Flourishing of Development Economics from the Late 1960s

With the establishment of a government department in Britain specifically devoted to development in 1964, which supported development research in a variety of ways, development economics (and development studies more gen­erally) became more organised and respected as a subdiscipline throughout the UK.^[8] From 1968, with the appointment of Paul Streeten as Director, QEH flourished as a centre for development research and, soon after, in 1971, Ian Little became Professor of the Economics of Underdeveloped Countries.

Streeten had been critical of orthodox micro-theory from his first writings in the 1940s. He was heavily influenced by Gunnar Myrdal, some of whose works he translated, and by his former tutor, the iconoclastic Balogh, who had a room in QEH. Streeten had also worked with Dudley Seers (in the Ministry of Overseas Development) who, like Myrdal, took a highly critical view of the use of Western economic concepts and models for analysing developing countries.

At QEH, Streeten, Balogh and Ady held a weekly development economics seminar which became the centre for critical analysis. Streeten attracted a group of younger scholars as students and research associates, including, Keith Griffin, Sanjaya Lall, Deepak Nayyar, Akbar Noman and Frances Stewart. Although the work of this group covered a large range of issues, they shared some common presumptions: that orthodox assumptions must be carefully and critically analysed with an emphasis on identifying hidden biases and values; and that analysis must be empirically grounded in developments in particular developing countries.

At the same time, at the other geographical end of Oxford—in Nuffield— Ian Little attracted another talented group of development economists who took a more orthodox view. The group included Jim Mirrlees, Maurice Scott, Christopher Bliss, Max Corden (on Visiting Fellowships), and, among the young scholars, Vijay Joshi and Deepak Lal.

The underlying approach at QEH was a questioning of the automatic transfer of Western-designed concepts and theory to the different conditions of developing countries, developing an alternative analysis with an emphasis on institutional factors; and an attempt to include political as well as eco­nomic elements. As Streeten wrote: ‘The main conclusion is to beware of the simple transfer of fairly sophisticated concepts from one setting to another, without close scrutiny of the institutional differences' (Streeten 1972: 127). He himself had questioned Western concepts of employment presaging the later focus on the informal sector in his appendix to Myrdal's 1968 Asian Drama. The QEH group adopted a similar critical approach to understanding the role of foreign investment, aid and technology. Particular contributions in the 1970s included analysis of foreign direct technology (Lall and Streeten), technological learning and capabilities (Lall), the role of appropriate technol­ogy (Stewart), and the impact of aid (Griffin and Enos).

Foreign Investment, Technology, and Aid: Lall and Streeten's analysis of mul­tinational investment was the outcome of an empirical study of the costs and benefits of foreign direct investment (FDI) in six developing countries. They questioned two views then prevalent: on the one hand, that FDI had only positive benefits (Reuber et al. 1973); on the other, the views of nationalists and dependencia theorists that foreign investment was mainly destructive. The Lall/Streeten conclusion was that FDI could make a positive contribution, but that careful analysis of costs and benefits as well as regulation was needed, especially in relation to the hidden costs of technology transfer. This study initiated Lall's lifelong work on technology transfer, FDI and learning, on which he made major and lasting contributions.

These contributions took three forms. First, he provided careful empirical analysis of the transfer pricing practiced, in particular, among pharmaceutical firms, involving large losses of tax revenue for developing countries (Lall 1979). Second, he was among the first to notice the growing significance of Third World multinationals, investing in the North as well as other develop­ing countries. Moreover, Lall showed that these investments were not only concentrated in small-scale labour-intensive activities, but some involved quite sophisticated capital-intensive processes, and he predicted rightly—in contrast to other observers—that this was likely to be of growing importance (Lall 1983). This led him to assume a major and long-lasting research interest in why, when and how developing country firms created technological capac­ity of their own and were not simply passive recipients of Western technology. Lall's analysis of the phenomenon of “technological capability”—its causes and consequences, all based on in-depth empirical analysis of particular firms in a range of countries—was path-breaking (Lall 1982, 1987, 1992).

