DEVELOPMENT THEORIES: AN OVERVIEW

DEVELOPMENT ECONOMICS: A POST-WAR DEVELOPMENT

CONCERN WITH ECONOMIC DEVELOPMENT OF POOR/LESS DEVELOPED COUNTRIES. DISILLUSIONMENT WITH EFFICIENT ALLOCATION OF RESOURCES BASED ON THE NEO-CLASSICAL ECONOMIC THEORY. STRONG INFLUENCE OF KEYNES (1936). ACTIVIST VIEW OF THE STATE 1940s, 1950s and 1960s: PERIOD WHEN THE STATE ROLE WAS STRONGLY EMPHASISED IN LDCs. CAPITAL FORMATION, IN THIS VIEW, WAS THE ENGINE OF DEVELOPMENT. FREE MARKET IN LDCs WOULD GENERATE LESS INVESTMENT THAN WAS SOCIALLY DESIRABLE AND ALLOCATE IT IN LESS THAN SOCIALLY DESIRABLE WAYS. DEVELOPMENT ECONOMICS COMBINED CAPITAL FORMATION WITH AN ACTIVIST VIEW OF THE STATE THAT CLASSICAL ECONOMICS HAD NOT. SOME MAJOR CONTRIBUTORS AN EARLY MAJOR ATTEMPT BY ROSENSTEIN-RODAN (Problems of Industrialisation in Eastern and South-Eastern Europe, Economic Journal, 1943) -

RR argues for government intervention in the form of a Big Push approach. He is the first major advocate for a

course of nationally balanced growth.

OTHER MAJOR CONTRIBUTORS INCLUDE THE FOLLOWING. 1950s: NURKSE (1953,1959), PREBISCH (1950), SINGER (1950), SCITOVSKY (1954), LEWIS (1954, 1955), MYRDAL (1957), LEIBENSTEIN (1957) and HIRSCHMAN (1958) 1960s: ROSTOW (1960), CHENERY (1960, 1962) and DOBB (1963)

Among the above, Ragnur NURKSE (Problems of Capital Formation in Underdeveloped Countries, Basil Blackwell, Oxford,1953) is perhaps the foremost and most influential advocate of the balanced growth hypothesis. AN APPEALING PROPOSITION FOR LATECOMERS: ENABLING GROWTH TO START BY INDUCING INVESTMENT IN INDUSTRY. Why did investment have to be induced at all, as opposed to arising naturally and optimally as the result of profit-seeking private investment? TWO MAIN ARGUMENTS: a) RULING MARKET PRICES DO NOT CONVEY ALL RELEVANT INFORMATION TO PRIVATE INVESTORS. (Not only are market structures imperfect, they are also incomplete.)

b)

FIRMS PERCEIVE THEIR DEMAND SCHEDULES TO BE RATHER INELASTIC WHERE AN EXPANSION OF OUTPUT WAS CONCERNED. (The assumption of 'elasticity pessimism' was perhaps a natural legacy from the inter-war period. Nurkse, certainly, was pessimistic about the prospect for international trade.)

MAJOR THEORETICAL DEVELOPMENTS (a) THE VICIOUS CIRCLE HYPOTHESIS THE NEED TO RAISE SAVINGS FOR CAPITAL FORMATION (as a deliberate move on the part of the State) Ragnar Nurkse (1953), Problems of Capital Formation

in Underdeveloped Countries, Basil Blackwell, Oxford,1953; and

Harvey Leibenstein (1957), Economic Backwardness and Economic Growth, Wiley, New York. Nurkse provides a very account of vicious circles of poverty. According to Nurkse (1953), a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty. The following proposition puts it nicely: a country is poor because it is poor. The vicious circle typically starts with low productivity, which leads to low output per person. Low output (income) leads to low savings, and because of low savings there is low net investment. And because of low investment (or the low building up of the capital stock) producers are unable to increase productivity or output per person. Leibensteins (1957) notion of low level equilibrium trap provided an equally influential theory of self-perpetuating poverty. He went beyond the subtle approach of the vicious circle trap as provided by Nurkse. By introducing the influence of expectations of future rates of

growth on investment decisions, Leibenstein helped to bring dynamic explanations. (b) THE COMPLEMENTARY NATURE OF INVESTMENT DECISIONS RIGOROUSLY PUT FORWARD BY SCITOVSKY (Two Concepts of External Economies, Journal of Political Economy, 1954) ALMOST ALL THE MAJOR WRITERS OF THE 1950s AND 1960s EMBRACED IT IN ONE FORM OR ANOTHER. TWO MAJOR ASPECTS: (i) ECONOMIES OF SCALE OR INDIVISIBILITIES IN INVESTMENT MAY INDUCE A PRODUCER TO CHOOSE MORE OR LESS THAN PROFITMAXIMISING INVESTMENT. THE MARGINALIST APPROACH GENERALLY OVERLOOKS THE DYNAMIC CHARACTER OF AN INVESTMENT DECISION RAISING THE RATE OF RETURN TO CAPITAL FOR OTHER FUTURE INVESTORS.

