 | 'Revolutionary' Textbook in Development Economics Takes Field by Storm Debraj Ray wins praise for incorporating new theoretical approaches and for not oversimplifying the material By PETER MONAGHAN In a developing nation that has no formal credit records, lenders will hesitate to trust money to small-scale farmers or entrepreneurs. That stands to reason: The lenders may know nothing about the likelihood of the borrowers' repaying the debts.
The problem, at base, is a deficit of information.
College teachers of development economics, too, have struggled with an information shortage: The few available textbooks in the field are warhorses of advanced years, heavily freighted with empirical data, anecdotes, and a lot of analysis along the lines of "Wow! This is a bad situation."
But they have packed little hard-nosed economic theory.
Alas, instructors say, when students read simplified versions of development issues, they can get the impression that they understand far more than they do.
What students really have lacked is a textbook that asks them to grapple with the enormous advances the subdiscipline has made in the last 25 years. Like economics as a whole, it has turned to game theory and similar approaches to understand better how embattled economies work, or do not.
Just such a textbook, teachers of the subject say, is Development Economics, by Debraj Ray, a professor of economics at Boston University. The 848-page volume, just out from Princeton University Press, is defying the usual prospects for textbooks: Despite the usual unprepossessing title, it is generating excitement.
Researchers and teachers are hailing it as the field's definitive textbook -- the first in 25 years to make development theoretically coherent, and to convey the dynamism of recent findings and theories.
"An excellent and revolutionary book," says Bruce Wydick, an assistant professor of economics at the University of San Francisco. "There is no other like it that I am aware of which so aptly incorporates the new microeconomics and growth theory into the field."
Development Economics lays out theories of economic growth under such conditions as unequal access to land and credit, poverty and poor nutrition, rapid increases in population and migration, and difficulty engaging in trade. It seeks out and explains economic models that do a better job of taking account of such conditions than did the classic ones -- from Adam Smith, John Maynard Keynes, and everyone else in Paul A. Samuelson's venerable Economics.
Mr. Ray's book has already been adopted widely -- most unusually, in almost all the major economics departments in the United States. Princeton has published it around the world.
Its real beauty, says Gabriel A. Fuentes, an associate professor of economics at Loyola Marymount University, is that it encourages students with a grounding in economics to delve deeper. "Most of the traditional texts are very chatty and penalize students for knowing economics," he says. He believes that authors have been afraid of scaring away students concentrating in fields less oriented to mathematics.
Mr. Ray is, at the age of only 41, one of the shining lights in a younger generation of theorists in development economics. Like many in that generation, he came from a developing country (in his case, India) to the United States at a time, in the late 1970s and early 1980s, when the serious treatment of uncertainty in economics had begun to mature -- when classic economic models of how markets work had been sharpened, and complicated, by the statistical methods of probability theory.
The use of such methods as game theory -- which models individuals' strategies when choosing among a number of often-imperfect options -- has been a boon to his field, says Mr. Ray: "People have learned to write down models that deal with fragmented situations."
Much of the theoretical material in hisnew book summarizes a broad range of studies by other researchers. But large parts of it, and many case studies that illustrate the theories, come from his own research. He has contributed, for example, to the rigorous modeling of the interrelations among poverty, poor nutrition, and labor markets. With Partha Dasgupta, a professor of economics at the University of Cambridge, he published some well-received articles on the subject in the 1980s.
His and Mr. Dasgupta's analysis can best be explained using game theory. Mr. Ray presents the problem of poor nutrition among workers as an example of the Prisoners' Dilemma, which holds that when two parties must choose to cooperate or compete with one another, the best choice for each may be not to risk boom or bust, but to insure that he just does all right.
In Mr. Ray's example, employers who pay their malnourished workers well risk losing them altogether, because once they become well-nourished, they will have the energy to find better employment elsewhere. The original employer doesn't reap the long-term rewards of the laborers' increasing nutrition. If labor is plentiful, he may decline to pay sufficient wages. Conversely, the employees cannot afford to work hard to try to attain better pay for better nutrition, for fear that the higher wages won't be forthcoming and they will be unfit for any work.
The best set of choices, per game theory: The employer should pay poorly and the laborer should work at half pace.
Game theory and statistical-probability approaches "don't explain everything," Mr. Ray says, "but they give us a way of thinking about and categorizing things."
