Theories and Politics of Development Materials

Theories and Politics of Development (PADM 1053)
CHAPTER ONE
1. Perspectives and Evolution of Development
Although we cannot be sure about when the concept originated, most people agree that development is closely
related with the evolution of capitalism and the demise of feudalism. The concept of development is very elusive
(difficult to understand in its totality). Development has many meanings. Thus, in order to understand the various
theories of development, one must see them from the historical and contextual perspectives. The terms
"Developed", "Underdeveloped", "Undeveloped", and "Less Developed" are used to denote the social and
economic conditions of countries.
However, whoever tries to describe the term "development" should incorporate ideas in a manner that it can be
perceived as: researches
1) A condition of life,
2) A goal to be achieved, and
3) A capacity to grow and change
These three points or ideas should be bound together in all efforts to understand and deal with the theory and
practice of development.
Why Do We Need to Study and Realize Development?
i) The Everest Reason:- "Why did you climb Mount Everest?" Answer: "Because it was there!" The
developing world constitutes the vast majority of the world's territory, hence it is not only important to
correct such imbalances, but also is a must to be worried about to understand the impacts of lack of it and
find ways of its realization.
ii) Human Compassion: Approximately, 75% of the world population lives in developing countries and in
below standard and sub-standard conditions. Human compassion dictates that understanding development
and being able to apply that knowledge to help those in such conditions is a useful endeavor.
iii) Terrorism: Recent events have brought to forefront the threats and impacts of global terrorism and that many
of those involved individuals come from the developing world. Thus, development can be a tool in the war on
terrorism.
1.1 Meaning and Dimensions of Development
Development is a very seductive term that induces interest to all. It is a term ubiquitous in our daily language.
Development has no as such single ‘proper’ meaning. People do mean by the term “development” many different
things and use it in several ways. Development has been taken to mean different things at different times, in
different places, and by different people of different professions and organizations. While examining the various
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Theories and Politics of development (PADM 1053)
meanings and dimensions of development, we often look into Cinderella words and concepts that are, as Chambers
(2005:186) says, the common currencies in the contemporary development discourse. The changing words,
meanings and concepts of development discourse therefore reflect and influence what have been and/or what are
being done in practice.
The dominant meanings have been those attributed by economists. Development has thus been equated with
economic development, and economic development in turn with economic growth or simply growth. Upon
economic considerations, Coffey defined development as "sustained and irreversible economic growth, which will
be characterized in quantitative terms by an increase in real income per capita…accompanied by certain structural
and social transformations of a given country".
However, defining development on the basis of the economic growth model or approach has shortcomings, since it
doesn't show the real impact of the growth on the public life. Economic growth is not just the same thing as
development and the difference between the two has been identified by many recent contributions to development
economics. For example, Todaro (1994) and Nelson (1970) do not agree with the equivalent meanings of economic
growth and development. They instead argue that acceleration of economic growth would make sense only when it
ensures the reduction of inequality and the eradication of absolute poverty.
Despite progress in Per Capita Income, GNP, or GDP in many developing nations, disparities in the living
conditions between rich and poor countries and between the richest and poorest people within the developing
countries continue to widen, and the absolute number of the poor increases overtime (Rondinelli, 1993:1).
According to Des Gasper (2004:2), it is a bare fact that ‘globalization’ is generating great wealth these days, which
could be used to massively reduce poverty worldwide and to reduce global inequality. However, the reverse is still
happening in practice.
“The world’s richest 225 people have a combined wealth equal to the annual income of the poorest
47 per cent of the world’s people. Almost one in four of the world’s population lives in abject poverty
without access to adequate food, clean water, sanitation, essential healthcare, or basic education
services. This tells that 1.3 billion people whose lives are blighted by poverty, robbed of their dignity,
deprived of the opportunity to fulfill their potential”
For these writers, economic progress is thus an essential aspect or component of development, not the same as
development per se since the latter is not purely an economic phenomenon. In broad sense, development must
encompass more than the material and financial side of people's lives. This in turn indicates that the meaning of
development has evolved over time to encompass many other dimensions. Scholars and practitioners provided a
new version to the concept of development that would fit into the changing approaches and realities.
In recent years, there has come a wide consensus in that development should primarily mean, and be measured in
terms of an improvement in the general welfare situation of the people through poverty reduction. Starting from the
1970s in particular, development came to be redefined in terms of the reduction or elimination of poverty,
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inequality and unemployment. Hence, “redistribution from growth” became a common slogan. This is a shift
away from the earlier understanding of the meaning, measurement and objective of development.
It broadly implies social transformations involving complex economic, social, political, and cultural changes
towards positive ends. Riggs (1964) defined development as "a process of increasing autonomy (discretion) of
social systems by raising the level of diffraction. While 'discretion' is the ability to choose among alternatives,
'diffraction' refers to the degree of differentiation and integration in a social system". Development, as Montgomery
also describes, "…is usually perceived as an aspect of ‘good’ change that is desirable, broadly predicted or planned
and administered or influenced by government action".
If development means good change; i.e. ‘societal improvement’, questions arise about what is good and what sorts
of change matter. Robert Chambers (2005:184-193) has added a new concept for a development agenda; that,
development is change with “responsible well-being”.
According to Des Gasper (2004:14), the very idea of development as societal improvement is value relative, which
justifies the need for the study of development ethics. Development ethics is also defined as ‘the normative or
ethical assessment of the means and ends of development’.
Galtung (1980), quoted in Gasper (2004), defined development as, “a process transforming structures – particularly
those of production-consumption and major institutions – so that basic human needs are satisfied for an increasing
number of individuals at an increasingly high level within the framework meaning provided by culture and the
outer limits provided by nature.
In addition to improvements in productivity/outputs and incomes, it typically involves radical changes in

institutional, social, and administrative structures as well as in popular attitudes, customs and beliefs. According to
Todaro (1994:67-68), development must be conceived as a multidimensional process involving the reorganization
and reorientation of the entire economic and social systems. Hence, development becomes to be perceived in terms
of the satisfaction of basic human needs rather than simply growth maximization.
Todaro has come also with a new concept known as the "core values'' of development, which represent common
goals sought by all individuals and societies. In his words, at least three basic components or core values should
serve as a conceptual basis and practical guideline for understanding the inner meaning of development. These core
values are: sustenance, self-esteem, and freedom,
i) Sustenance: by sustenance, he meant the ability to meet basic needs that people invariably have without which
life would be impossible. These life-sustaining basic human needs include food, shelter, health, and protection.
When any of these is absent, or in critically short supply, a condition of "absolute underdevelopment" exists.
Here, therefore, we may claim that economic development is a necessary condition for the improvement in the
quality of life, and that is what should be called 'development'.
ii) Self-esteem is used to denote 'to be a person", a sense of worth and self-respect, dignity, identity, honor,
recognition, of not being used as a tool by others for their own ends. The nature and form of this self-esteem may

vary from society to society and from culture to culture. However, with the expansion of the "modern values" of
developed nations, many societies in the Third World Countries that have had profound sense of their own worth
suffer from serious cultural confusion when they establish close contact with economically and technologically
advanced societies.
iii) Freedom from servitude (from suppression or from obeying by others' interest) means to be emancipated from
alienating material conditions, or to be able to choose from an expanded range of options available for societies
together with the minimization of external constraints in the pursuit of some social goals, which we call
development. The advantage of economic growth is not that wealth increases happiness, but that it increases the
range of human choices. Wealth can enable people to gain greater control over nature and the physical
environment than they would have if they remained poor.
1.2 Objectives of Development

Despite differences in the political and development patterns of countries, (both in the developed and developing
ones), there is a widely shared consensus among people and leaders regarding the goals and objectives of
development. Many scholars in the field of comparative administration (development administration) agree that the
two major elements of development objectives are “nation-building and socio-economic progress”. Esman (1966)
describes nation-building as "the deliberate fashioning of an integrated political community within the fixed
geographic boundary in which the nation-state is the dominant political institution, while economic and social
progress is defined as the sustained and widely diffused improvement of social welfare".
Therefore, the emphasis of recent arguments is on clarifying the target and purpose of development; i.e. the well-
being of all people by providing them with the opportunities to ensure better life. In this context, Wen (1976: 355)
argued, "...development will not have moral as well as practical validity or justifications unless it is firmly
subordinated (associated) to supreme social objectives, namely, the preservation of humanity and improvements in
the quality of life of the poor". Hence, development as a process involves integration of social and economic
objectives; i.e. growth with equity.
The other dimension of explaining the objective of development is empowerment of the underprivileged people by
enabling them to control over resources and decisions affecting their lives. For the contemporary development
thinkers, the basic question related to development is not only concerned about efficiency, but about achieving
social justice through changing society's basic values. As Jones and Inaba (1997:10) have said, the essential
components that demonstrate the ultimate purpose of development include, among others, securing equitable
distribution of income and wealth; raising the level of employment; expanding and improving facilities for
education, health, nutrition, housing and social welfare, etc.
According to Robert Chambers (2005:189-93), the overarching end (objective) of development is ensuring well-
being for all. Well-being can be described as the experience of good quality life. Well-being differs from wealth.
Unlike wealth, well-being is open to the whole range of human experience, social, psychological and spiritual as

well as material. It has many elements including living standards, access to basic services, security and freedom
from fear, good relations with others, peaceful mind set, fulfillment of self-being and so forth. In contrast, wealth
doesn’t serve all these values. Generally, genuine development should serve four interrelated objectives; i.e.
livelihood security, capability, equity, and sustainability. The notions of these words/phrases are elaborated by
Chambers in the following manner.
i) Livelihood Security: Livelihood can be defined as adequate stocks and flows of food and income to meet
basic needs and to support well-being. Security refers to assured rights, physical safety, and reliable access to
resources, food and income, and basic services.
ii) Capabilities: Are the means to the fulfillment of livelihood and well-being and their enlargement through
learning; practicing, training and education. Capabilities refer to what people are capable of doing and being.
iii) Equity: Suggests that the poor, the weak, the vulnerable, and the exploited should come first. Equity includes
human rights, intergenerational and gender equity, and the reversals of “putting the last first and the first
last”, to be considered in all contexts. However, the reversals are not absolute, but to balance and level.
iv) Sustainability: To be good, conditions and changes must be sustainable economically, socially,
institutionally, and environmentally. Sustainability means that long-term perspectives should apply to all
policies and actions as objectives for present and future generations. Sustainability helps to maintain or
enhance resource productivity on a long-term basis.
When well-being is qualified by equity and sustainability, it becomes ‘responsible well-being’, as the overarching
end. Well-being is then not at the cost of equity and sustainability, but is enhanced when it contributes to them.
Responsible well-being recognizes obligations to others. In general, the word ‘responsible’ has moral force in
proportion to wealth and power. The objective of development, then, becomes responsible well-being by all and for
all.
In objective terms, as Titi and Singh (1995:9) noted, the primary objective of development should be to overcome
poverty and to protect or broaden human options. This in turn requires the formulation of appropriate development
policies. These days, almost all countries adopt development policies in the face of a new philosophy known as
“people-centered” or “community-based” development.
1.3 Measures of Development

In the pre 1970s, development has been measured in terms of the capacity of the national economy to show an
annual increase in its GNP or the ability of the nation to expand its output at a rate faster than the growth rate of its
population. A common economic index of development has been therefore the use of the rates of growth of income
per capita or per capita GNP. The levels and rates of growth of "real" per capita GNP (monetary growth of GNP
Per capita minus the rate of inflation) are normally used to measure the overall economic well-being of a

population. However, such measurements and assumptions of development have had very little to do with changes
in the living standards of the poor.
Social scientists tend to disagree among themselves about the characteristics of measures of development.
Economists equate it with the capacity to produce a high level of material output or resources in relation to size of
population. Such measures are translated in concrete terms as Gross National Product (GDP), Gross Domestic
Product (GDP), and Per Capita Income (PCI). Others focus on the forms of social and economic organization as
prevailed or evidenced in developed countries. Such measures are relative or qualitative in nature, which may
include:
 Justice and equality

 Utilization of modern technology
 Criteria of rewards based on achievement rather than ascription
 Political and administrative modernization
International development agencies (like UNDP and the World Bank) often apply the Human Development Index
(HDI) as measures of development, including:
 Education, employment rate, clothing and shelter
 Infant and child mortality rate
 Life expectancy,
 Access to modern health facilities and safe drinking water
 Nutritional status as measured by calorie intake
 School attendance as percentage of school-age population
These all imply that the term “development” goes beyond a material conceptualization of the common good.
Moreover, pure economic measurements of development alone, which have been conventionally used in the pre
1970s, cannot adequately demonstrate the actual living standards of a society.
Tip
GDP is the measure of the value of goods and services produced by the national economy over
a year. To avoid double counting, only goods used for final consumption or investment are
included, not those used up in producing the final goods. Gross National Product (GNP) adds
to GDP the income that accrues to domestic residents from investment abroad, and deducts the
income earned in the domestic economy, which is owned by people abroad. GNP per capita is
therefore the better measure of development as welfare, while GDP per capita is a better
measure of productive forces.