Stewart, too, questioned the generally accepted approach to technology, but from a different angle, criticising the neoclassical assumption of the exis­tence of a range of efficient technical choices of varying labour and capital intensity (Stewart 1977). Rather, she showed, again based on empirical cases, that capital-intensive technologies generally dominated, being much more efficient than most labour-intensive ones. This arose because the technologies were developed in high-income countries to suit their own conditions. She showed that this lack of choice explained the limited modern-sector employ­ment opportunities, and argued, along with Schumacher (1973), that there was a need for efficient appropriate technology reflecting conditions in devel­oping countries; moreover, Stewart developed the concept of “appropriate products”—consumer goods specifically designed to meet the needs of poor people—arguing that the absence of such products further impoverished such consumers.

The role of aid was also subject to critical scrutiny by Griffin and Enos (Griffin 1970; Griffin and Enos 1970)—Griffin had been a student of Streeten and Balogh and was closely associated with QEH, becoming its Director from 1978 to 1979. Enos and Griffin concluded—on the basis of theoretical arguments and empirical evidence—that aid might not promote economic growth and might indeed retard it, partly because of a negative impact on domestic savings. They were among the first to make this point, and a large theoretical and empirical literature ensued, much of it confirming their argu­ments, though problems of the direction of causality were not fully resolved.

Griffin also produced an important book on the Green Revolution of the 1950s and 1960s, in parallel with a growing literature by Indian economists. New hybrid seeds introduced and promoted by the Consultative Group on International Agricultural Research in the 1970s were expected to transform agriculture and reduce poverty as a result of a large increase in agricultural productivity (Brown 1970). However, in one of the first challenges to the unqualified positive view of the impact of the new seeds, Griffin (1974) sug­gested that they were ‘“landlord-biased”... suitable only for those who had access to good irrigation facilities and plenty of working capital' (Griffin in Boyce 2011: 271). Griffin argued that the nature and impact of technology change depended on the institutional context, and that in the South Asian case this meant that the technology was unequalising, leaving out most poor people. In contrast, a study of the village of Palanpur (described below) showed an equalising impact (Bliss and Stern 1982). Twenty years later, a review of over 300 studies of the impact of the Green Revolution showed that 80% of the studies confirmed Griffin's view (Freebairn 1995).

Rural development in Sub-Saharan Africa was analysed by Heyer et al. (1981). On the basis of extensive country studies from the region, they argued that “rural development” was imposed by outside agencies, notably the World Bank, and like the Green Revolution analysed by Griffin, this was rarely in the interests of African peasant farmers, which largely accounted for the near­universal failure of the programmes.

Joseph Stiglitz was a Visiting Fellow at St Catherine's College (1973-1974) and held the Drummond Professorship of Political Economy from 1976 to 1979. During his Fellowship, Stiglitz's work reflected his penetrating insights into market imperfections arising from their very structure, drawing on research in Kenya. Thinking about development problems led him to rethink the way that real markets work in a world characterised by asymmetric infor­mation and unequal asset distribution.

Strategies of Development: In the course of the 1970s, problems with the import-substituting, growth-oriented strategy of development then adopted became apparent—in particular, although countries’ economic growth was generally quite good, poverty and inequality were high and too few jobs were created for the growing workforce. The strategy was criticised by both Nuffield and QEH groups albeit from different perspectives.

