capital investments. These areas not only highlight some of the questions that need to be addressed for understanding the process of economic development, but they also bring a range of issues that are often secondary in the standard 912growth literature to the forefront of analysis. These include, among other things, the organization of financial markets, the distribution of income and wealth, and issues of incentives, such as problems of moral hazard, adverse selection and incomplete contracts both in credit markets and in production relationships; unfortunately, space restrictions have precluded me from providing a satisfactory discussion of these issues, and instead, I had to incorporate these in simple growth models in reduced-from ways.
The recognition that the analysis of economic development necessitates a special focus on these topics also opens the way for a more constructive interaction between empirical development studies and the theories of economic development surveyed in this chapter. As already noted above, there is now a large literature on empirical development economics, documenting the extent of credit market imperfections, the impact of inequality on human capital investments and occupation choices, the process of social change and various other market failures in less-developed economies. By and large, this literature is about market failures in less-developed economies and sometimes also focuses on how these market failures can be rectified. The standard models of economic growth do not feature these market failures. A fruitful area for future research is then the combination of theoretical models of economic growth and development (that pay attention to market failures) with the rich empirical evidence on the incidence, characterization and costs of these market failures. This combination will have the advantage of being theoretically rigorous, empirically grounded, and perhaps most importantly focusing on what I believe to be the essence of development economics—the questions of why some countries are less developed, how they can grow more rapidly, and how they can jumpstart the process of structural transformation necessary for economic development.
21.9.