Ever wondered why a new fashion trend can explode in a matter of weeks, but creating an entirely new economic sector can take decades, or never take off at all? Welcome to the curious case of history versus expectations, one of the more interesting ideas in development economics. Let me break it down.

 

When we talk about why economies develop differently, history usually gets most of the blame - or credit. Colonisation, inherited institutions, infrastructure, policy and plain bad luck can all shape where a country begins and which direction it continues moving in. And yes, history matters. But that is only half the story. The other half is what people expect everyone else to do.

 

Economist Paul Krugman used the idea of “history versus expectations” to examine economies with more than one possible long-run outcome. Past conditions can keep an economy on one path, but expectations can sometimes pull it towards another - particularly when people’s decisions depend on what they believe others will do.

 

Imagine you are an investor considering opening a garment factory in a country without an established garment industry. You check the roads, electricity and infrastructure. But you are also watching everyone else. Are suppliers setting up nearby? Are other investors betting on this industry? Will workers have the right skills? Is the government likely to support it? Will there be enough demand to make the investment worthwhile? If the answer to most of these questions is “not yet,” you wait. The problem is that everyone else may be waiting too.

 

A supplier does not enter because there are not enough factories. A factory does not open because there are not enough suppliers. Workers do not train for jobs that do not exist, and investors do not fund an industry without skilled workers. Individually, waiting looks sensible. Collectively, it keeps the industry from starting. That is a coordination failure: a better outcome may be possible, but nobody wants to move first when the payoff from their decision depends on other people moving too. Research on “big push” development models studies exactly this problem - how firms’ investments can become more valuable when other firms invest alongside them.

 

Now compare that with fashion. One person wears something new. A few people notice. Creators pick it up. More people copy it. Retailers respond. Suddenly, an item everyone would have mocked six months ago is sold out in three colours. The speed is dizzying because trying a fashion trend is usually cheap, visible and reversible. If the outfit fails, you change it. Maybe delete a photograph. Possibly deny ever owning those jeans. The cost of being early is fairly small, while the payoff - attention, novelty or simply getting there before everyone else - can be immediate.

 

Starting an economic sector is slightly less forgiving. Factories are expensive. Supply chains need to work. Workers need training. Investors need confidence. Infrastructure, finance and policy cannot be summoned into existence by one well-timed reel. And unlike a questionable fashion purchase, you cannot return an industrial plant because the vibe changed. A fashion trend needs coordination too, but social proof can provide it quickly. An economic sector needs coordination across capital, labour, infrastructure, suppliers and institutions. Those things move more slowly and cost considerably more. That is why it can be easier to start a trend on TikTok than to establish an entirely new manufacturing sector.

 

History tells us where an economy has been. Expectations influence where people are willing to invest, build and go together. That does not mean optimism can repair bad roads or make capital appear. Expectations are not economic fairy dust. But they can affect whether businesses invest, workers train, governments commit and entire industries begin to look possible. Sometimes an economy remains stuck not because a better outcome is impossible, but because nobody wants to be the first person to bet that everyone else will show up.

Shoutout to my Development Economics exam for unlocking that thought. Who knew stress and theory could come together to create content? Maybe the real question is not whether expectations can reshape economies. It is who moves first - and what makes everyone else believe they should follow.