CHAPTER TWO
2. Paradigms and Theories of Development
2.1 Introduction
The concept of development is essentially concerned with social changes and human progress in developing
countries, which suffered from the evils of colonialism. Colonies began to achieve their independence following the
end of the 2nd WW. But there was another phenomenon known as the ‘cold war’ that took place between the
capitalist of the west and the communist east. Part of this war was the struggle to acquire allies from the developing
countries. The search for such allies has in turn come to be backed by the emergences and applications of different
development theories. Radical new theories emerged under the various schools of thoughts or paradigms, each
claiming that their theory held the key to understand development and underdevelopment.
Development paradigms provide the basic underpinnings to describe the theories and policy approaches of
development and guide the applications of such development theories and policies into practices. Paradigms and
theories are much alike in their abstractions, except that the former is broader to encompass many such of the latter.
Both use assumptions and past experiences to argue on their respective positions and explain propositions. Theories
and paradigms are generalizations. Hence, the implications of a given paradigm and theory vary widely from
country to country since every country has unique economic, social, cultural, and historical experiences.
What do theories try to do?
Development theories seek to explain and predict how:

 Economies develop/could develop (or not) over time,
 Barriers to development can be identified and overcome,
 Governments can induce, sustain and accelerate development with the application of appropriate
development polices,
There is no one agreed ‘model of development’. Instead, each theory gives an insight into one or two dimensions of
the complex process of development, and has its own merits and limitations.
As paradigm is broader than theory, the various development theories could be seen under two dominant paradigms
or school of thoughts known as "Development From Above" or "Top-Down", and "Development From Below"
or "Bottom-Up" paradigms.
The two paradigms/schools of thoughts present their arguments more in the context of "regional development".
However, the term "region" could be understood broadly by dividing the world into zones (North and South) or into
continents and sub-continents, and narrowly by dividing a single nation into regions or sub-national states. The
values of society are the ultimate standards by which development or lack of it will be judged. Thus, the validity of

development approaches will not be determined as a result of mere theoretical and ideological debates, but also in
the realm of practice.
Both paradigms are conceptual constructs, which in practice may rarely occur or be distinguished in pure forms.
Despite differences between those who espouse or advocate the center-down paradigm and that of the bottom-up
development paradigm, there are some areas of agreement between the two approaches concerning the ways and
means for alleviating poverty. These may include:
 More attention to human resource development,
 Greater efforts to curb population growth,
 Wider and more rapid diffusion of agricultural innovation,
 Planning in terms of functional economic areas, and
 Linking functional economic areas by transportation and communication policies that encourage not only
the spatial diffusion of innovation, but also that facilitate the movement of agricultural and light-industry
outputs from rural areas to large urban markets.
The two paradigms do have also common grounds from the "Economic Base Theory", which will be discussed
under section 2.3 later, and the “Stages of Growth Theory”.
Both schools of thoughts recognize that nations/regions will progress through different "Stages"; evolve from lower
stages to higher stages of development. According to Rostow (1960, 1971), the transition from underdevelopment
to development can be described in terms of a series of stapes or stages through which all countries must pass (have
passed). Rostow sees national/regional development progressing in five stages, namely: traditional, transitional,
takeoff, maturity, and mass consumption. Therefore, it is possible to identify all societies in their economic
dimensions, as lying on one of the five categories.
(a) Traditional Stage (traditional society): This stage is characterized by subsistence economic activity or limited
production function; i.e. output is consumed by producers rather than traded. Agriculture is the most important
industry and production is labour intensive, using only limited capital. A region in the traditional stage of
development is one in which there is limited availability of technology relative to other regions and there probably
exists a hierarchical social structure.
(b) Transitional Stage (precondition for takeoff): the second stage of growth embraces societies in the process of
transition; that is, the period when the preconditions for takeoff are developed. At this stage, surpluses for trading
and entrepreneurs emerge supported by an emerging transport infrastructure. Savings and investment grow. In the
second stage, the region's economic and social structure begins to change. This occurs when leading regions make
investments in lagging regions in transportation, communication, and manufacturing processes for the purpose of
exploiting natural resources. In this stage, managers and skilled labor are transferred to the lagging regions, and
new social and political elites emerge.
(c) Takeoff: In the third stage, industrialization increases rapidly, new techniques spread in majors sectors, with
workers switching form the agriculture to manufacturing sector. During the takeoff, the rate of effective investment
and savings may raise with significant proportion to the national income. Growth is concentrated in few regions of
a country and in one or two industries. New political and social institutions evolve to support industrialization. It
occurs when an external stimulus infuses investment by leading regions into lagging regions, and when the new
social and political order works to sustain continued national investment by inducing private sector investment in
core industries.
(d) Maturity (drive to maturity): In maturity stage, growth is diverse supported by technological innovation in all
front. In other words, the economic base of a nation/region is diversified, and many formerly imported goods and
services are produced locally. The economy of a nation finds itself in the international economy, goods formerly
imported are produced at home, new import requirements develop, and new export commodities produced to match
the import. The economy extends its range into more refined and technologically more complex process.
(e) High Mass consumption: The fifth stage occurs when a country/region exports many goods and services that it
formerly used to import. The leading sectors shift towards the production durable consumers' goods and the
diffusion of services on mass basis. At this stage, the society ceased to accept the further extension of modern
technology as an overriding objective. The emergence of welfare states is one manifestation of the high mass
consumption stage, and countries allocate increased resources to social welfare and security.
Rostow's theory has many implications. Development requires substantial investment in capital equipment; to foster
growth in developing nations the right conditions for such investment would have to be created; i.e. the economy
needs to have reached stage two. For Rostow:
 Savings and capital formation (accumulation) are central to the process of growth, and hence development,
 The key to development is to mobilize savings to generate the investment, to set in certain self-generating
economic growth,
Rostow's model has its own limitations. For example, Rostow explains well the development experiences western
countries, but does not explain the experience of countries with different cultures and traditions. Considerations of
development from "above" or "below" are in essence the considerations of the nature of development itself by
individuals. Because, in the ultimate sense, development is the reflection of personal values, conditioned by societal
framework in which one lives. In different national or regional situations there is undoubtedly considerable
variation in the make-up of these two schools of thoughts. Let us briefly contrast the two paradigms (concepts) with
each other.
DEVELOPMENT FROM:
A
BOVE (TOP DOWN)?
OR
2.1 Development From Above Paradigm

(The Top-Down/Center-Down Development Paradigm)
At least until recently, the center-down development paradigm has dominated the spatial planning theory and
practice in the context of developing countries. This school is rooted to the traditional neoclassical economic
models; in the balanced versus unbalanced growth controversies of the 1950.
(a) Balanced growth (or the big push) theory argues that as a large number of industries develop
simultaneously, each generates a market for one another. Balanced growth involves the simultaneous
expansion of a large number of industries in all sectors and regions of the economy. If a large number of
different manufacturing industries are created simultaneously then markets are created for additional output.
For example, firms producing final goods can find domestic industries that can supply them with their inputs.
The benefits of growth are spread over all sectors and, ideally, over all regions. Balanced growth theory is an
extension of Say’s Law; the demand for one product is generated by the production of others. It is argued that
free markets are unable to deliver balanced growth because entrepreneurs:
 Do not expect a market for additional output – why risk resources when sales are uncertain?
 Require skilled workers but are not willing to hire and train unskilled staff who may then leave to work
for rival firms – employers cannot ‘internalize their positive externalities’,
 Do not anticipate the positive externalities generated by the investment of other firms engaged in
expansion,
 Are unable to raise finance for projects
If government can coordinate simultaneous investment in many industries, one firm provides a market for another.
This requires state planning and intervention to:
 Train labor
 Plan and organize the large-scale investment program
 Mobilize the necessary finance
 Nationalize strategic industries and undertake infrastructure investments e.g. build roads
 Protect infant industries through tariff (tax on imports) and quota (limit on quantity of imports) policies
The strategy of balanced growth is beyond the resources of most poor countries. Balanced growth within a closed
economy rather than specialization and trade contradicts comparative advantage. Government planning results in
government failure; i.e. government intervention in the market fails to bring about an efficient allocation of
resources as it involves bureaucratic processes. LDC’s development policies focusing on import substitution,
agricultural self-sufficiency and state control of production have yielded poor growth.
(b) Unbalanced growth theorists argue that government cannot mobilize sufficient resources to promote
widespread and coordinated investments in all industries. They share analysis with balanced growth theorists
that free markets, alone, cannot generate development but differ in that government planning or market
intervention is required just in strategic industries. Those with the greatest number of backward and forward
links are prioritized. A country lacks resources to finance balanced growth. Resources should therefore be
concentrated on strategic industries with:
 Significant forward linkages; i.e. firms creating essential inputs for other key firms in the economy,
 Significant backward linkages; i.e. key firms buying industrial inputs from a large number of domestic
firms,
 Import substitution; i.e. developing domestic industries replaces imports and so improves the balance of
payments,
Government identifies strategically important areas with significant backward and forward linkages so as to
subsidize or fully own such sectors or areas. For example, state owned development banks finance priority
investment projects chosen for their contribution to growth and development. The development-from-above school
views development as essentially emanating from the core and growth centers and trickling out to the periphery and
hinterlands. In its crudest sense, this school views regional development as starting from worldwide demand for
critical innovation that filters down to national, sub-national, urban units, and hinterland units.
In other words, the essential position of this paradigm is that development will spread over time from few dynamic
sectors and geographic cluster to the rest spatial system. Of the historical roots of the development from above
paradigm, the unbalanced growth was given high importance during the period of the 1950s in the highly influential
works of Perroux, Myrdal, Hirschman, and Friedmann.
(i) Perroux (1955): Growth Pole

Perroux coined the term "growth pole" with the primary concern that tended to promote interactions among
industrial sectors rather than spatial development processes. The "growth center (or pole) and hinterland"
concept distinguishes within a regional context. Growth poles or centers are urban or extended metropolitan areas,
here called "urban fields", containing a set of expanded activities, which induce further economic development
throughout its hinterlands. A growth pole is an urban growth center from which growth diffuses through the
hinterlands. On the other hand, hinterlands are outside the urban fields. In Perroux's growth pole concept,
development in hinterlands is fueled by expanding metropolitan centers. In this context, investment trickles out
from the growth pole or growth center to the hinterland.
According to Perroux, growth doesn’t appear everywhere at the same time; it manifests itself in points or poles of
growth, with variable intensities; it spreads by different channels and with variable terminal effects for the economy
as a whole. He emphasized on the importance of entrepreneurial innovation in the development process, which
proceeds by a succession of dynamic sectors, or poles, through time. Perroux reflected the position of the center-
down development strategy; stresses on few dynamic sectoral clusters as well as on urban-industrial growth as key
to development.
The rationale for the growth pole strategy maintains that with limited resources, it would be inefficient and
ineffective to attempt to sprinkle developmental investments thinly over most or all-across the national territory.
Rather, key urban centers should be selected for concentrated investment programs that would benefit from
economies of scale and external economies of agglomeration. However, empirical studies show that the innovation
diffusion process and the spread effects to the hinterlands are minimal and highly discontinuous in spatial terms.
(ii) Myrdal (1957): Cumulative causation
Myrdal develops the theory of cumulative causation and mentioned about the existence of "leading-lagging
regions” in the process of the spatial/regional aspect of development. The "leading-lagging concept distinguishes
advanced regions from underdeveloped regions at both the global and regional levels. To explain the results of the
"leading-lagging" relationships and develop his analysis, Myrdal employed the concepts of "backwash" and
"spread effects".
Leading regions possess initial comparative advantage due to location, infrastructure, and other factors.
Agglomeration results in ever-increasing investment in leading regions, while little investment moves from leading
regions to lagging regions. Even this little investment is controlled by leading region elites to assure economic
dominance. Hence, lagging regions are further inhibited from development because of backwash factors. The
'backwash' effects involve the phenomenon of population migration, trade, and capital movements.