The main emphasis of the Nuffield group was on inefficiencies in the mar­ket interventions of the strategy. The first major contribution was the work of Ian Little and Jim Mirrlees, who produced a new method of social cost-benefit analysis for project evaluation (Little and Mirrlees 1969, 1974). Existing methods of evaluating public investment focused on estimating the monetary value of unpriced externalities, measuring a project’s net benefit in terms of its contribution to domestic consumption, and taking domestic prices (market prices) as a guide to costs and benefits. Little and Mirrlees argued that with high levels of protection, then prevalent in most developing countries, a proj­ect might show high values at domestic prices, yet be uneconomic since the country could consume more by importing the product and exporting some other commodity. They therefore advocated valuing project costs and benefits on the basis of opportunity costs, using border or world prices for tradable commodities and social marginal costs for non-traded commodities taking into account both the low marginal productivity of labour and the additional consumption that wage employment generated. This procedure would show that many of the industries that had developed in the presence of high import tariffs and quotas had a negative present value—in effect, they were arguing that world prices would broadly give the correct signals. In contrast to most methods of social cost-benefit analysis, Little and Mirrlees downplayed the role of externalities and, initially, gave limited attention to income distribution.

Their method was criticised by some Oxford economists—for example, for assuming full capacity domestically so that extra output would not be a net addition but would displace other potential production, and for understating linkage and dynamic effects of projects (Joshi 1972; Stewart and Streeten 1972; Stewart 1978). Nonetheless, as Healey stated: ‘The Little-Mirrlees methodology is a major contribution to the theory and practice of cost-bene­fit analysis’ (Healey 1972: 150).

For a while, the approach was quite widely adopted—for example, it became the standard approach in Kreditanstalt fur Wiederaufbau, the German state-owned development bank. Oxford economists, including Maurice Scott, Nick Stern and Deepak Lal, then a Research Officer at Oxford, adopted the method for particular evaluations (Stern 1972; Lal 1972; Little and Scott 1976; Scott et al. 1976), but UNIDO and the World Bank each developed their own methodologies (Dasgupta et al. 1972; Squire and Van Der Tak 1975).

In the long run, the publication of Industry and Trade in Some Developing Countries by Little, Scitovsky and Scott in 1970 had a more profound effect than the work on social cost-benefit analysis (Little et al. 1970). This book was based on six country studies. It argued ‘that trade controls, and inward­looking policies more generally, impose large economic costs and reduce employment and growth. It advocated radical trade liberalisation, but not laissez-faire: it was explicitly in favour of using taxes and subsidies to offset domestic market failures' (Bliss and Joshi 2014: 321). The book made an important contribution to the growing number of critiques of the planning and market interventions in developing countries then prevalent—others included Balassa (1965, 1971), Krueger (1966, 1974) and Ranis (1972). Written in an accessible style, it was very widely read, and had a significant influence on the radical change in perspectives on development that occurred in the late 1970s, with a switch away from planning towards market reforms. This changing perspective in turn led to the dismantling of import protection that occurred in the 1980s and 1990s, as the debt crisis—as noted earlier— empowered the International Monetary Fund (IMF) and World Bank to insist on such reforms. In 1982, Little wrote a textbook on economic develop­ment, Economic Development: Theory, Policy and International Relations (Little 1982), which carefully laid out the reasoning behind this neoclassical view of economic development, while criticising structuralist views.

In QEH, Stewart, Streeten, Griffin and James also criticised prevalent development strategies, but from a very different angle. Stewart and Streeten argued that to deal with the evident problems of unemployment, inequality and poverty, a three-pronged approach was required ‘combining signals and incentives, institutional reforms directed at the redistribution of assets (includ­ing education) and technical and institutional innovation' (Stewart and Streeten 1976: 403), while Griffin and James (1981) urged that radical asset redistribution was essential for a substantial reduction in poverty and explored ways of achieving this. The focus remained on incomes, but widely shared and employment-creating, in contrast to existing patterns of development.

The questioning of accepted approaches in this period also extended to the role of the international system more broadly, beyond aid and foreign invest­ment to the entire relationship between countries and regions of different wealth, with the imbalances in power relations that followed. The awareness of power relations coming from many scholars interacted with a particular sensitivity to the role of institutions and history, which originated in Area Studies. The LAC's work on the economic history of the region, in a succes­sion of case studies centred on Oxford conferences, was a prime example (Thorp 1984; Thorp and Whitehead 1987; Cardenas et al. 2000a, b) to all of which FitzGerald and Thorp contributed.