The prevalence of "astonishing disparities" among nations' economic opportunities is "depressing," he acknowledges. But the new theories and findings give him hope. With sober enthusiasm, his book conveys the importance of topics that might strike non-economists as hopelessly dry: land-rental contracts, the creation of efficient surplus, incentives.
Like many in his field, Mr. Ray has seen struggling economies firsthand. After receiving his doctorate from Cornell University, he taught for four years at Stanford University, then was based for seven years at the Indian Statistical Institute, in New Delhi -- "a marvelous place," he says, that permitted him to teach or conduct research in Brazil, China, Kuwait, and Spain.
He had grown up in Calcutta, and had witnessed the depredations of poverty. "The problems just come jumping up at you," he says. As a child, seeing mass migration from rural to urban areas, Mr. Ray says he wondered: "If life in the villages is so idyllic, why do so many people come in from the villages to the towns? What are the forces?"
He came to realize that understanding developing economies was similar to understanding the economies of industrialized nations -- the substance of both is the functioning of markets. However, development economists also know well that markets in all underdeveloped nations share a characteristic: They work in weird, inefficient ways, if they work at all.
As he describes in the book how they operate, his explanations of basic concepts -- ways of measuring income, poverty levels, and the like -- soon give way to more-arcane and newer concepts, such as Lorenz curves (graphic representations of income distribution) and Kuznets ratios (a measure of economic inequality).
Such terminology often leads to quite complicated, technical areas, but somehow Mr. Ray seems able to make it all -- or almost all of it -- appear unintimidating, even to the curious non-specialist.
Says Frederic Zimmerman, an assistant professor of economics at Stanford's Food Research Institute: "He brings development economics at the advanced undergraduate level into the era of technical mathematical economics." The wonder, he adds, is that Mr. Ray has done that without heaping on dizzying mathematics.
As Mr. Ray says, "There is no calculus except in an occasional footnote."
To avoid overloading the book with mathematics, he adopted a method he uses when teaching graduate and undergraduate courses in development economics. "I wrote drafts of it absolutely not holding the math back. Then I said, 'If an idea here is interesting, I should be able to get it across in English.' That's how I vetted the book."
He volunteers that, here and there, he may have slipped up, and left in potentially chilling flourishes of mathematics -- for their sheer exuberance.
He did, in any case, further clarify concepts by including in the book many examples -- often in boxed vignettes -- of economic practices and phenomena around the developing world. He says he wanted his volume to seem like the work of "a theorist married to an empiricist."
To illustrate the operation of credit in economies that lack formal lending mechanisms, he describes such remedies as credit cooperatives, in which, typically, people who know one another collectively trade loans for goods and services.
Another example: Villagers may insure one another against unexpected outcomes, such as crop failures. Such schemes rely on the good faith of group members or, failing that, on such sanctions as expulsion for defaulting. The members know better than any professional insurers who is likely to fulfill his or her responsibilities.
Often, incentives help get things done. One example Mr. Ray gives is the prac tice of donkpe in Benin: The young men of a village form teams to complete such tasks as building houses and work ing fields. Their pay is based on both team performance and performance within teams -- an arrangement, Mr. Ray notes, "whose parallel can be found elsewhere only in the upper levels of corporate management.
In part, Mr. Ray writes, Development Economics is "a story of how informal, imaginative institutions replace the formal constructs we are accustomed to in industrialized economies."
New findings about the subtleties of development economics are being put into practice in many parts of the world, Mr. Ray notes. India, for example, used to run on "the rules" -- including, as he puts it, "Thou shalt not evade taxes."
"It's very easy to write down a law like that, or 'dowry is illegal,'" he says, "but if there is no enforcement, and there is little to do to monitor compliance, then such a rule is useless."
So, taking their cue from theorists, Indian lawmakers have designed such incentives as a value-added tax that requires manufacturers to pay a tax not only on their own products, but also on those of any of their suppliers who haven't paid tax on what they got from their suppliers. "So, you have an incentive to monitor your suppliers," Mr. Ray says.
A fundamental concept of justice pervades Mr. Ray's book. He believes that the benefits of development should flow equitably to all of a nation's citizens.
But ever the tough-minded economist, he never wrings his hands over the desperate straits of victims of dysfunctional economies. He is too busy demonstrating why decreasing inequality -- whether by improving nutrition or leveling incomes -- actually helps speed economic growth, and raise everyone's living standards.
Yet he never loses sight of what is at stake. As he writes, "It is not easy to describe, head on, the horrors of poverty and its attendant correlates: illiteracy, undernutrition, ill health, and the utter bleakness of the future."
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