Skilled workers, educated individuals, business leaders, and venture capital will be drawn from the hinterlands
(lagging regions) to the growth poles (leading regions) to seek higher returns because of increased demand
available at the center. Goods and services produced in the leading regions are sold to the lagging regions at such
low prices that local industries cannot compete. Such backwash effects create the tendency of an increased
inequality between the center and the periphery.
On the other hand, though long time it may take, there is a propensity of "spread effects" that may counter the
'backwash' effects that emerge as a result of the relationships between the "leading and lagging regions". Because,
one feature of leading regions is that they tend to spread out into lagging regions. Besides, most lagging regions
will have some comparative advantages, principally in natural resources that result in positive investment flow.
Hence, increased outlets for the hinterland's agricultural products and raw materials and a tendency of technical
advancement to diffuse from the growth centers will be imminent. When the spread effects become stronger than
the backwash effects, cumulative causation leads to development in the lagging regions.
(iii) Hirschman (1958): Polarization and Trickle Down
Hirschman maintained that development strategies should concentrate on a relatively few sectors rather than on
widely dispersed projects. Hirschman's polarization and trickle-down concepts correspond closely to Myrdal's
concepts of backwash and spread effects. He argued that growth is communicated from the leading sectors of the
economy to the followers. The advantage of this approach over the "balanced growth" is that it leaves considerable
scope to induced investment decisions and economizes the scarce resource.
The actual effects of the growth points or centers on the hinterlands or the peripheries depend on the balance
between favorable effects that trickle-down to the latter from the progress of the former and the unfavorable, or
polarization, effects on the hinterlands as a consequence of the attractiveness of the growth poles. The most
important trickle-down effects are generated by purchases and investments placed in the hinterlands by the growth
points. On the other hand, polarization may take place in a number of ways. Competition from the growth points
may depress relatively weak and insufficient manufacturing and export activities in the hinterlands, and the growth
points may produce "brain drain" rather than creating employment opportunities in the hinterlands. Therefore,
Hirschman suggests that the essential task of government is the provision of infrastructure as the only permissive
inducement mechanism, and through which to provide the hinterlands with a continuous economic activity in
different sectors..
(iv) Friedmann (1972): Core-Periphery
Friedmann has made the first attempt to formulate a systematic and comprehensive core-periphery development
model. The "core (center)-periphery" concept distinguishes between regions on a global scale, while regions can be
composed of the entire nations or collections of states. He argued that development is the unfolding of the creative

potential of a society through a successive series of structural transformations. This occurs through a continuous,
but cumulative, process of innovation. Development originates in a relatively small number of "centers of change"
located at the points of highest interaction.
Hence, innovation diffuses from these centers to dependent areas of lower interaction. In general, Friedmann's
theory assigns a decisive influence to the institutional and organizational framework of society, especially to the
patterns of authority and dependency. Friedmann's theory also integrates cultural and political processes into the
process of economic development. In summary, it was observed that in the years between the 1960s and 1980s,
deploring the use of Western theories and methods, based on an urban-industrial orientation, in dealing with the
problems of developing countries has been almost fashionable.
The center-down paradigm is not simply a matter of the national economic development of individual countries; it
involves significant and highly controversial international dimensions. It suggests the creation of multinational
firms on a continental basis as a precondition for more rapid diffusion of innovation in the developing countries. As
Hansen said, the concept of development 'from above' assumes that development, whether spontaneous or induced,
starts only in few dynamic sectors and geographical clusters, from where it will or should, spread to the remaining
sectors and geographical areas.
This 'trickle down' process is essentially supposed to start at the global level (from worldwide demand, or world
innovation centers), and then filter down and outward to national or regional units, either through the urban
hierarchy, through input-output relations, or through the internal channels of multi-plant business organizations, or
large-scale government organizations. Its emphasis, therefore, has been on urban and industrial capital-intensive
development, the highest available technology, and maximum use of external and scale economies. This usually
involves:
 Large investment projects;
 Increasing units of functional and territorial integrations;
 Increasing scale of the private and public organizations required to transmit development through these
integrated units;
 Large redistributive mechanisms; and
 The reduction of economic, social, cultural, political and institutional 'barriers' (including distance friction
and institutional differentiation), which might hinder transmission effects within and between these units.
The paradigm of development 'from above' is also based upon the following hypotheses:
(1) Development in its economic, social, cultural, and political dimensions can be generated only by some very
few selected agents such as entrepreneurial pioneers, the white, the urbanite, or the intellectual;
(1) The rest of the population are considered 'incapable of initiatives in making improvements, consequently
everything must be done for them from outside, at least temporarily;

(2) These few, agents are able and willing to allow all others to participate in the development process within a
reasonable time-span and on a reasonably equal basis;.
(3) These other groups (recipients) are able and willing to adopt the same type of development pattern.
All these assumptions and hypothesis generally imply that the paradigm presumes an eventually monolithic and
uniform concept of development, value systems, and human happiness, which automatically will spread over the
entire world. These notions are related very closely to the interests of the large-scale organizations, which were
installed, to serve as the "'motor' of development. In many cases, however, these have come instead to dominant the
system that we want to address; very often overruling the interests of local and regional communities, which they
were meant to serve.
This has led to a high concentration of power in few private or governmental organizations which now dominate
the greater part of the world system. At the same time such a strategy ignores:
(1) The great diversity of value systems and aspirations created by the differences between cultural systems.
(2) The great variations in natural conditions;
(3) The fact that, with different aspirations and cultural and natural preconditions, the imposition of a uniform
concept and measurement of development is bound to relegate some groups to what is called
'underdevelopment', leaving them further away from those set standards and plunging them further into the
role of the disadvantaged in any measurement;
(4) That this subsequently leads to differing levels of 'dependence'. Once such economically disadvantaged
groups start to interact more intensively with more developed ones on the latter's terms, they are increasingly
forced to adopt the same social, cultural, political, and institutional norms in order to compete with them in
economic terms;
(5) That this entails the subordination of broader societal and cultural values to economic determinants, which is
a fact that can be observed in most highly developed countries and those directly influenced by them today.
Critical appraisal of the center-down paradigm has further alleged that, within developing countries, this orientation
has contributed to:
1) Dependence on developed countries and multi-national corporations situated in these countries,
2) The persistent dominance of one or few large cities, which have critical problems of unemployment and
underemployment in themselves,
3) Increasing income inequalities,
4) Persistent and growing food shortages,
5) Deteriorating material conditions in the countryside.
The relevance of these propositions varies depending on the objective conditions of individual countries. Marxist
and other critics who emphasize the issue of dependence have done so largely on two grounds:
(i) The political dependence that tends to accompany economic dependence, and
(ii) The failure of existing institutional mechanisms to alleviate mass poverty, especially in rural areas. However,
while there are apparent shortcomings of the center-down paradigm, it may be wrong to dismiss this

approach as altogether useless and harmful. Whatever the merits of these objections, they don't in themselves
provide an alternative development strategy.
Worldwide investment stagnation and pressures on multinationals to invest at home are not obviously helping
developing countries. While some informed observers have become pessimistic about the efficacy of the approach,
others argue that it has not been implemented properly as investment has been too few; planners have worked with
unrealistic short-time horizons. Thus, one may say that the center-down is not necessarily wrong; it has never been
tried. Normally, large-scale organizational linkages between areas of greatly differing levels of development lead
(due to factors such as unequal distribution of power, unequal terms of trade, unequal distribution of scale
economies) to increasing spatial divergence rather than a convergence of living levels.
In other words, even with explicit sub-national development policies operating through large-scale organizations,
the sum of backwash effects in most cases still seems to exceed spread effects. With a "top-down" development
strategy, this can only be avoided if at the national level there is both a strong control mechanism avoiding leakages
to the exterior (a control on commodity and factor flows) and a strong internal redistributive mechanism with broad
public participation. Hence, the alternative would be to give clear priority for economically less developed social
groups and areas to their own self-determined societal standards. This alternative approach is that of "development
from below". Indeed, some critics of the center-down paradigm assert that rural development and bottom-up
strategies are necessary for developing countries.
2.2 Development from Below Paradigm

(The Bottom-Up and Periphery-Inward Development Paradigm)
The paradigm of development 'from below' is not simply related only to the level at which development decisions
are taken. A change in the level of decision-making is a necessary, but not a sufficient (and not even the most
important) condition for a bottom-up strategy. The development "from-below" does not necessarily dispute the path
of development "from-above", instead, argues for regions to take control of their own institutions and create the
desired life-style. In other words, according to Richardson (1973), the objective of the development-from-below
school is to tailor development patterns to fit regional and/or local character and assure generative growth.
Development-from-below involves: (a) controlling the backwash effects of development 'from above' discussed by
Myrdal earlier and (b) the creation of dynamic development impulses within less-developed areas.
The crucial question is as to how these two requirements can be fulfilled. The first requires changes in the
interaction between different nations/regions; and the second requires the creation of endogenous factors of change
for increased equity and developmental dynamics. Instead of optimizing selected factor components in a 'center-
down' fashion and thereby fostering the human and natural resources of favored segments of economies,
development "from below" aims for the full development of a nation's/region's natural resources and human skills-
for a generative growth. Most basic-needs services are territorially organized, and manifest themselves at small
social groups and local community levels.

Clavel (1983) witnessed that, although there are critical flaws in its approach, the school shows promise for
attaining the social, political, and economic outcomes desirable for particular regions, if properly addressed.
Development 'from below' implies alternative criteria for:
 Factor allocation (going, from the principle of maximizing return for selected factors to that of maximizing
essential resource mobilization);
 Commodity exchange (going from the dominating principle of comparative advantage to one of equalizing
benefits from trade);
 Specific forms of social and economic organization (emphasizing territorial rather than mainly functional
organization);
 A change in the basic concept of development (going from the monolithic concept defined by economic
criteria, competitive behaviour, and external motivation to diversified concepts defined by broader societal
goals, by collaborative behaviour and by endogenous motivation).
Hence, in the view of the "bottom-up" paradigm, development would need to be considered as an integral process
of widening opportunities for individuals, social groups, and territorially organized communities, and mobilizing
the full range of their capabilities and resources for the common benefit in social, economic, and political terms.
Unlike development 'from above', which was supported by the neoclassical economic theories during the periods
between the 1950 and early 1970s, there seems to be no well-structured theory available yet for an alternative
paradigm of development 'from below'. One reason for the lack of such a coherent framework may be that the new
paradigm may require support from a variety of disciplines while cooperation between different disciplines is
practically very difficult to achieve. In addition, there is no only single strategy in development 'from below' as has
been the case for the strategy of 'from above'.
Development from below suggests that beyond some basic common features, different cultural areas need to
construct their own development strategies, which will require compatibility only at certain points of mutual
contact. Alternative strategies of development 'from below' need to emerge from and be adapted t, the requirements
of different cultural areas. Such strategies may change over time, possibly alternating with some elements of
development 'from above'. The traditional top-down and out-ward oriented paradigm may provide a starting point
in the search for alternatives within the bottom-up paradigm.
Those periods (1950s-1970s) dominated by development strategies 'from above' didn't result in the reduction of
disparities in living conditions. Disparities between social strata and geographical areas have instead increased as
many of the case studies have witnessed. Development 'from below', therefore, suggests that large part of any
surplus created within an area should be invested locally for the diversification of the national/regional economy
and provision of services acceptable for internal accessibility. This process is then envisaged to occur gradually in
successive higher scales. Through the retention of at least part of the regional surplus, integrated economic circuits
within less-developed regions would be promoted and development impulses would be expected to successively
pass 'upward' from the local/regional to national levels. Policy emphasis, therefore, need to be oriented towards:
 Reinvesting regionally created savings within the region;
 Creating small-scale and labor-intensive industries; and medium-size projects;
 Making available territorially organized basic-needs services;
 Realizing rural and village level development;
 Adopting technology permitting the full employment of local/regional human, natural, and institutional
resources on a territorially integrated basis.
This effort can be coordinated through decentralized sub-state or regional administrative organizations supported by
business groups. Development 'from below', therefore, assume a certain degree of 'selective spatial closure' to inhibit
transfers to and from regions or countries, which may reduce their potential for self-reliant development. This could
be done by control of raw material or commodity transfers that would contribute to negative terms of trade. The
development from-below school generally includes five approaches or theories, namely: territorial development,
functional development, and agropolitan development, endogenous/self-reliant development, and need-based
(community-based) development.
(i) Agropolitan Development
Territorial and functional approaches to development do not consider the extent to which regions themselves may
take control over their social and economic conditions. A major criticism against these approaches is that they
entail the domination of leading regions over lagging regions. As Friedman and Weaver (1979) said, agropolitan
development theory allows regions/nations themselves to determine the kind of development that is desired by them
in economic and social respects. It believes that development mainly occurs from internal sources. This approach
presumes a more-or-less homogeneous population in all respects. Agropolitan development has its roots in utopian
thought, particularly from the writings on cultural regionalism.
Utopia was a book written first by Thomas More (1516) describing the perfect society on an imaginary island.
Utopia is ideally perfect state; especially in its social and political and moral aspects. While some writers have
created fictional places that embody their ideal societies, others have written satires that ridicule existing conditions
of society, which show possible future societies that are anything but ideal. In this view of human nature,
institutions that hindered individual freedom were unnecessary. Such institutions prevented humans from assuming
responsibility for themselves.
Advocates of this theory argue that only by preserving cultural regionalism would a regional society have a chance
to carry on industrialization with its tendency to force cultural conformity with the industrial interests. They
propose regional/national panning that would formally create autonomous organic territories that would be defined