(ii)

(c)

SECULAR DETERIORATION OF THE TERMS OF TRADE OF PRIMARY PRODUCE STRONGLY INFLUENCED BY PREBISCH (1950) A NUMBER OF OTHER CONTRIBUTORS INCLUDING SINGER (1950) AND MYRDAL (1956) ALSO EMPHASISED THIS.

GENERAL ACCEPTANCE OF A NUMBER OF PROPOSITIONS: 1. 2. 3. Economic development is a discontinuous process of structural transformation. Above a certain critical minimum level of per capita income, growth tends to become self-sustaining. To break out of the poverty trap and achieve selfsustaining growth, a critical minimum effort or big push is required. While this push requires many inputs, its single most important component is massive increase in the ratio of investment to national income. Development entails industrialisation which, by choice or from necessity, will concentrate on satisfying the home market for manufactures.

4.

5.

DISSIDENT VOICES (a) RIGHT-WING CRITICS P T BAUER (1972), A LEADING CRITIC OF THE MAINSTREAM DEVELOPMENT ECONOMICS, DOES NOT APPROVE ACTIVIST STATE. Jacob VINER (1952) and Hla MYINT (1954) WERE AMONG MORE MODERATE AND EARLY CRITICS. Deepak LAL (1985) IS A RECENT VOCAL CRITIC. THE WORLD BANK AND THE IMF ARE ALSO VERY CRITICAL OF THE INEFFICIENCIES OF RESOURCE USE, FOLLOWING AN ACTIVE GOVERNMENT ROLE IN DEVELOPMENT.

(b)

MARXIST CRITICS ALTHOUGH AGREE WITH THE CRITICISMS RAISED BY THE MAINSTREAM DEVELOPMENT ECONOMICS, THEY DO NOT BELIEVE THAT THE CAPITALIST MODE OF DEVELOPMENT WILL HELP THE DEVELOPING COUNTRIES ACHIEVE ECONOMIC DEVELOPMENT. EMPHASIS ON COLONIAL AND NEO-COLONIAL EXPLOITATION. MAJOR CONTRIBUTORS INCLUDE Paul BARAN (1957), Andre GUNDAR FRANK (1966) and Samir AMIN (1974).

1970s and 1980s: DOWNGRADING OF THE ROLE OF THE STATE IN BOTH DEVELOPED AND DEVELOPING COUNTRIES IN THE LDC CONTEXT, THREE MAIN KINDS OF EVIDENCE WERE PRESENTED. 1. The use of the state to promote Import Substituting Industrialisation (ISI) during the 1950s and 1960s had resulted in inefficient industries requiring permanent subsidisation, with little prospect of achieving international competitiveness. 2. Extensive government intervention tended to generate rent-seeking on a significant scale, i.e., to divert the energies of economic agents away from production and into lobbying for increased allocation of government subsidies and protection. 3. Some of the most successful LDCs - including Taiwan, South Korea, Hong Kong and Singapore had achieved extraordinary industrial growth by using an outwardoriented model driven by market incentives and a strong private sector.

IN THE NEOCLASSICAL VIEW, THE ENGINE OF DEVELOPMENT IS NOT SO MUCH CAPITAL FORMATION AS EFFICIENT ALLOCATION OF RESOURCES. Once institutional arrangements are in place to generate an efficient allocation of resources investment can be left to take care of itself. GOVERNMENT SHOULD LIMIT ITS ACTIVITIES TO IMPROVE THE FUNCTIONING OF MARKETS AND TO PROVIDING ONLY THOSE GOODS WHERE THE GOVERNMENT HAS A CLEAR COMPARATIVE ADVANTAGE RELATIVE TO PRIVATE GOODS. IF PRICES REFLECT SOCIAL OPPORTUNITY COSTS, THE UNDERLYING ARGUMENT GOES, PROFIT INCENTIVES WILL DRIVE THE ECONOMY TO ITS MAXIMUM PRODUCTION POTENTIAL. NEOCLASSICAL PRESUMPTIONS: THE THEORY BELIEF IN COMPARATIVE ADVANTAGE. THAT ANY NATION WILL BE BETTER OFF IF IT CONCENTRATES ON THOSE ACTIVITIES ON WHICH ITS COSTS ARE RELATIVELY CHEAPER. CRITICISMS: THE CLASSICAL CASE FOR FREE TRADE AS A MEANS OF HIGHER GROWTH IS SHAKY.

