Gambling on Development: Why Some Countries Win and Others Lose

Stefan Dercon

Stefan Dercon is a Professor of Economics who has embraced political science. This book puts politics at the centre, and argues strongly that development only happens when an elite bargain is in place, linking politicians, business leaders, the military and public intellectuals. Dercon calls this a ‘development bargain’. Aid will work when such a bargain is in place, and when donors take a long-term view, accepting risk, and helping to shape incentives which sustain and strengthen the bargain: approaching aid in the manner of value investing, and ‘dancing a tango’ in close partnership with the elite. Aid will not work where an elite bargain does not exist, though humanitarian aid is needed, and opportunities can be found to deliver social assistance, focusing on individuals or units who will help to build state capacity and accountability for the longer-term.

Dercon makes this argument over twelve chapters which set up the framework (Chs 1-3), explore it in case studies from Africa and Asia (Chs 4-10), and propose aid strategies in countries which look like they have a development bargain (Ch 11) - or don’t (Ch 12). The focus of the last two chapters is on aid, ‘not because I believe it is the main route to change, but because it is a mechanism I know well’.

The book is a pleasure to read, closely argued, wide in scope and rich in anecdote. The core arguments are restated frequently to drive points home, and the book seems designed to facilitate the work of the note-taker or seminar attendee: three conditions,  four propositions, three principles, one rule of thumb . . . There are many quotable observations, too, as well as some hearty swipes at shibboleths (like the SDGs), and discreet (sometimes not so discreet) digs at UK Government priorities and policies (like David Cameron’s ‘golden thread’).

The book begins by examining four propositions about why countries and people are poor, and cross-referencing these against the ideas of best-seller authors like Sachs, Stiglitz, Collier and others (links to my reviews of some of these at the end). The four propositions are: countries and people are poor because they are poorly endowed; market failures are costly for poor people and may trap them in poverty; growth traps stem from market failures that are costly for poor countries; and growth traps stem from failures in states and their governance. You might think that the development bargain idea is consistent with the proposition on governance. Dercon writes favourably of Acemoglu and Robinson on this topic, but he emphasises Acemoglu and Robinson’s long view of history: he is sceptical about countries ‘buying themselves a better history’. In writing about the ideal of Sweden (apparently the new Denmark for development analysts), he says that ‘the main lesson from Sweden is not where it has ended up, but how it got there. Sweden was already a high income country by the time the Swedish model and the idea of Sweden emerged’.

Today’s development bargain matters, therefore, and is usually a work in progress. Dercon identifies three key characteristics, namely: there are durable and political deals among the elite; the capabilities of the state are used, but it avoids doing more than it can handle; and the state has the political and technical ability to learn from mistakes and correct course. These characteristics can be found in authoritarian states as well as democratic ones. And note that these are points about process not substance. Dercon follows the Growth Commission in arguing that there are ingredients for success (like macro-economic stability), but no foolproof or universal recipes.

Note also that the drivers of change are internal not external: ‘the primary challenges that developing countries must overcome reside within those countries, not in global markets . . . global challenges are not enough to explain failure’.

In practice, the evolution of a development bargain plays out differently in different places. Leadership is important, but bargains also tend to emerge after a period of conflict, and when an elite is seeking legitimacy. Dercon looks in detail at more than a dozen cases. He is impressed by some (e.g. China, Indonesia, Vietnam, Ethiopia, Rwanda), less by others (South Sudan, Malawi, DRC). The case studies make up about half the book.

When it comes to aid, Dercon asserts that it ‘should not be a core concern in debates about development, because putting aid to good use is hard or even at times counterproductive unless an elite bargain that is consistent with development is present or emerging’. In general, the SDGs have been unhelpful in focusing too much attention on finance, and not enough on the political preconditions of development.

Where a development bargain is present, at least in embryo, then donors should pile in as a value investor would: take a gamble on development. Budget support is good. Aid is advised to support technocrats, and for institutional investment, like tax departments and those regulating investment.  And NGOs can be supported in advancing accountability. Dercon is not a fan of large-scale concessional finance: he thinks countries with development bargains can access capital markets and other sources of non-concessional finance.

In ‘messy places’, where the development bargain is hard to discern, the priority for official aid is to alter the incentives and shift the politics and economics of the elite bargain. The key, he says, is the economy, supporting the technocrats, the central banks and the regulatory authorities, and working to bring international capital directly into firms, via Development Finance Institutions like the IFC or the UK’s British International Investment (formerly CDC).

There are other ways to spend aid in ways which help the poorest, for example cash transfers, vaccination programmes, and of course humanitarian aid – but donors should emphasise scale and be hard-nosed with respect to improving the underlying systems. Don’t, Dercon says, give a government an excuse for not taking development seriously. And, particularly with regard to humanitarian aid, whether natural disasters or otherwise, ‘progress in the quality of the response . . . can be measured by the extent to which the world does not have to depend on the international humanitarian system’.