by natural resources, climate, certain historical elements, cultural traditions, and social structure. This assumption
however seems to be unrealistic to think of homogeneity of all these aspects in a given region/nation.
The agropolitan approach was originally intended to be applied to the hinterlands of the Third World Countries as
suggested by Friedmann (1997) and Stohr (1981). The proposed organization of the agropolitan approach is based
on common culture, political, and economic spaces that would be defined spatially. Agropolitan development
theory shares some features (components) from the location, entrepreneurship, endogenous, and export-base
theories.
 There is a location theory component in that agropolitan development requires access to market, transport
network and such other services.
 There is also a sense of entrepreneurship theory because local investment (creating productive work),
either private or state, is necessary to utilize the natural resources.
 In effect, agropolitan development theory is an endogenous development model aimed at self-sustaining
through the presumed ability to transform the socio-economic system, react to external challenges, the
formation of social learning and specific forms of social regulations at local level.
 Since agropolitan theory favors or accepts those export-base industries that have potential to raise local
quality of life and production of goods and services as import substitution, it is possible to say that it has
some components from export-base theory.
However, agropolitan development theory has also its own principal features, which may include:
1) Assuming greater control over renewable natural resources. Renewable resources are managed to sustain
yields and thereby assure permanent economic base.
2) In less developed areas with surplus labor and sufficient capital, agropolitan development theory favors the
establishment of labor-intensive technologies to use local (internal) resources. Efforts would be made to
provide goods and services locally that would otherwise be imported. This may involve targeting training
activities, incubation, and subsidization policies to specific industries
3) Highway systems would be built to improve accessibility with in agropolitan areas and not necessarily
between agropolitan areas and growth centers.
4) Only those export-base industries that raise local quality of life are encouraged, and those exploit local
resources but do not measurably improve local quality of life would be discouraged if not prevented. One
among such measures may be investing local savings for local opportunities even where investment returns
may be less than returns earned from investing outside the region.
5) An effort would be made to create a social consciousness to produce common benefit. There would also be
creation of a process for social learning designed at once to reinforce local cultural and social orientations
and to prepare individuals for continuing challenges.

There are, however, serious limitations of the agropolitan approach. While certain aspects of the approach may be
feasible, many are not. The limitations steam from its propositions, namely:
(a) The proposition that an agropolitan district may assume greater control over its natural resources, especially
to mange renewable resources to sustain yields and thereby assure a permanent economic base. In many parts
of the country, the natural resources base may be owned or controlled by government agencies
accommodating the interests in other regions.
(b) The agropolitan approach result in highway systems designed and built principally to improve accessibility
within agropolitan areas and not necessarily between them and growth centers. Improving highways within
hinterland does little to improve regional development prospects. Only highways that improve accessibility of
hinterland areas to major urban markets are found to be economically beneficial.
(c) The agropolitan approach would require reinvestment of local saving into local enterprises even if returns are
less than offered elsewhere. This may be accomplished perhaps in situations where capital is immobile. But it
is difficult to imagine such behavior on a mass scale in situations where there are few barriers to capital
movements.
(d) Finally, the agropolitan approach assumes a homogeneous environment and population in many aspects. This
implies that the agropolitan districts would be free to decide who can or cannot live in the districts, which
may largely violate the most acceptable principles and constitutional provisions in civilized societies.
Generally, the weakness of agropolitan theory lies on its assumption of self-confinement and taking regional or
local development as an end by itself, which lacks practicality.
(ii) Self-Reliant (Endogenous) Development Theory
Knowing the failures of the externally induced and imposed standardized development approaches prescribed by
big international organizations (like WB and IMF), radical writers presented a new and potential theory/approach
known in various names as “endogenous development”, “self-reliant development", and “new growth theory”. The
new growth theory, however, seems to be a little broader than the endogenous and/or self-reliant development" as it
further encompasses such other local and inward-oriented theories.
The new growth/self-reliant theory somehow provides a theoretical framework for analyzing endogenous growth.
In contrast to the traditional neoclassical theory, this model holds GNP growth to be a natural consequence of long-
run equilibrium. Even so, there is no yet common understanding about what self-reliance implies for development
strategies except the fact that some of the economic aspects are obvious enough. They include reducing dependence
on imported necessities. This would involve also changing the consumption patterns, and improving national
capacity for negotiating with transnational corporations. Endogenous development model is relatively a self-
sustaining model capable of transforming the local economic system based on local characteristics with the ability
to control certain fundamental variables. This includes:

a) The use of local resources (capital, entrepreneurship, specific knowledge of the production process of
professional tasks, material resources),
b) The ability to check the accumulation process,
c) The ability to innovate,
d) The existence of productive interdependence,
According to Garofoli, endogenous development does not mean ‘’closed economy’’ the expansion of the internal
market (regional and inter-regional) which should be covered by local production to solve specific problems and to
satisfy basic needs of the local community is much more important.
The essence of local resource for local use should not prohibit the flow of external sources as long as the
region/nation could get substantial benefit out of that. So, as Garofoli said, it is impractical to have an endogenous
development with a closed economy. The theory of endogenous development bears some structural resemblance to
their neoclassical counterparts but they differ considerably in their underlying assumptions and conclusions. The
new growth theory believes that a good deal of conventional neoclassical development theory needs to be modified
to fit the unique social, institutional, and structural circumstances of the developing nations. This theory also firmly
believes that promoting efficient production and distribution through a proper functioning price system is an
integral part of any successful development process.
Despite the contribution of the new growth/endogenous development theory in establishing a conceptual framework
for the development activities to be attempted from the reversal of the traditional top-down approach, it is not
without limitations and criticisms. An important shortcoming of the new growth theory is that it still remains
dependent on a number of traditional neoclassical assumptions that are often inappropriate for Third World
economies. While economic growth/development in developing countries is frequently impeded by inefficiencies
arising from poor infrastructure, inadequate institutional structures, and imperfect capital and goods markets,
endogenous growth/development theory overlooks this very influential factor. Therefore, its applicability for the
study of development is limited, especially when country-to-country comparisons are involved.
Moreover, it is clear that poor incentive structures and allocation inefficiencies, which are common to economies
undergoing the transition from traditional to commercialized markets are considered as responsible for sluggish
GNP growth as low rates of saving and capital accumulation. However, their impact on short-and medium-term
growth has been neglected by the new growth theory due to its overemphasis on the determinants of long-term
growth rates.
(iii) Need-Based (Community-Based) Development
The "basic need development" (BND) is a new line of development paradigm advocated by those who try to redress
the meaning and purpose of development in the context of human welfare. The approach has its own historical roots
and involves several broad concepts, arguments, perspectives, and justifications. BND as an alternative

development approach is a relatively recent phenomenon that emerged as a result of the failure of other approaches;
the modernization approach, which we will see in section 2.3.1 later.
The BND is the result of an evolutionary paradigmatic shift in development approaches necessitated by the failure
of the previous approaches and strategies. It is aimed at meeting basic human needs and improving the standards of
living in a wider perspective. It is an approach seeking development to occur in its fundamental meaning and to
have more human element. The BND approach is a comprehensive strategy that seeks to ensure sustainable
development and realizing poverty alleviation. It focuses on actions and stresses on operating the idea of
development at the community level and implementing plans that can further the welfare of the poor. In this regard,
Jones and Inaba (1997:24-25) wrote about community-based development conveying similar notion to NBD as
capable of providing the opportunity to define and measure the social aspect of progress in a community,
neighborhood, or household.
As a result of the failure of the modernization paradigm, the basic needs approach, which gave due consideration to
poverty eradication, employment creation, income distribution, and the provision of basic services to people, took
over dominance in the development discourse and practices since the mid 1970s. According to Chambers
(1994:53), this period has been marked by shifts of development approaches from top-down to bottom-up, from
centralized standardization to local diversity, and from blueprint to a learning process. This fundamental shift is
variously referred in the literature as "another development", "alternative development", "people-centered
development", "community-based development" and "participatory development" (Oakley, et. al. 1991:3). In some
literature, we find also "self-reliant development" or "endogenous development" as having similar notion to "need
based development" and its elements especially the latter as a particular strategy or one aspect of the former.
Hope (1996:195-196) viewed this approach in the context of what is known as "Community-Based Development"
(CBD) in a broader gist, referring it as a process that involves social and economic actions for solving local
community problems by combining efforts and resources of various stakeholders. It is a process that passes through
sequential and continuous stages both in knowing the reality and taking actions. It demands, first and foremost,
understanding of the basic social and economic problems of a given community. The central pivot of community
development, as discussed by Hope, is about progress, growth, generation of wealth and the use of resources on a
continuous and sustainable basis. Fussell (1996:47) also discusses about the interconnection between community
and development. He underlined that the fundamental unit of development is the community hence, the output of
the development process should create an increased sense of human well-being; i.e. the enhancement of the quality
of life as measured in terms of felt needs or basic needs identified by the community.
In the final analysis, the principal objective and the ultimate goal of the NBD approach is the "empowerment" of
the poor. The concept of empowerment has been at the center of the reconceptualization of development (paradigm
shift) and the formulation of strategies to ensure poverty alleviation and sustainable development. It has become a
central concept concerned with changing the pattern of controlling resources and political power, as well as the
attainment of self-reliant development and determination of own destinies by disadvantaged groups. Wuyts

(1992:132) noted that “empowering the poor” has become an almost universal slogan. It is stated as a desired
process by which the poor are to take direct control over the circumstances of their own lives, so that they are in a
position to become their own development agents in the future.
Chambers (1993:11) similarly indicated “empowerment means that people are enabled to take more control over
their lives, and secure a better livelihood with ownership and control of productive assets as one key element”.
From the empowerment point of view, the purpose and goal of community-based development is enabling poor
people to achieve all life necessities. The general belief is that through empowerment individuals, communities and
nations could obtain collective responsibility for their own future and become managers of their own development.
Community-based development emphasizes the adoption of needs-oriented strategies with the establishment of
small-scale projects, which can increase social and economic access for the disadvantaged group and be managed
and duplicated easily. It considers local level projects as a tool for implementing community-based or need-based
development strategy. Furthermore, CBD approach presupposes projects to be adaptable to local conditions (in
terms of knowledge, skill, technology etc), and be community-owned and directed so that they can create local self-
reliance (Robinson 1995; and Hyman, 1989). As Menendez (1991:17) pointed out, to think realistically about
projects as instruments of need-based development they should be demand-driven and be targeted toward poverty
issues. Community development projects have been established and widely used as a panacea for poverty and
underdevelopment.
Although community development retains relevance in both developed and developing countries as a primary
vehicle through which social changes are enacted at the local level, there are both success and failure stories of
development projects. There are also debates on the merits and demerits of projects as instruments of development
interventions. During the 1960s and 1970s projects were used as a primary means through which governments of
developing countries translated their development policies and strategies into programs of actions. Until fairly
recently, most of the projects aimed at improving the socio-economic conditions of the poor were simply initiated,
designed and implemented from the top without systemic consultation and involvements of the intended
beneficiaries. The basic idea, according to Burkey (1993:xxi), was that the introduction of modern technology from
the center would automatically bring development and improve the living standards of the poor.
However, development projects during these periods were not successful in developing countries for many reasons.
The first, and probably the most important, reason is the rationalistic planning and management techniques
espoused by governments and international organizations. Such planning and management techniques, as discussed
by Rondinelli (1993:6), were of limited use in coping with the uncertainty and complexity of development
problems, and in responding to the needs of the people in developing countries. They lacked flexibility,
experimentation, and social learning that are essential to help the intended beneficiaries achieve their objectives.
The World Bank report also concluded that governments in developing countries could best make sustainable
progress against poverty by following a twin-track strategy. The first is growth-oriented policy that uses the most