THE THEORY OF COMPARATIVE ADVANTAGE COVERS ONLY THE EFFECTS OF ONCE-AND-FOR-ALL CHANGES IN TRADE RESTRICTION. IT FAILS TO SPECIFY A CAUSAL MECHANISM LINKING REALISATION OF COMPARATIVE ADVANTAGE TO HIGHER GROWTH. PAUL KRUGMANS CONCLUSION: The idealised theoretical model on which the classical case for free trade is based will not serve us any more. The world is more complex than that, and there is no question that the complexities do open, in principle, the possibility of successful activist trade or industrial policy. (1986, p.15) IN CONDITIONS OF INCREASING RETURNS TO SCALE AND IMPERFECT WORLD MARKETS, A COUNTRYS GROWTH CAN BE FASTER IF IT RESTRICTS TRADE TO SOME DEGREE. LATE 1980s and 1990s: ATTEMPTS TO REVIVE DEVELOPMENT THEORY TWO INFLUENTIAL PUBLICATIONS - AMSDEN (1989) AND WADE (1990) - SERIOUSLY CHALLENGED THE NEOCLASSICAL ATTACK ON DEVELOPMENT THEORY. BOTH AMSDEN AND WADE HEAVILY CRITICIZED THE NEOCLASSICAL STANDPOINT AND, IN PARTICULAR, THEIR INTERPRETATION OF THE SUCCESS OF THE LATE INDUSTRIALISERS ON THE FREE MARKET APPROACH. WADE (1990) ARGUED A CASE FOR GOVERNING THE MARKET. IN EAST ASIA, MARKET GUIDANCE WAS EFFECTED BY AUGMENTING THE SUPPLY OF INVESTIBLE RESOURCES (through spreading or socialising the risks attached to long-term investment), and

STEERING THE ALLOCATION OF INVESTMENT (by methods which combine government and entrepreneurial preferences). IN PARTICULAR, THE GOVERNMENT GUIDED THE MARKET BY VARIOUS WAYS (pp.27-28) including Controlling the financial system and making private financial capital subordinate to industrial capital; Maintaining stability in some of the main economic parameters that affect the viability of long term investment, especially the exchange rate, the interest rate, and the general price level; Modulating the impact of foreign competition in the domestic economy and prioritizing the use of scarce foreign exchange; Promoting exports; Promoting technology acquisition from MNCs and building national technology system; and Assisting particular industries. KRUGMAN (1992) PROVIDED STRONG INTELLECTUAL BACKUP FOR DEVELOPMENT ECONOMICS, THOUGH CAUTIONED AGAINST DOGMATIC GOVERNMENT INTERVENTION. No clarion call for interventionist trade and industrial policies, while cautioning against carrying a free-market orthodoxy too far. There is an intellectually solid case for some government promotion of industry.

Krugman adopts a cautious approach while advocating the case for high development theory:

It is probably time once again to focus on market as well as government failures. (p.32)

J STIGLITZ (2002): HIGHLY CRITICAL OF THE CURRENT LIBERALIZATION STRATEGY JOSEPH STIGLITZ, who won the Nobel Prize in Economics in 2001, HAS BEEN ANOTHER STRONG CRITIC OF THE MARKET STRATEGY PUSHED FORWARD BY THE IMF AND THE WORLD BANK, AS HE BELIEVES THAT THE STRATEGY IS BASED ON THE OUTWORN PRESUMPTION THAT MARKETS, BY THEMSELVES, LEAD TO EFFICIENT OUTCOMES. (J Stiglitz, 2002) While arguing for a supportive role of the state in developing countries, which Stiglitz believes has played an important role in the economic development of the industrialized world, he exposes the hypocrisy of the Western countries, in particular of the United States which, while remaining highly interventionist, has been pushing developing countries to remove their interventions including trade barriers. As Stiglitz observes, Adam Smith was far more aware of the limitations of the market, including the threats posed by imperfections of competition, than those who claim to be his latterday followers. (Stiglitz, 2002, p.219) However, Stiglitz also is critical of weak governments and too-intrusive governments which have both hurt stability and growth. (p.220)

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Mozammel Huq 28 January, 2005

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