Pranab Bardhan on Economic Development

Tell me about your first choice, The Wealth of Nations by Adam Smith. 

The reason I included The Wealth of Nations in my choices is because I see this as one of the major books in the world of development economics. At the time Adam Smith was writing Britain was a developing economy. It was around the time of the Industrial Revolution. And there are many things in the book which remain important even today. Often this work is misinterpreted. For example, he is widely cited as a market fundamentalist which he was not. He is regarded as the guru of greed – greed that is supposed to propel a capitalist economy, which is quite the opposite of his intention, as you can read from parts of this work and his preceding book, The Theory of Moral Sentiments. 

The problem is, he is always quoted from a very small part of The Wealth of Nations in which he is trying to explain economic exchange. But the rest of the book and the other book are about the whole plurality of human motivations. When he is explaining economic exchange he is saying self-interest alone is enough to get an exchange. But he is talking about what is the minimum assumption on which one can get an economic exchange rather than that this is what human beings are like, which is what many people took it to mean. 

Economic exchange is only one part of the subject of economics; another part is how goods are distributed, and he showed a great deal of concern for the poor. He wasn’t happy with how poverty relief in Britain was being carried out at the time. He was also in favour of free education. Once you concentrate on the other parts of his work you see he is focusing on economic development which is about improving the living standards of the masses of poor people.

Your next book is The Strategy of Economic Development by Albert Hirschman. With this book we are now skipping almost 200 years to the middle of the 1950s. Albert Hirschman is a European intellectual who migrated to the United States. This book was written after his wide experience in Latin American policy-making for economic development. The reason I cite this book is that he is one of the early proponents of what in recent years has been revived as the political-economy approach to development. 

Economics has made a big transition. In Adam Smith’s time, and even later on with other classical economists, they were not just interested in economics per se but also in the political basis of economics. But then from around the end of the 19th century for many decades the focus of economics was narrowed down to purely technical economic analysis, leaving aside the political basis of economic decisions and happenings. However, in more recent years the earlier tradition has been revived, of looking at it from the political point of view as well, in order to understand the political background and underpinnings of economic policies. 

In the last 25 years there has been a great deal of work in development economics in this area, which is also my own area of interest. A great deal of my China-India book deals with political economy in both countries.

Your third book is The Theory of Economic Growth by W Arthur Lewis. He was the first Nobel Prize-winner in the subject of development economics. He was also very much rooted in classical economics of the political-economy tradition as well as the classical economist’s concern with structural transformation of a developing economy. 

In the early days economies are primarily agriculture-based and then at some stage the transition takes place to go from agriculture to other, more productive, sectors of the economy, primarily to industrialisation. The book emphasises the specific problems of this process as people get more and more absorbed in the industrial sector. But, he doesn’t just point to the historical pattern; he also suggests some advantages arising out of the agrarian origins of industrialisation. 

For example, on the basis of a relatively low wage, which is the case in the low-productivity agricultural sector, you can get a lot of people to work in industries, keeping unit labour costs down and thus raising profits from industrial investment. 

Is this something you have seen happening in China and India with your research in that area? 

Yes, particularly in China. Their success from the 1980s until very recently has been in labour-intensive industrialisation, in products like garments, shoes, toys and wigs. China is now widely regarded as the manufacturing workshop of the world. Over time they graduated into the labour-intensive part of the production of otherwise technical products like mobile phones, laptops and digital cameras. China is a good example of what Arthur Lewis was writing about – the advantages of low wages in the early stages of development. But the wages in China are now increasing and that’s what Lewis expected to happen in the transition process of development; after what he called the surplus labour in the agricultural sectors gets relatively exhausted wages rise and there are demands for improving the work conditions. 

He was describing this process as it historically happened and he was observing it happening in developing countries as we see it happening in China today.