abundant asset of the poor (labor) and focuses on strengthening institutions, infrastructure, and market incentives,
distributing information, and adopting appropriate technology. The second element is the provision of basic social
services to the poor. Whether it is the result of the Bank's prescription or own experiment, there are indications or
trends where poverty-focused community development projects can be relevant. The application of CBD to
developing countries can be effective under specific circumstances. Thus, since the mid 1980s there have been
increasing evidences of resurgence of interests in, and support for CBD projects in developing countries (Abbot,
1995:161).
Many contemporary pro-active writers have strongly argued that for the goals of development; i.e. poverty
alleviation and empowerment of the poor, to be realized on a sustainable basis, mobilization of resources and
people's capacity should come at the forefront of any development intervention. In other words, all development
activities/ projects should necessarily be participatory in nature. What follows, therefore, in our discussion is to
look into the explanations and justifications provided by such propositions in support of the participatory strategy.
Not withstanding the fact that participation in development is still myth than reality, "... it is now almost reactionary
to propose a development strategy which is not participatory" (Oakley. et.al. 1991:6). Although many people have
tried to define participation in their own perceptions, Bamberger (1988:2) and Oakley et al, (1991:6) acknowledged
that Paul (1987) has contributed a broadly accepted definition that can be taken as a representative one in
understanding its essence. “In the context of development, community participation refers to an active process by
which beneficiary or client groups influence the direction and execution of a development project with a view to
enhancing their well-being in terms of income, personal growth, self-reliance or other values they cherish".
Bamberger (1988:5) extended the definition beyond the project level. According to him, community participation
should be seen as an evolutionary process in which activities at the project level can create the conditions for
further popular participation in development programs at the local, regional, or national levels. Moreover, he
suggested that a complete definition of community participation should take the following into consideration:
 Involving agents or organizational groups (“instruments”),

 Using mediums or methods like formal leadership training, learning by doing, consciousness raising, etc,
 Identifying the stages of the project in which beneficiaries are involved,
 Identifying the scope or level of the program,
 Identifying who participates, and ascertaining that the underprivileged groups are involved, or whether the
project is being influenced by powerful economic, political or cultural groups to exclude certain groups of
intended beneficiaries,
 Identifying the intensity of participation in terms of the number of people involved and the duration of
regularity of their participation as well as in terms of its aspects as information sharing, consultation, and
decision-making,

According to Vivian (1992: 53), true popular participation goes much beyond the mere provision of labor and other
inputs into projects initiated from outside the community; it further involves decisions being taken and plans being
formulated at the local level. In other words, as Wen (1976) contemplated, participation implies not only people’s
involvement to contribute material, labor and local knowledge to a given development effort, but also their position
to gain an equitable share from the fruits of development. In this case, therefore, participation is not to be
understood as an involvement of people only at a specific level of any development intervention. Encouraging
participation enables people to voice their demands so that projects reflect the actual needs of the group they
attempt to help, and ensures acceptance and collaboration at the local level.
Traditionally, many development projects have been designed by donors in consultation with central government
officials and the budgets and time tables were planned rigidly that made difficult for communities to play
significant roles. Such development projects designed and implemented without the full involvement of the
intended beneficiaries have had high rate of failure. Aid agencies have drawn lessons from such experiences of
failures and sought to incorporate participatory principles into their projects (Sharp, 1996: 40). For this reason,
Bamberger (1988:9) suggested that wise and prudent development planners and managers should be concerned to
ensure that beneficiaries are adequately consulted and involved from the beginning of the project. There are varying
arguments, however, on the potential benefits and costs of community participation in the development process.
Those who argue in favor of the participatory approach cite the following as advantages that could be reaped from
the system:
 It can help to collect more accurate and representative information about the needs, priorities, attitudes or
opinions and capabilities of people, and to obtain more reliable feedback on the impact of government
initiatives and programs,
 It can enable to take full advantage of using local technology and knowledge, and can make easier the
mobilization of scarce resources to be employed more efficiently to meet local conditions,
 It can generate new ideas, ensure a project’s social acceptability, build constituency support, or increase the
likelihood of beneficiaries commitment to the project,
 It may help to ensure more equitable distribution of benefits and that politically or economically weak groups
have access to the project services and benefits,
 It is usually an essential condition for the sustainability and higher cost recovery rates of the project,
 It can help to reduce mistakes in program or project design and implementation, to detect irregularities in
implementation, and to reduce the cost of program administration.
All these advantages could be gained only when politicians, planners, and managers are made aware of the benefits
of participation and are anxious to use it. Unfortunately, there is another line of argument made against the
participatory approach. From the point of view of officials, planners, and administrators, the participation of the
public may delay the process of planning and implementation. In their views, the villager is lazy, ignorant,
unresourceful, irresponsible, and inexperienced while the professional is the expert and knows everything.

Therefore, despite an apparent widespread recognition of the importance of participation in development, planners
would argue quite differently. In their perception there are potential risks of failure and high costs implicit in
greater people's participation. On the basis of current practices many writers criticize that local people’s
participation is strong in rhetoric than in practice. As a result, some writers see participation as being merely
"popular faddishness" and emotional commitment. In this regard, Uphoff (1986) convincingly explains the fact that
in many projects participation is more of illusory than a reality.
Many authors such as Uphoff (1986: 425-426), Wen (1976: 357-358), and Checkoway (1995: 8-9) have noted, as
there are net gains or benefits from promoting and implementing the participatory approach. It will ensure
sustainability of development projects and thereby develop the spirit of self-reliance among people. Self-reliance
helps people to break the mentality of dependency, to promote self-awareness and confidence, to examine problems
and think about solutions, to increase a sense of control over issues, which affect their lives, and to learn how to
plan and implement. Similarly, sustainability would mean that participation could ensure local people to maintain
the continuity of projects- the maintenance of an acceptable flow of benefits from the project after its completion.
However, Oakley et al (1991: 14) didn’t underestimate the possible obstacles that could hinder participation. These
include, inter alia, administrative obstacles (centralized government structure), structural obstacles (ideology,
political and legal system), and social obstacles (mentality of dependency, culture, and tradition). People who
support popular participation and recognize the existence of such obstacles have their own propositions. They
believe that in order to give people an opportunity to participate in the development process, a decentralized
government structure should exist.
For these people, decentralization increases popular participation, and helps to formulate realistic and locally
relevant plans, which will result in efficient implementation. Decentralization increases flexibility and
responsiveness in the management of development projects, because decisions to correct mistakes or to adjust to
changing circumstances can be made at the local level (Wen, 1976; Sharp, 1996). In the majority of countries, the
popular participation argument has led to the establishment of a system of village- and ward- level development
committees and the terminology used to describe these grass-roots organs of participation has been remarkably
uniform in many cases (Nainson, et .at. 1996:79).
2.3 Theories That Share the Features of the Two Paradigms

(i) The Economic Base Theory:
The economic base theory presumes that development is driven by economic rules that would be applied anywhere.
The economic base theory mainly focuses on firm productivity and firm location. It describes the economic
relationships between hierarchies of places. Development is sustained through vertical and complementary linkages
among industries. This theory identifies three kinds of external relationships critical for development, namely:
 Trade, characterized as imports and exports of goods and services;

 Migration of people, in their capacities as both consumers and workers; and

 Migration of other factors, principally capital for investment.
It further suggests that economic activities of a region can be divided between industries producing goods or
services for export, and industries producing goods or services for local consumption. The economic development
of a region/nation depends on its ability to raise the volume of exports and to continue in doing the same relative to
consumption of locally produced goods and services. This requires attracting capital and skilled labor essential to
sustaining its development. However, countries, may gain much from producing goods and services for the local
population that they must otherwise import. They can reduce the outflow of capital by replacing goods and services
that are imported with locally produced ones.
(ii) Export-Base (Staple) Development Theory
According to Hilhorst (1990:83), the theory of export-led regional growth, first advanced by Harold Innis (1933), is
referred to as the theory of export staple. The word staple here denotes the most important commodity produced in
a region. The development of export staple production is conditioned by internal and external factors. It is highly
influenced by external factors because for a region to be able to produce and export a certain product there should
be assurance of demand for that product. The ability to be strong in the market (to win in the competition) is
another requirement in the export economy. Therefore, the production decision and activity has to take place on the
basis of a comparative or absolute advantage to bring about economic growth in a given nation or region. Since this
theory is considered to be inter-regional/national theory, a thorough analysis of the demand side and the capacity to
increase productivity and transfer of the export commodity, determines the economic growth of the region/nation.
In the process of producing export commodity, a continuous technological change is necessary. Continuous
technological change enables to diversify export products, rather than depending on a single or few products in
order to have significant share and stay in the market. Because a single export product for a region means serious
dependence on the existence of real demand (market) for that product, which in turn implies the occurrence of
downward multiplier and sinking of the overall economic activity if market for that staple product falls. The
advocates of the export-base theory believe that once these conditions are satisfied, external economies can be
expected to rise and the quality of life to grow.
These developments will cause certain spatial structure to come about like the establishment of urban centers in
which goods previously imported can start to be produced in the region itself (Hilhorst, 1990:84). This idea shows
the necessity of producing complimentary and substitute products for a region to be self-sustained. Because it is
demand driven (demand induced), export-base theory is said to be conditional as well as short-term in nature. It is
conditional because many internal and external factors affect its success or failure. It is also short-term because
installed capacity is considered given.

For a region/nation to be able to export its products, first it should have factor production capacity, i.e. renewable
natural resources, capital, required skill and so on. The role of capital particularly for regions to begin with
producing exportable products is typically important. The source of such capital for investment could be either from
local saving and accumulation or from external sources. Investment, be it from internal or external sources, has its
own advantage in creating additional employment opportunity to the region/nation besides to its ability to rise local
income through export. Hirschman argues the existence of consumption linkages in export base economy.
As export income increases, demand by regional consumers for certain imports may become the factor for the
product to be produced inside the region. In other words, as production for exports increase, there will be also an
increasing trend of producing import substitute products. However, new import needs emerge.
In sum, as Hilhorst (1990:85) pointed out, the steady growth of regions export sector may have the following
effects.
1) the growth of the residential sector on the basis of creating internal demand and induced investments;
2) the expansion of the economic infrastructure to permit continued growth of exports;
3) the creation of external economies, external consumption demand as well as investment attraction;
4) the increasing of output per worker and the introduction of new technologies, resulting in higher wages;
5) the concentration of industry in few places, especially when these locations are attractive for market-oriented
activities.
These effects are interdependent which represent a conditional sequence in that the effects will occur only when
certain conditions are fulfilled. This applies to what is known as “the multiplier effect” of development or growth.
Many internal and external factors affect the export-led regional theory like the physical environment, market,
politics, infrastructure, investment capital, application of new technologies by firms, etc. Because of such
determinant factors, the export-base/led development theory is often considered as a conditional theory.
In summary, many writers suggest that the economic development of a region/nation depends on its ability to raise
the volume of exports relative to consumption of locally produced goods and services. Such ability to sustain long-
term economic development in turn depends on the ability of a region/nation to continue exporting goods and
services. This requires attracting capital, and appropriate skilled labor essential that could sustain the development.
However, export-base theory has its own limitations. It has a tendency of giving more importance to exportable
items and leaving aside the production of local consumption commodities.
(iii) Entrepreneurship Theory
There are several major strands of literature on entrepreneurship that has been forthcoming in recent years.
Entrepreneurship is defined as “…the process of identifying, developing, and bringing a vision to life. The vision
may be an innovative idea, an opportunity, or simply a better way to do something. The end result of this process is
the creation of a new venture, formed under conditions of risk and considerable uncertainty”. Entrepreneurship is
self-employment of any sort. Broadly speaking, there are two types of entrepreneurships; -private entrepreneurship

and collective entrepreneurship. Entrepreneurship is business idea generation and implementation by taking into
account the technological, geographical, and sociological factors. The startup of entrepreneurship could be
opportunity driven or necessity driven, or a combination of both.
Three highly interrelated elements of entrepreneurship include: (a) the decision to enter self-employment, (b) once
self-employed, the decision to remain in business, as opposed to closing down and (c) “success” in self-
employment measured by firm growth, profitability, and/or job creation. Entrepreneur is an independent business
person who raises the required funds and who develops and operates the enterprise. The entrepreneur has several
roles in the economy, such as:
 Creation of job opportunity
 Identification of business opportunities and markets
 Better production methods and production of complementary goods,
 Conservation and better utilization of natural resources,
 Abolition of monopoly and enhancement of competition
 Increase in per capita output and income
 Generate or save foreign currency
Qualitative studies of self-employment often distinguish “entrepreneurs” from the mere self-employed by
attributing to the various traits of the former group. The self-employed are merely about to make a living while the
entrepreneurs are the shakers and movers that remold the trajectory (the path) of society. The entrepreneurs know
from the start that they are trying to build a significant corporation…they are driven by a desire to create an
innovative force in the corporate world.
Entrepreneurship has economic and social explanations. Economists explaining the decision to pursue self-
employment have traditionally emphasized the monetary rewards of entrepreneurs relative to alternative
employment. An increase in the expected payoff of self-employment (holding wages constant) causes people to
shift out of wage labor status in favor of entrepreneurship. Conversely, an increase in wages (holding self-
employment return constant) induces people to abandon entrepreneurship in favor of employee status. Lucas (1978)
suggested that persons entering self-employment are those possessing relatively more entrepreneurial ability than
those choosing to be employed. Because self-employment is a method of avoiding sexist and racist employment
practices that depress wage income, blacks or women should be relatively over represented among self-employed.
Therefore, economists tend to conclude that possession of financial capital is vitally important, while liquidity
constraints may exclude those with insufficient funds at their disposals.
Sociologists on the other hand explain entrepreneurship by focusing broadly on the social environment, which
encompass cultural, religious and economic factors. Both sociologists and economists have recognized the
importance of access to financial capital as a prerequisite for entry into the lines of self-employment. The
possession of work experience, education credentials, and specific skills (broadly referred to “human capital” are
also considered as prerequisites, especially for small business entry.

