Since then, development economics—moving away from macroeconomic explanations à la Keynes or Harrod/Domar—has increasingly emphasized the microeconomic foundations of development. Researchers and policymakers have realized how crucial micro-level decisions are for economic growth. Examples are the role of women in household decision-making; the effects of the proportion of household resources controlled by women on the health and nutrition of their children; the role of microeconomics in poorly functioning land, labor, and credit markets; and the role of informal networks and institutions in dealing with market failures. The aim of this micro development literature is to understand what institutions may arise at the micro level to cope with such failures and to structure policy to provide for them.

Recent research, both theoretical and empirical, has emphasized that there need not be a trade-off between growth and equity, and that inequality could slow the pace of poverty reduction.<sup>5</sup> This has led to the view, now shared by most development economists, that the economy grows and develops best when the majority of the population can participate in and benefit from growth. This view is described at length in the _2006 World Development Report_ on Equity. Development strategies should aim to reduce sharp inequalities and equalize opportunities, and would thus improve both efficiency and equity.

# 2.2 State vs. Markets

In most developing countries in the 1950s and 1960s the dogma of planning held sway, with its emphasis on pervasive market failure and the need for a highly interventionist state. By the 1980s, the neoliberal counterrevolution had taken hold. Where the planners saw market failure, the neoliberals saw massive government failure, and their response was to move developing-country economies toward unregulated markets. “Getting prices right” was the mantra—an important corrective to the planning ideas, but equally incomplete as an approach to development. These competing ideologies continued to drive decision-making in many countries even after deeper economic analysis and extensive evidence undermined their credibility. The polarization of development debates and the lack of rigor in policy analysis did little to further the cause of poverty reduction.

In the 1990s, the development community largely moved beyond the twin dogmas of pervasive state control (1960s–1970s) and unregulated markets (1980s–early 1990s). The latter half of the decade witnessed the gradual consolidation of a consensus that states and markets are in fact complementary. Private enterprise operating through the market is the main engine of sustained economic growth. But keeping that engine running and ensuring that it powers poverty reduction require a state that is active in two key areas. First,

> 5 Kuznets, Chenery and development economists in the 1970s posited that although inequality was undesirable as an end, it was a means to long-run growth, because wealthy people tended to save and invest more of their incomes.  The central policy challenge for the Bank in the 1970s was to achieve as much growth as possible and then to redistribute.  In the 1990s, the view—originating in research described in the World Bank’s _2006 World Development Report_ —changed.  Economists saw that there did not necessarily have to be a trade-off between growth and distribution of income. Policies aimed at reducing sharp inequalities and equalizing opportunities were having positive results for both efficiency and equity. For instance, ensuring access to education and health care improves the productivity of the poor, boosting their quality of life and potentially the dynamism of society. Access to work opportunities decreases the likelihood that people will resort to crime. Because economic power often translates into political power, greater equity can underpin a broader targeting of public policy. If well executed, measures to equalize opportunities for people to lead productive lives are good for consensus, social justice, political stability, and productivity.

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