Academic journal article Seoul Journal of Economics

Development Economics and Policy Deficits

Academic journal article Seoul Journal of Economics

Development Economics and Policy Deficits

Article excerpt

I. Introduction

Practitioners of economic 'science' failed by and large to predict the 2007 crisis.5 But then economics has a bad track record of anticipating business cycle turning points.6 More puzzling is the failure to avert a crisis of this magnitude by layers of market institutions, regulators, monitoring agencies, international bodies such as the IMF and the FSF, highly informed market participants and commentators, and by the experienced financial entities, which suffered huge losses and continue to incur large penalties. In the years that have elapsed since, efforts to introduce reforms and safeguards that would minimize the likelihood of a recurrence have made limited progress.

There is an urgent need to restore the pace of growth in the advanced economies and to maintain the hard won growth momentum of developing countries. And in countries faced with mounting unemployment, persistent poverty, and an increasing concentration of incomes, governments are under pressure to make growth more inclusive. Moreover, the widening awareness of climate change is generating a demand for the greening of growth; although, even if growth can be made increasingly green and inclusive, it will not solve our many pressing problems - in fact, it could create problems of its own. But slowly growing economies will find it far harder to cope with unemployment, poverty, inequality, and fiscal deficits, and to mobilize the resources needed to finance the greening of infrastructure and innovation.

Is economic science rising to the challenge and providing the analytic frameworks to guide decision makers, better tools and clearer instructions on their effective use? My sense is that the discipline is not delivering in large part because it is caught up in sectarian conflicts between rival schools, and in somewhat mindless hypothesis testing for purposes of publication.7

The ongoing debates on macroeconomic management, fiscal indebtedness, growth, technology and sectoral policies, while arguably energizing for economists, are confusing for the public and the business community, and they contribute to uncertainty that discourages investment.8 Shared conventional wisdom on the workings of the economy and on policy remedies is being drained by contradictory findings based not infrequently. on questionable empirical analysis. For example, is harsh austerity together with a shrinking of the state sector, the medicine that will revive growth in western nations with significant fiscal deficits?9 What is the fiscal deficit indicator that should serve as a benchmark?10 Are several East Asian economies caught in a middle-income trap or are they regressing towards the mean global growth rate as indicated by the research on growth accelerations?11 In attempting to restore higher rates of growth, what options do they have other than investing and exporting more than they currently do?12 Does rising income inequality (paralleled by a decline in the share of gross corporate value added that is paid to labor between 1975 and 201213) demand remedial action (possibly to avoid a slowing of growth) and if it does, can we identify politically viable policies to reverse the trend?14

Issues such as these deserve to be settled, however, supposedly cutting edge research is not yielding compelling answers that could forge a consensus on policy actions. We need a fresh approach to research in economics that more fully accommodates behavioral and institutional factors as well as political constraints impinging upon policy making: and in the balance of this paper, I propose to identify seven important areas where research-policy gaps need to be narrowed. These are: Crises: Growth: Poverty: Role of the state: Technological change and innovation: Urbanization: and Foreign assistance.

Each - to varying degrees - has been the focus of attention for the past four decades and more. Very broadly, from the 1960s onwards through much of the 1980s, achieving high growth rates was at the forefront with adjustment a parallel concern, as countries struggled with periodic crises followed by bouts of recession. …

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