Economic Models in Development Economics

This paper is concerned to explore and evaluate the use of mathematical models in development economics, particularly “computable general equilibrium” (CGE) models. Such models have become an increasingly important tool of analysis in development economics. They represent an intriguing and powerful device for making predictions about the behavior of complex national economies in response to a variety of kinds of shocks. They are used to evaluate the probable economic consequences of various policy interventions (e.g. currency devaluation or an increase in food subsidies), as well as to identify the macroeconomic properties of a complex national economy. Such models permit the economist to run simulations of various macroeconomic scenarios. They thus represent the opportunity to conduct “experiments” within economics.1 And they provide an important basis for policy advice offered to national governments by development consultants and agencies. My perspective in what follows is the philosophy of social science. I will try to identify the criteria of validity and consistency that ought to govern the evaluation of such models, and to question the degree to which we can attach rational confidence in their results. Consider a schematic example. Let M be a macroeconomic model of the Mexican economy. M takes a list of exogenous variables xi and a list of endogenous variables yi and parameters pi. The model makes a set of causal assumptions about how the exogenous variables affect the endogenous variables and what the intra-system relations are. These assumptions are represented in the form of a set of equations defining the behavior of the endogenous variables in terms of the parameters and exogenous variables. The model employs econometric techniques to establish values for exogenous variables and parameters and their trends over time. And it imposes a set of closure rules. The equations are solved for a given set of values for the parameters and exogenous variables; this represents the equilibrium condition for the endogenous variables in this setting. The model can now be used to consider the possible effects of various counterfactual conditions: change in exchange rates, energy price shock, removal of trade barriers, and so on. The central attraction of such models is their promise of providing a systematic representation of the inter-relatedness of a modern competitive market economy. A national economy such as Mexico's is an extremely complex affair, involving dozens of sectors, thousands of industries, millions of workers, a variety of government economic policies, and a fluctuating international economic environment. And it is desirable to have some way of estimating the probable consequences of possible economic shocks--e.g., increase in international petroleum prices, fall in the price of coffee--and possible government policies--e.g., increase in food subsidies or expenditure on primary education. Partial equilibrium analysis leads economists to concentrate on a single sector (e.g. agriculture) and ask some or all of these