Summary of the Two Schools

Development-from-below fundamentally aims to create regional autonomy through the integration of all aspects of
life within a territory defined by its culture, resources, landscape, and climate. In contrast, development from-above
aims to achieve functional integration wherein leading regions expand into lagging regions and resources of lagging
regions are made more accessible to the leading regions. Thus, they diverge in the level of integration desired
between leading and lagging regions and in the capacity of any given region to tailor policies and resources to
achieve indigenously determined social, economic, and political institutions. There may be, however, much overlap
between the two schools as both schools: (a) apply economic base approaches to describe the notion of
development and design national/regional development policies; and (b) acknowledge the different successive
stages of growth in level of development.

CHAPTER FOUR
Issues of Development in Developing Countries
4.1 Development and Aid
Before discussing issues related to foreign aid, one may logically inquire to know who the aid donors are in the first
place, what does aid mean, and what the measures of aid are. The major multinational investment agencies that
distribute aid to 'developing' countries include, among others: the United Nations (UN), the Organization for
Economic Cooperation and Development (OECD), the IMF, the WB, the Development Fund of the European
Economic Community (EEC). There are also various national (country-specific) bodies such as the US Agency for
International Development (AID), the UK Overseas Development Administration (ODA), and the German Ministry
for Economic Cooperation (MEC), etc.
Knowing who the donors are, the next question is that, "what is meant by aid?" Recognizing the importance of aid
in international development, we may next turn to the problem of defining it in a precise way. Aid implies the idea
of a gift, of assistance rendered, of unilateral transfer. This means that not everything that results in a transfer of
resources, and that is often loosely referred to as aid, is in fact included in this definition. For instance, private
foreign investment, export credits, and public loans at commercial rates of interest do not represent aid, even
though they may be useful to the recipient.
The global nature of aid gave rise to the evolution of the concept of burden-sharing among donors. Burden-sharing
means that the burden of aid should be shouldered by various donor countries in some sort of agreed ratio related to
their respective economic or financial aid-giving capacities. The attempt to workout agreed formulas for burden
sharing immediately raised the question of what should or should not be counted as aid within the meaning of the
agreed formula. A definition of aid that is acceptable to most economists and developmentalists is one that
dramatically shows up the inefficiencies of the existing concepts that underline resource transfers to the LDCs.
Resource transfers, the cost of which exceeds their contributions to the development process of the recipient
country, cannot be classified as economic assistance. It is necessary that the donors restructure their aid
administration set-up in order to provide the financial resources that are most needed and can be most effectively
used by the poor country concerned.
4.1.1 Objectives and Requirements of Aid
What are or what should be the objectives of aid?

What does foreign aid require?
The central aspect of international development that we need to keep in mind is the fact that it can be predicted
that the gap between the rich and poor countries is bound to grow in both absolute and relative terms in the

foreseeable future. "In the course of the next 30 years, the gap between the rich and poor countries may widen
by between three and four times, and the consequences both political and economic of this immense growth in
inequality are likely to be immense". As a result, two-third of the world's population will not reconcile itself to
a level of living that is permanently diminishing in comparison to the standards enjoyed by the privileged
citizens of North America, Europe and the oil-rich countries.
According Michael Todaro (1994), the formulation of detailed development plans with specific sectoral output
targets and carefully designed investment projects has often been a necessary condition for the receipt of
bilateral and multilateral foreign aid. In fact, some cynics would argue that the real reason why LDCs
construct development plans is to secure more foreign aid. With inventory of projects, Third World
governments are better equipped to solicit foreign assistance and persuade donors that their money will be
used as an essential ingredient in a well-conceived and internally consistent plan of action. To some level, this
process is an imitation, motivated by developed country's desire for sophisticated and detailed project
descriptions in the framework of a comprehensive development plan.
'Neutral' reports and study outputs, therefore, recommended a 'massive transfer of resources' as one of the
main instruments (but by no means is the only instrument) for reducing the inequalities of income distribution
between the rich and poor countries. Within this massive transfer of resources, in turn, the increase and
improvement of aid or official development assistance (ODA) was to play a key role. In theory, official
development assistance should be very effective in stimulating development, and it is preferred in raising
funds than from commercial banks (private sources) because:
(a) It can be used for the development of social utilities (schools, hospitals, and other non-commercial
establishments) , which are less attractive to private investors,
(b) It can be more carefully controlled by officials in the field to ensure that those who are supposed to
receive it actually do,
(c) It is much more flexible source of funds than private investment, and usually is much cheaper because of
the various forms of acquisition as interest-free loans or straightforward grants,
More generally, aid overcomes the shortages of investment capital and provides the foreign currency to pay
for the necessary technological imports the TWC needs for manufacturing and commercial agriculture. Aid
acts as a 'pump-priming' mechanism according to this view, triggering growth in the modern sector the effects
of which will 'trickle down' to the relatively backward sectors of the economy.
For ODA to play its proper role as a means of ensuring development in the context of a massive transfer, it has
been necessary to increase the 'absorptive capacity' of poor countries. Their limited absorptive capacity was
attributed mainly to extremely restrictive conditions imposed by the donors: political conditions of bilateral

donors; tying of bilateral ODA to capital goods and other supplies from the donor country; the 'conditionality'
of the International Monetary Fund (IMF), that is, the imposition of strict policy conditions with a
deflationary/monetarist bias for much of the IMF support; the tying of World Bank funding to specific projects
with expected high standard of project analysis and project preparation; the limitation of practically all ODA
to cover only external (import) requirements and the exclusion of local cost financing, etc. To increase
absorptive capacity for ODA, therefore, it would be necessary to abolish or modify all these restrictions. In
other words, the ODA should be attached with broader and less restrictive eligibility requirements.
Among those liberalization proposals designed to increase absorptive capacity for ODA, particular emphasis
has been placed on a greater share for 'program lending'; i.e. flexibly usable funds that are not tied to specific
'investment projects'. The lack of such program lending has been described as 'the most serious gap' in the
ODA system. Program lending is expected to be related to well-conceived and clearly defined development
programs. Poor countries could also get technical assistance, for example, through the United Nations
Development Program (UNDP) in drawing up well-conceived and clearly defined development programs, but
such a precondition for making program lending effective in increasing absorptive capacity should surely have
been specified and made the subject of specific recommendations.
The second condition is that the fulfillment of the development programs must be 'monitored', presumably by
the donors or at any rate acceptable to the donors so as to continue to give program aid. Nevertheless, many
practical questions have been raised that pertain to the conditionalities of
ODA on the one hand, and the fairness of the same as well as the desire and acceptability from the recipient
countries on the other hand. This may include: Would such 'monitoring' of program aid be politically
acceptable to the poor countries? Is it compatible with self-reliance objectives of ODA? How could or should
it be organized? Could it be done by the poor countries themselves, and yet be acceptable to donors? The
proposals did not answer the questions of how 'monitoring' was to be implemented.
For aid to be an ‘agent of development’, it is necessary that it should be given in such a way that it attacks
certain key steps to wards the achievement of structural change in the world economy, such as an increased
processing of primary commodities, increased mineral (including fuel) exploration and development, buffer
stocks and other measures to stabilize and improve primary commodity prices, increased food production and
rural development, strengthening technological capacities, etc in poor countries. In all these respects, study
reports have come up with important suggestions.
The primary objective of aid allocation policy must be the reduction of the ever-widening international gap.
The extent to which it is distributed in accordance with the true principles of equity and efficiency reflects the
contribution of the well-to-do members of the international community towards eliminating the imbalances

and inequalities within the world economic system. Indeed, international assistance that is given without
regard to the relative needs of the recipients is self-defeating, in that its contribution to the development of the
recipient country is highly unlikely to be very fruitful. The contribution of the rich economies towards the
development requirements of the poor nations will thus have to be geared to the development needs of the
latter and not to the interests, both political and economic, of the rich countries themselves. This is a feature of
central importance. If aid is to be used as an agent of development we will have to move towards the creation
of an international institutional aid allocation mechanism that minimizes the political control of the aid donors
and allocates assistance strictly in accordance with development criteria.
Are there aid allocation criteria?

At least in a short-and medium-run sense, aid allocation must be determined by the requirements of the
recipient countries. In other words, if aid is to have any economic meaning at all, it must be related to the
development process of the LDCs. The necessity for unilateral resource transfers from the rich to the poor
countries has arisen because of the widening gap that separates these two groups of economies. The ultimate
aim of economic assistance must be to bridge this gap; the gap that arises from the dual nature of aid resources
transferred to LDCs, which imply:
1. Aid adds to the total resources or savings of the LDCs available for investment (it does so if it is
assumed that aid resources go into investment, rather than consumption, in a 1:1 relationship).
2. In addition to adding to total resources and investment, aid adds to the foreign exchange resources.
It was thus usually held that aid should be allocated to those countries that demonstrated a capability to
generate domestic (public or private) savings but were finding it increasingly difficult to meet their import
needs. The gap analysis suggests one set of economic criteria that should be applied when aid is being
apportioned among recipient nations. Other economic criteria have also been recommended, and some of the
more important ones are:
(a) To eliminate poverty in the poorest countries; identified as the ‘welfare’ objective of foreign aid;
(b) To discriminate in favour of countries that have effective aid administration set-up;
(c) To discriminate in favour of countries where the future marginal efficiency of aid is highest.
These objectives are rarely consistently pursued in the aid programs of any of the major aid donors. A given
program of foreign aid has to balance the "development" objective against the "welfare" objective. In a short
run sense, it is certainly true that these objectives may be irreconcilable. What is 'development' from the point
of view of recipients may not be so from the point of view of the donors. One may also raise a question about
the "scope of Aid". It is clear that the flow of 'resources' to LDCs is wider than 'true aid' because it includes a
number of transactions that are strictly commercial and in which there is presumption that there is s unilateral

advantage to the recipient of the flows. These include private investment abroad, which by definition cannot
be aid because it is strictly commercial. They also include such things as export credits, or loans made by
governments or international organizations (like the World Bank), at more or less commercial rates of interest
(e.g. 8 per cent per annum) without grace periods and repayable as a firm commitment in hard currency.
At the other extreme may be placed the unconditional gift by a rich government to the government or people
of the LDC without any obligation or strings attached. In this transaction the true aid element or grant element
is close to 100 per cent. Between the two extremes is a continuum of many forms of aid, which are too
numerous to mention. There is the "soft loan" (like with 2.5% interest) repayable over long period, such as 30
years, with an initial grace period of, say, seven years possibly with a provision that repayable can be
postponed if the recipient country is in difficulty. Another type of intermediate transaction, neither fully
commercial nor wholly aid, is a grant or gift that, however, can be used by the recipient country only for the
import of specified capital goods from the donor country. A loan or grant at the free disposal of the recipient to
cover budget deficits or balance-of payments deficits, or to support the general development plan of the
country, is obviously much more valuable to the recipient than a similar loan or grant hedged around with very
restrictive conditions, or perhaps limited to a project that would not be within the recipient’s priority scheme
without the loan or grant.
A rich country may allocate resources to a poor country with a variety of motives, while the purely
commercial motive and purely humanitarian motives could be the two most possible motives among others.
An obvious example is a military motive. A country may supply equipment free of charge or on soft-terms to a
military ally. The issue is that it is obviously non-commercial, but is it aid? The UN definition excludes
military aid, but in practice this is not easily disentangled from development aid since the execution
modalities/ terms are so different types. For example, there is aid that is perhaps not strictly military, but that is
closely linked with diplomatic support. There are people who argue that as long as the flow is non-commercial
and meant developmental, it should be included as aid whatever the motive.
Generally, whatever form of aid from any source is given, often has not only the economic aspect, but also
political, ideological, and historical contents attachments. Western aid programs for example are selective
inasmuch as most support those countries, which are friendly to western interests. In effect, this means that
any country that adopted an anti-socialism or anti-communist policy and which opened its doors to western
investment has been a potential recipient of aid as evidenced before the disintegration of socialism and
socialist countries. As has been evident for long, aid transfers have been, and still are, highly political
especially in regard to superpower competition. Donors' broader goal is a long-range political one; it has never
been and is not today development for the sake of sheer development.

