Development of economic analysis

Our definition of the subject will be the use of economic analysis to understand the economies of poor
or developing countries. This includes, in particular, how standards of living in the population are
determined, and how they change over time, and further how policy can or should be used in the
influence of these processes. The definition contains, in principle, much or most of analytical methods in
economics insofar as they can be put to use in the examination of the issues of interest. This is as it
should be but it poses a problem for a survey in a journal. A comprehensive treatment is infeasible so
we shall follow a different route. The survey will focus on what I take to be the major themes and
approaches which characterise the productive aspects of the subject. There is, therefore, no pretence at
being exhaustive. The purpose is rather to highlight some of the advances. Many of these have been of
real substance.

There are a number of possible purposes for a survey and it is important to be clear at the outset for
whom it is intended, what it is, and what it is not. This survey is addressed to economists and students
of economics who .know the tools of their trade but not necessarily how they have been applied to, and
fashioned for, the analysis of the economics of developing countries. It is a description of the ways in
which problems can be productively formulated and approached, in terms of examples chosen for their
intrinsic importance and interest. The vastness of the subject means that we have to be highly selective.
It does not seek to provide a summary evaluation of the current view of the 'appropriate' response to
immediate policy questions. It is not a history of thought, nor a research manifesto nor an attempt to
adjudicate or settle the major debates. Where they arise naturally from the major purpose some
judgements on these subjects will be offered, but they do not themselves constitute the primary intent
of this survey.

A distinctive feature of development economics from its early days has been the attempt to learn about
the problems of development and the processes of growth by comparing the situations and growth
experiences of different countries. We review in this section some of the main contributions to these
comparative studies and at the same time present some basic background. In more recent years the
main source of information for this type of work has been the data base assembled by the World Bank
and published annually in the World Development Reports (WDR) since I978 (see also the World Bank
World Tables I 976, I 980, I 983, I 987) . Cross-country statistical comparisons are fraught with problems
since there will be different standards of data
` comparisons. The changes reflect the different price levels ruling in the different
countries. Thus prices of the main items of national income in Bangladesh, for example, must
be particularly low relative to other countries. And notice that some commodity prices can be
volatile. For a general discussion of some lessons from their data see Summers and Heston
(i988). We shall focus here on the more quantitative aspects of cross-country comparisons and
on large samples of countries. We include demographic, educational, nutritional, and medical
indicators as well as the usual economic variables. The unit of observation is the country. This
unit may have only limited economic rationale. Thus it may be more interesting, for example, to
compare Singapore and Hong Kong with Guangzhou (Canton) and Bombay rather than with
China and India. Given the very wide disparities within countries we can learn little about the
individual or household distribution of income at this level. Different units for comparison will
appear at a number of points below. In making comparisons across countries, whether more
formal by using econometric models or less formal by using tables and examples, we face some
basic problems of modelling and method. We usually wish to associate differences in outcomes
with differences in policies or circumstances. In order to do this we have to assume broad
similarity in the underlying processes so that the differences we isolate in outcomes may
reasonably be associated with the causes indicated. This is a standard problem in cross-section
econometrics where we have, for example, samples of households or firms. But one is perhaps
less uncomfortable with the assumption that General Motors, Toyota and Renault share similar
functions when we are trying to estimate a relationship between employment and output in
the motor industry, than we would be with the corresponding assumption when we are trying
to estimate the effect of the rate of growth of labour on the rate of growth of output using data
from, inter alia, China, Brazil, Indonesia, India, Pakistan and Bangladesh. One can try to divide
samples appropriately, to include the relevant measurable explanatory variables, and to avoid
taking the models too literally, but nevertheless one has to treat the results from cross-country
regressions with a great degree of circumspection. Whilst there are no doubt many common
underlying processes, the idea that there are common parameters in a basic model and that
Brazil and China are different drawings from a similar underlying (conditional) distribution is
hard to swallow. It is better to treat these cross-country regressions as simple data descriptions,
although as such they can be suggestive. From this perspective we should not, therefore, argue
that the relationships derived from a cross-section are necessarily relevant for the progress of a
single country over time. The state of a richer country now is not a description of where a
poorer country will be in the future just as India now is not in the same position as, say, the
United Kingdom, in previous centuries. Knowledge, the influence of other countries and a host
of other factors will all play a role in invalidating the analogy. There is a different kind of
analysis of growth experience which can be particularly illuminating. This concerns the careful,
analytical and detailed