Over the 1960s and 1970s, there was increasing recognition that monetary income per capita—even if well distributed—was an inadequate measure of progress (Seers 1969), and Oxford economists contributed to the identifica­tion of alternative development objectives. Streeten and Mahbub ul Haq led a team at the World Bank (including Javed Burki, Norman Hicks and Frances Stewart) aiming to replace an income-oriented approach by the basic needs approach, which (temporarily) had a major impact on World Bank policy (Streeten et al. 1981; Stewart 1985).

Amartya Sen was a Professor at Oxford from 1977 to 1988 (Drummond Professor from 1980). He cannot be categorised in terms of the two schools of thought noted above, but can be connected with both. He made two fun­damental contributions in this area. First, he focused on famine prevention, and showed how massive famine could occur even when food output was increasing (Sen 1981). He argued that people's “entitlements” were critical in determining whether they starved or not. Entitlements are essentially people's legal claims on food through incomes from work and other sources which can fall below survival level even when food supplies are adequate if, for example, inflation reduces real purchasing power as happened in the massive Bengal famine of 1943 due to wartime colonial policy. Sen's approach transformed the analysis of famine and was further developed by Martin Ravallion, when at Oxford in the 1980s, adding speculation to Sen's framework (Ravallion 1987).

Secondly, Sen's highly influential work on capabilities was initiated while he was at Oxford (Sen 1980). In his Tanner Lecture, entitled Equality of What?, Sen played down the role of income. He argued that inequality should be measured not in terms of utility or incomes but rather people's capabili- ties—or what they can do or be. The capabilities approach was developed further after Sen left Oxford and has become an established framework of analysis. With elements drawn from basic needs analysis, it formed the theo­retical underpinning of the human development approach, embodied in the publication of the Human Development Reports of the United Nations Development Programme (UNDP), the first of which appeared in UNDP (1990). John Knight also worked on human development (with Keith Griffin), coming to similar conclusions to those in the UNDP report (Griffin and Knight 1990).

Sen, Anand and Stewart contributed to the first Report and many later ones, analysing numerous aspects of human development. Sudhir Anand—in collaboration with Sen—contributed to the methodology underlying mea­sures of human development, notably to the way income was treated in the Human Development Index (HDI), the inequality-adjusted HDI and mea­sures of gender inequality (Anand and Sen 1994, 1995, 2000; Anand 2018). He also explored the relative contribution of private incomes and public ser­vices to human development outcomes (Anand and Ravallion 1993). Stewart and others explored the two-way relationship between human development and economic growth and the important role of social institutions and social capabilities (Stewart et al. 2018).

Oxford contributions to the human development approach were contin­ued by a later generation. Sabina Alkire made a significant contribution to the theory and application of the capability approach (Alkire 2002) and to the measurement of multidimensional poverty to be discussed below. Diego Sanchez-Ancochea focused on the political economy of inequality, moving beyond the narrow, anti-poverty approach long promoted by international institutions like the World Bank and paying particular attention to universal social policy. His work proposes more pragmatic and holistic ways to build universal social policy, considering alternative public interventions, the con­tradictory role of the private sector and the need to build cross-class alliances more explicitly (Franzoni and Sanchez-Ancochea 2016). Sanchez-Ancochea also analysed the lessons from Latin America's history of vertical and horizon­tal inequality for the rest of the world. Negative processes currently observed in developed countries, like weakening democracies and dual labour markets, have been present in Latin America for more than a century (Sanchez- Ancochea 2020).

Since the first Human Development Report, global concern with human aspects of development has increased dramatically, as shown by the Millennium Development Goals agreed on a global basis in 2000, followed by the Sustainable Development Goals in 2015. Although income growth remains a dominant objective, there has been a substantial enlargement of development objectives. Oxford development economists played an important role in this change.

3.3