Although official western policy is to allocate aid to countries that operate 'democracies', in practice a number
of military and dictatorial governments have been able to attract both financial and military aid, for example
Pakistan, Chile, and Argentina. In terms of the historical traces to colonial relationships, most of the
assistances of the ex-colonial powers flow to their former colonies to maintain their historical ties in the other
form and preserve their interests. For example, 90% of UK aid goes to India, Pakistan, Bangladesh, and Kenya
alone. What these tell about is that 'development' is a camouflage for Western and American aid to TWCs.
4.1.2 Types/Forms of Aid

(i) Bilateral versus Multilateral Aid
The distinction between bilateral and multilateral aid may at first seem clear, but like many other ‘clear’
distinctions it becomes blurred on subsequent analysis. The ‘pure’ case of bilateral aid is where one single donor,
normally a donor government, deals directly with one single recipient, also normally a government. The ‘pure’ case
of multilateral aid is represented by a global or world agency, normally part of the UN system, dealing directly with
a recipient government or group of governments. However, there are many intermediate forms of aid between these
extreme forms of bilateralism and multilateralism. The term ‘bilateral’ is applied more to the source of the aid than
to the recipient; for example, UK or US aid directed to the East African Community rather than to Ethiopia, Kenya,
Tanzania or Uganda separately, is still classified as bilateral, even though there are multilateral recipients.
One difference between multilateral aid and bilateral aid arises in the criteria for allocating aid among different
recipients. In the case of bilateral aid, allocation is obviously heavily influenced by political considerations,
historical links and commitments, diplomatic links, etc. Thus the bulk of UK aid goes to the Commonwealth and
few remaining colonies, the bulk of French aid to Francophone African countries, the bulk of US aid to Latin
American or strategically important countries along the periphery of Russia (formerly USSR) and China, and the
bulk of former USSR aid to allies such as Syria, Iraq, Cuba and India. By contrast, the global multilateral aid
sources (e.g. the World Bank and UNDP) tend to spread their aid more or less evenly (widely but thinly) over all
their member countries.
(ii) Hard versus Soft Aid
The question of allocating aid among different countries, which has just been emphasized in relation to multilateral
versus bilateral aid, leads to another important distinction. Should aid be allocated according to some criterion of
need or according to some criterion of capacity to use the aid effectively? In some ways, of course, the answer must
be ‘both’. Some criterion of need must be involved, since we limit aid to the poor countries presumably because the
rich countries-in the West and Middle East-do not need aid. Similarly, we do not want to see aid wasted; we want to
see it effectively used for the purpose for which it is given, even if the purposes might be purely humanitarian. For

example, if we give aid to help the victims of earthquakes or civil war, we do not want to see the aid money going
into the pockets of civil servants or speculators.
The answer ‘both’ has still another meaning. The best type of aid is aid that benefits the needy and at the same time
makes them more capable and more effective in improving their own situation by their own efforts. In this way, the
criterion of need and effective use are ideally combined. Perhaps the best way of doing this is to channel aid into
employment creation, to utilize the unemployed and underemployed manpower of the recipient country for
productive investment (e.g. irrigation or rural roads) that creates a permanent basis for continuing development and
additional employment. Unfortunately, the present rules of the aid game are very ill-designed to have this ideal
effect; employment involves largely local expenditures, where as aid is mainly geared to providing the import
components of large-scale capital-intensive projects.
Both objectives; i.e. need and effective use are legitimate aid criteria, but they require different forms of aid.
Normally, aid allocated on the criterion of need should be soft aid, without payment obligations. This is clear in the
case of financing rural public works for the purpose of employment creation and in financing local expenditures
generally. In the case of aid given on the criterion of effective use, hard terms can be justified in so far as the
repayment can take place out of the increases in production, which will still leave the recipient better off if the
terms of repayment are not exorbitant.
(iii) Project Aid and Program Aid
Aid either may be tied to the execution of a specific development project (e.g. building a dam, setting up a cement
factory or building a hospital) or may be given without such specific project tying (e.g. in the form of budgetary
support, a credit line of free foreign exchange or supply of surplus food at the disposal of the government). The
tying of aid to projects is only one possible form of typing; aid can also be tied to goods from the donor country, or
to foreign exchange requirements (imports) as distinct from local currency expenditures. Normally, ‘tied aid’ or
‘untied aid’ refers to the typing of aid money to the purchase of goods from the donor country.
There is no necessary relationship between the tying of aid to projects and the tying of aid to goods from the donor
country. The World Bank, for example, seems firmly wedded to the principle of project aid to what many critics
believe is an excessive degree; on the other hand, the Bank, as an international organization, does not and obviously
cannot tie its aid to buying goods from any particular donor country. By contrast, the United Kingdom (bilateral
aid) may well give, say, India a loan not tied to any specific project but in the nature of a general line of credit for
spare parts or raw materials. It may give also the loan even without restriction and yet tie the expenditure of this
credit line to British goods only. It is therefore somewhat confusing to speak of tied and united aid generally
without specifying the nature of the typing referred to. Is it justified to tie aid to specific projects? There are many
arguments for answering this question positively or negatively. The main arguments for project aid, which by no
means is the exhaustive list, include:

1. The donor country or agency has a better judgment of what is required than the recipient government would
have if the expenditure of the money were left to its own judgment.
2. By tying aid to projects the donor makes certain that the recipient is forced to develop a proper project plan
(properly prepared, studied, programmed and executed project) while in the absence of such requirements or
lack of carefully prepared projects, aid money might not be spent for developmental purposes or would be
wasted on hastily prepared projects.
3. By tying the aid to the project and doling the aid out as the project materializes and proceeds, the donor
maintains some kind of leverage and control over the money, which would be absent in the case of more
general support.
4. Project aid makes it natural and easy for the donor to combine financial aid with the proper technical
assistance in regard to a particular project (e.g. skilled consultants for feasibility studies, pilot schemes,
training of staff for running the project, and writing of proper specifications for the supplies needed).
5. There is demonstration effect of good project preparation; if the recipient country is forced to develop
effective projects in order to attract aid, it will learn by doing the proper organization for project appraisal,
and project preparation is more likely to develop.
There are a number of arguments against tying aid to projects:
1. If the donor uses aid as a leverage to force its own idea of priorities upon the developing country, this violates
national sovereignty.
2. It may also be ineffective because a country will not be wholehearted in supporting projects that do not
reflect its own priorities.
3. It is somewhat the arrogance of aid donors to believe that they know the priorities of development better than
the government of the recipient country that is directly faced with the problems.
4. There is an element of illusion in project aid, if the recipient LDC is given money for project A, which is in
any case part of its own priorities, its own money will be released to carry out another project much lower
down the priority list for which the money otherwise would not be available.
4.1.3 The Failure of Development Aid
Though aid has been largely considered as the major source of finance and officially incorporated in development
planning of most countries in the Third World, aid agents have been strongly opposed for their approach and hidden
motives. For example, at the start of the International Monetary Fund (IMF) 1988 Annual Conference held in West
Berlin, 40000 anti-IMF demonstrators marched against the Conference demanding fundamental changes to the
Fund's investment and aid policies. Instead of relieving poverty in TWCs, the IMF's programs were contravened as
being the very cause of this poverty.
Such protests are common and they are part of a wider critique of international development programs that have
managed and sponsored by very powerful agencies in the capitalist First World. Development planning within the

TWCs has been subject to similar attacks from those, which are supposed to help. Though aid and GNP increase in
some TWCs, they are accompanied by a massive insoluble debt problems and rapid growth in the magnitude of
poverty in these countries. "Something somewhere has gone wrong!" Although loans from official sources have
been provided at relatively low costs to TWCs there is now a very large debt-burden carried by the latter. The debt-
burden is a unique feature in the process of 'development' experienced by TWCs accompanied by hunger, sickness
and poverty.
Susan and George (1988) have mentioned about the 'debt-crisis' in TWCs. While official and commercial banks
have been prepared to lend increasing amounts to the TW, the abilities of countries to repay these loans looks
increasingly unlikely in the future. Although TWCs have been repaying their debts, most owe more in interest and
capital repayments than they earn each year from exports. To keep going, they have to borrow more, and so the
debt burden increases, where it now stands at a very frustrating level. The continuing failure of official international
aid to encourage the emergence of a self-sustaining development has led many to question the appropriateness of
aid per se. A number of problems have been identified with the current system of aid assistance. These may
include:
(i) Since some of the aid is in the form of loans rather than direct grants poor countries may find
themselves getting into increasing debt. This apparently happens because of the inability of poor countries
to repay to the lenders. This problem of repayment is of course heightened inasmuch as a good deal of the aid
that is received is used to finance social projects, which do not generate revenue for the country. Hence, poor
countries remain to be liable for the vicious of poverty and persistent dependency.
(ii) A considerable proportion of any aid package is swallowed up in payments to technical experts, the
field-staff of the donor countries, or on the costly housings, transport, and diet arrangements made for
them in the host country, which takes close to 25% of Western aid budget. Experts typically receive tax-
free salaries usually paid directly into their home country bank accounts as they have a living and transport
'allowance' to cover their needs while working in the host country. Thus, salary is unlikely to be used to buy
host country products, a potential source of demand that is sorely missed.
(iii) An important form of assistance to the TWCs is food aid, which involves undesired consequences; i.e.
mentality of dependency. The first country to establish food-aid program was the United States after 1945.
the context in which this program was formulated reveals yet again the way that aid has been of considerable
value to the donor country than the aid recipient one. The Productivity of US farmers during this time was
exceptionally high due to the application of large-scale farming techniques and support prices from the
government. Productivity outpaced American consumption and huge surpluses were created which had to be
stored at a cost of hundreds of millions of dollars each year. Hence, the grain was made available to the
TWCs by the US government replacing the previous aid in financial terms.

In the long term, food-aid can have serious social and economic consequences. Economically it tends to
undermine the Third World agricultural sector by depressing local markets and so discourage local
production. Socially, this can lead to farmers going out of business adding to the huge volume of
underemployed and unemployed laborers. Politically, it can also encourage subservience to donor states by
Third World governments such that they may be obliged to buy surplus donor goods when they are
unwanted.
(iv) Aid often increases dependency by being loaned to a country on condition that it is used to purchase
goods from the donor country; that is known as 'aid-tying'. For example, almost 70% of British aid is
loaned on these terms, which means in effect that aid provides an important market for British manufactures.
Development commentators say that aid creates more jobs and leads to the establishment of more industries
in the developed than developing countries.
(v) Aid beneficiaries in the Third World tend to be urban centered; bureaucrats, entrepreneurs,
politicians, and industrial workers. The poor in the rural sectors, which were supposed to benefit most
from the aid, usually end up seeing very little of it. The system of aid transfers is still dominated by the
commercial interests of the donor economies.
Generally, the role of aid to the development poor countries has been variedly dealt with depending on the views
and perspectives possessed by different schools of thought, organizations, donors and so on. Treating such
variations on group basis would lead us to say that:
 The liberalists view aid as an obstacle to the development because of the failure of the recipients (third world
countries) to administer and utilize efficiently,
 Radicalists' argument on the other hand is that the very intention of aid is not to help poor countries; rather it
is used by rich countries and their machineries (agents) as a means to exploit resources of the former and
thereby to make them remain dependent.
4.1.4 Trade and Aid
Quantitatively, aid is still very much the junior partner to trade. In recent years, official assistance has been
equivalent to about one-fifth of foreign exchange earned through merchandise exported by developing counties. A
reduction of exports would therefore hit developing countries much more severely than a proportionate reduction of
aid. The availability of foreign exchange (or more broadly, of foreign resources) can of course be increased by
export expansion as well as by additional transfers in the form of aid. To this extent at least, trade and aid are
exactly equivalent as both could provide foreign resources.