Then, finally, the global environment is not entirely irrelevant to either set of countries, the messy places or the others. Dercon argues for trade agreements which give preferential access to developed country markets, especially for goods and services with complex supply chains; for action on illicit finance; and for investment in global public goods like climate, conflict resolution and knowledge.

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I can imagine that card-carrying political scientists are pretty pleased to have a distinguished and influential economist becoming a country member of their club. It has been a while. There was a time when I first joined IDSInstitute for Development Studies, Sussex in the early 1980s when no-one talked about anything except developmental states (not me, obviously – all I talked about was farming systems research and rural development). It is a pity that Gordon White and Robert Wade are missing from the bibliography; their IDSInstitute for Development Studies, Sussex Bulletin from 1984 is here. Similarly, ODI, and many others, have had work on governance and states for at least two decades, including pioneering work led by David Booth on developmental regimes in Africa and politically smart, adaptive programming. Two recent papers inspired by this work describe how to think and work politically in Nigeria, and tackle the question of how to move from elite bargains to (more) open and (more) inclusive politics. See also the new book by Tim Kelsall and colleagues on Political Settlements and Development. I couldn’t find much from this group of researchers in the bibliography. That raises a question they will answer more readily than I: has Stefan Dercon done enough homework, and has he got it right?

I am certainly left with some practical questions about the model. Specifically, how does one recognise a ‘development bargain’ when one meets it in the street? And is it enough just to have two categories, the ‘messy cases’ and the rest? A notable feature of Stefan Dercon’s list of development successes is that some have recently fallen from grace or are accused of having done so. Ethiopia springs to mind, given conflict in Tigre. Rwanda is nothing if not controversial (see my review of Michela Wrong’s book). Even India is a debated case. And then, there are some cases one can think of that give every indication of having an elite bargain, which those involved probably think of as developmental, but which others might dispute. North Korea? I remember working in Ethiopia in the mid-1980s, before liberalisation, when the Mengistu Government had co-opted an elite in favour of heavy state control. That raises a question: who defines development?

Moving on, the four propositions about what causes poverty are somewhat curious. Does the list elide poor countries and poor people?

If the focus is on poor countries, then the rest of the world gets pretty short shrift. The sections on trade and illicit financial flows are hidden away at the end of Chapter 11. I don’t think it is good enough to say that the global doesn’t matter, because some countries have managed to develop even though they face the same external conditions as some others that have not. And surely a review of best-selling books about development would have included some on colonialism, centre-periphery relations and capitalism in the world economy.

If the focus is on poor people, then there must be more to say than that the cause of poverty comes down to poor endowments and market failure. Really? Perhaps start with Lenin, on the differentiation of the peasantry . . .

A final set of questions relates to the argument on development cooperation, and specifically aid. Personally, I would have liked to see more on non-aid aspects of development policy: trade, illicit finance and climate, yes, but also migration, security policy, drugs.  See the report on Beyond Aid of the House of Commons International Development Select Committee. But with reference to aid, there are two issues.

The first is that ‘aid’ covers many things: bilateral and multilateral, development and humanitarian, finance and technical cooperation, programme and project, research,  food aid, much else. I wrote a paper in 1996 on ‘Apples, Pears and Poverty Reduction’, making this point. There are hints in Stefan Dercon’s book about the apples and pears, some of it no doubt controversial in UK aid circles: in favour of budget support, for example, and of (greater) spending on research. It would have been good to have more.

The second issue is about pulling together an account of the big decisions facing aid administrators: the ‘who, where, what, how much, how long’ of overall aid allocation. It is possible to discern that Stefan Dercon would like to see more spending in countries with development bargains, and more targeted spending in the messy places. But an overall strategy would have been interesting. How would Stefan spend a £10bn aid budget?

Just as an example of how these two points play out in practice, have a look at my piece on what it would mean to take climate change seriously. I had a ten point programme, including five big shifts for the then DFID: more grand challenges; more budget support; explicit climate conditionality; more spending in climate vulnerable countries; and more multilateral aid.

Have a look also at my thoughts on the comparative advantage of UK aid – a chapter notably missing from last year’s Integrated Review of Security, Defence, Development and Foreign Policy. What is the UK especially good at in the development field? I had a list.

It might be hoped that all these questions have been answered in big picture terms in the new UK development strategy, published on 16 May. The next job is to analyse that.

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Reviews of some of the ‘best-sellers’ cited by Stefan Dercon

Why Nations Fail: The Origins of Power, Prosperity and Poverty, by Daron Acemoglu and James Robinson

Poor Economics, by Abhijit Banerjee and Esther Duflo

The Bottom Billion, by Paul Collier

The White Man’s Burden; Why the West’s efforts to help the rest have done so much ill and so little good, by William Easterly

And for other reviews, including of recent books by Stiglitz, Collier and many others, see here.