Development as a Process of Change: Toward a Dynamic Public Economics

Thu 21 Nov 2002, 00:00

In this lecture, Nicholas Stern examines the challenge of developing a dynamic public economics building on growth theory, earlier development theories and standard public economics. Development is viewed as a constant process of learning, innovation and change in activities, institutions, technology, and behaviour of economic agents. Drawing on the evidence of fifty years of development experience and on an understanding of the processes of development which is inspired by the work of Schumpeter and Hirschman, Stern outlines his strategy for development. The latter is, in essence, a strategy for growth which places poor people at center stage and which focuses on the key links between investment climate and empowerment, as the strategic pillars, and the goal of poverty-reducing development. The objectives for development, drawing on the work of Sen and others, should be set broadly and will have a strong influence on the analytical approach to policy. The role of small and medium enterprises, including farms, is emphasized notably because they represent a significant share of employment and income, but also because they provide a way out of poverty for many poor households and are a dynamic source of learning, ideas and other externalities in the process of development. Growth is fostered by creating an investment climate that encourages firms, both small and large, to invest, create jobs, and increase productivity. Empowering and investing in poor people enables them to participate in the generation of, and rewards to, growth. This requires investment and public action both to provide poor people with access to health, education, and social protection, and the creation of mechanisms to allow participation in the decisions that shape their lives. Various experiences in the generation of growth and the enabling of poor people to participate in growth are discussed. The lecture reviews recent advances in theory and empirical studies based on household, firm and community surveys, and discusses how public policies can be designed to foster innovation and inclusion as the key drivers of development. The design of such policies will require innovation in public economics itself.

Nicholas Stern

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