Searching for Fish in Trees (緣木求魚)? Economic Development when Context Matters

In this chapter, we develop a framework for analyzing the determinants of economic development and their implications for policy. We distinguish between classical determinants—such as inputs into education and health, access to credit, and geography—and non-classical determinants—including cultural values, social norms, beliefs, identity, and social organization. We classify these determinants along two policy-relevant dimensions: whether they can be clearly ranked in terms of their contribution to development (vertical versus horizontal) and whether they can be directly altered through policy intervention (manipulable versus non-manipulable). We show that even for classical determinants, policy impacts are often hard to predict and are mediated by local social and cultural context. These issues are more pronounced for non-classical determinants, which are more complicated to change through policy intervention and more difficult to rank in welfare terms. In some cases, traits commonly viewed as obstacles to development may be well-adapted to local conditions or even supportive of economic performance, a possibility we refer to as “reverse vertical.†Building on Hirschman’s (1967) distinction between trait-making and trait-taking policymaking, we argue that interventions that attempt to directly transform non-classical determinants often rest on fragile assumptions about ranking and manipulability and risk generating unintended or adverse effects. By contrast, many of the most successful development episodes of the past several decades relied on policies that took existing social and cultural traits as given and designed institutions, technologies, and incentives that worked within those contexts rather than attempting to overturn them.