It is perfectly true that freely fluctuating foreign exchange rates, or frequent devaluation of fixed rates, would
restore balance-of-payments equilibrium, but naturally they would do so partly by reducing imports. At a practical
level of discussion, several points have emerged concerning the relative desirability of trade and aid. At this level it
is useful to make a distinction between the points of view of the developed and developing countries. Some of the
more relevant among the several possible arguments are the following:
1. Additional trade has the advantage that it does not add to developing countries’ indebtedness; neither does aid
in the form of grants. Besides, some forms of trade (like bilateral arrangements) do imply a kind of
indebtedness, in the form of import obligations, so does aid in the form of high interest rate loan.
2. Additional trade has no strings attached to it, whereas aid normally is conditioned in some respect or another.
However, some trade expansion may also have to be bought with political or economic concessions. From the
developed country’s viewpoint, conditionality is certainly an advantage of aid, for it allows a degree of
influence over the recipient country, which can be used for either economic or political objectives, or both.
Also, there may be an honest desire to influence the use of external resources for the recipient country’s own
benefit, in the belief that allocative decisions can be more efficiently made from the outside than if they are
left to a presumably inefficient developing country’s government. A special sub-advantage (in reality of
tremendous importance) for donor countries is the possibility offered by aid programmers, directly or
indirectly, to promote the donor country’s ideology.
3. From both the developed and developing countries’ viewpoints, aid administration procedures are costly and
time-consuming. Procedures are to some extent dependent on the very same motives that govern the granting
and acceptance of aid in the first place. The results that an aid programme is supposed to achieve are so many
and so complex that its administration is necessarily costly and complicated. It has to consider the donors’
desires for channeling the aid in certain directions and for certain purposes, as well as the recipients’
preoccupation with avoiding excessive interference with their economic policies. Trade on the other hand
involves less cumbersome regulatory procedures and is less costly.
4. An important advantage of aid over trade, from the developed counties’ viewpoint, is the avoidance of direct
losses to domestic producers. While the political capacity of the developed countries to give aid and alter its
magnitude is limited by the general attitude of their citizens towards international development, their political
capacity to grant trade concessions (in the sense of preferential treatment of the developing countries’ exports
of at least of removal of implicit discrimination against them) is limited, probably more severely, by the
political strength of the domestic manufacturers who would stand to lose from such concessions. To
paraphrase an old economic maxim; "while aid costs everyone a little, trade preferences cost a few people a
lot".
5. Aid may be thought to be more or less uncertain than trade. Thus, the cost of aid to the developed countries is
more clearly identifiable and measurable than the total cost of trade concessions. For the developing countries
on the other hand, depending on the circumstances, future aid inflows may be seen as more or less uncertain
than future export earnings.

6. Finally, both the developed and developing countries may have a preference for "earned income" over
"handouts". In fact, they certainly do, but whether this general preference in practice plays a significant role
is highly questionable, in the face of down-to-earth considerations.
The question now is that which one does maximize the net real flow of external resources to the developing
countries? Neither ‘Trade not Aid’, then, nor ‘Aid not Trade’, but obviously ‘Trade and Aid’ is the answer.
However, innumerable concrete circumstances will determine the proper weight of each, at different points in time.
We fully concur with the conclusion on this point that, there can be no clear-cut generalization about the absolute
merits of aid and trade. The viewpoint of each party and the conditions under which aid and trade are conducted
will determine the preference of each. One clear link of aid with trade is embodied in the various supplementary
financing schemes. One major step would be for aid to be given in the form of a subsidy on imports from
developing countries greater than the tariff on those imports (i.e. a negative tariff). It would be much more effective
since the subsidy would give preference over the local producer as well as over the rival exporter from the
competing developed countries, but for this very reason it would be politically more difficult.
A part from supplementary financing and from negative tariffs, aid can be used to stimulate trade. Among aid-
financed projects, those with an export potential could be especially emphasized, technical assistance on export
promotion could be given, and donor countries could prevail upon their private firms establishing branches or
subsidiaries in developing countries, or licensing production there, to permit exports of new production more freely.
Aid could be given also on regional basis and for multinational projects or groups of projects, thus encouraging the
developing countries trade with one another.
4.2 Development and Trade

International trade is normally conceived as an "engine of growth". It is the exchange of goods and services
between countries. International trade has many roles. Trade improves consumer choice and total welfare. It allows
increased specialization so that higher output allows economies of scale. International trade operates under
competition, which in turn stimulates high productivity (efficiency).
The overriding issue in the relations between trade and development is the ultimate question of whether there is a
conflict between the gains from trade and the gains from growth. More specifically:
 Can foreign trade have a propulsive role in the development of a country?
 Or, on the contrary, are the dictates of comparative advantage incompatible with the requirements of
accelerated development?
 What determines the commodities and services that a country will export or import?
 How can we predict the future exports and imports of a country?

The orthodox interpretation is that foreign trade can be a propelling force in development. Adam Smith's model of
foreign trade postulates the existence of idle land and labor before a country is opened to the world market. The
excess resources are used to produce a surplus of goods for export, and trade, thereby "vents" a surplus productive
capacity that would otherwise be unused. The idea of "vent for surplus" assumes that resources are not fully
employed prior to trade, and that exports are increased without a decrease in domestic production, with the result
that trade raises the level of economic activity.
Big international organizations, like the World Trade Organization (WTO) have been reporting about the
importance of international trade and the prevalence of "equal terms of trade" in the world trade system for poor
nations to escape out of poverty. "Terms of Trade" simply means the ratio of a country's index of average export
prices to its average import price index. WTO reports the efficiency and appropriateness of the global market
system, as it would serve all countries on equal footing. This assumption/conclusion has been supported by the
World Bank's annual reports.
Of such positively addressed comments, the following hold space in their reports: "The world has increasingly got
unique opportunity since the past decade to use global markets for the benefits of all nations and all people" (World
Bank/HDR, 1992). This statement places global market in proper perspective. Competitive markets are the best
guarantee for efficient production provided that these markets are open to all. If so, they need skillfully crafted
regulatory framework, and they must be supplemented by judicious social policy actions.
More generally, classical economists considered comparative advantage, which will be discussed up next in section
3.3, as determining the pattern of trade. Not the use of surplus resources, but the reallocation of resources allowed
trade to benefit a country by promoting a more efficient international allocation of resources. Without any increase
in resources or technological change, every trading country is able to enjoy a higher real income by specializing in
production according to its comparative advantage and trading. The exports have instrumental significance as the
intermediate goods used for the "indirect production" of imports: exports allow a country to "buy" imports on more
favorable terms than if produced directly at home. The gain from trade is on the import side, and it is significant
that the gains are also mutual, realized by all the trading countries. By specializing in commodities for which its
costs are comparatively lowest, a trading nation would increase "the sum of commodities and mass of enjoyments";
in modern jargon, trade optimizes production.
Although specialization, according to comparative advantage theory, yields the direct benefits of international
exchange, there are in addition dynamic aspects of trade that are relevant for the growth-transmitting effects of
trade above and beyond the static gains. Trade results in a "more efficient employment of the productive forces of
the world" that might be considered the direct economic advantage of foreign trade.
The most important "indirect" dynamic benefit is the tendency of every extension of the market to
improve the processes of production. A country, which produces for a larger market than its own, can
introduce a more extended division of labor, can make greater use of machinery, and is more likely to

make inventions and improvements in the process of production. Widening the extent of the market,
inducing innovations, and increasing productivity through foreign trade allow a country to overcome
the diseconomies of being small.
The indirect benefits of trade on development are therefore of three kinds:

(1) Those that widen the extent of the market, induce innovations, and increase productivity,
(2) Those that increase savings and capital accumulation, and
(3) Those, which have an educative effect in instilling new wants and states and in transferring technology,
skills, and entrepreneurship.
This emphasis is on the supply side of the development process; i.e. the opportunity that trade gives a poor country
to remove domestic shortages, to overcome the diseconomies of the small size of its domestic market, and to
accelerate the "learning rate" of its economy.
For these several reasons, the traditional conclusion has been that the gains from trade do not result in merely a
once-over change in resource allocation, but are continually merging with the gains from development:
international trade transforms existing production functions and increase the productivity of the economy over time.
If trade increases the capacity for development, then the larger the volume of trade, the greater should be the
potential for development. More recently, various export-based models of growth have been formulated to present a
macro-dynamic view of how an economy's growth can be determined by expansion in its exports. One version of
the export-based model is that of the "staple theory of growth". The term "staple" designates a raw material or
resource-intensive commodity occupying a dominant position in the country's exports. It has a structural similarity
to the vent-for-surplus view insofar as "surplus" resources initially available and subsequently exported.
The staple theory postulates that with the discovery of a primary product in which the country has a comparative
advantage, or with an increase in the demand for its comparative advantage commodity, there is an expansion of a
resource-based export commodity; this in turn induces higher rates of growth of aggregate and per capita income.
Previously idle or undiscovered resources are brought into use, creating a return to these resources and being
consistent with venting a surplus through trade. The export of a primary product also has effects on the rest of the
economy through diminishing underemployment or unemployment, inducing a higher rate of domestic saving and
investment, attracting an inflow of factor inputs into the expanding export sector, and establishing links with other
sectors of the economy. Although the rise in exports is induced by greater demand, there are supply responses
within the economy that increase the productivity of the exporting economy.
A more general analysis of the effects of trade on the rate of growth tells that instead of the "demand-motored"
(demand-driven) model of the staple theory, the "supply-motored" (supply-driven) model that emphasizes growth
in factor supplies and productivity has more objectivity. After a country opens itself to the world trade/market, five
effects may be distinguished:
(i) The "impact effect": corresponding to the static gains from trade in that current real income is raised.

(ii) The "capital accumulation effect": an increase in capital accumulation results when parts of the static gains
are invested. This amounts to a transfer of real income from the present to the future instead of an increase in
present consumption.
(iii) The "substitution effect": resulting from a possible fall in the relative price of investment goods to
consumption goods if investment goods are import-intensive. This would to an increase in the ratio of
investment to consumption and an increase in the rate of growth.
(iv) The "income distribution effect": there will be a shift in income toward the factors that are used intensively
in the production of exports. If the savings propensities differ between sectors or factors, this will have an
effect on the overall savings propensity and hence on capital accumulation.
(v) The "factor weight effect": which considers the relative productivity of capital and labor and recognizes that
if the rate of growth of output is a weighted average of capital and labor growth rates, and then if export rises,
the rate of growth of exports will rise more rapidly.
All these effects are cumulative and intensify the increase in real income over time as a result of opening a country
to foreign trade. The positive view of trade and development thus emphasizes the direct gain that comes from the
international specialization plus the additional support to a country's development through a number of spread
effects within the domestic economy.
Despite all these (real and assumed) benefits of trade, quite meaningful criticisms are in place on the other side. The
critics of the view on that trade will transmit development often deny the relevance of the conclusions of the
neoclassical trade. Despite the fact that many international organizations, like the World Bank and the WTO, have
tried to present the positive influence of international trade on Third World's development, global markets are
neither free nor efficient in reality. At time when national markets are opening, global markets remain greatly
restrictive instead. Developing countries are finding it difficult to exploit fully the potential of these markets.
Though this may partly be due to the weaknesses of their policies, the main reason is the restrictions on the global
market. "If the global markets were truly open, they would allow capital, labor, and goods to flow freely round the
world, and help equalize economic opportunities for all". Some claim that the theory of "comparative advantage",
which is the very foundation of the principles of trade, is static and misses the essence of change in the
development process itself.
Contrary to what the equilibrium theory of an international trade would seem to suggest, that all participant
countries will have equal chance of success (net gains) in international trade equilibrated through a market system,
the play of the market forces doesn't work towards equality in the remunerations to factors of production and
consequently in incomes. If left to take its own course, economic development is a process of circular and
cumulative causation, which tends to favor those who are already well endowed and even to thwart the efforts of
those who live in regions that are lagging behind. The backset effects of economic expansion in other regions
dominate powerfully the poor countries.

As long as there is pure competition in the international market (without any purposive reform and adjustment to
favor weak competitors), lagging regions will obviously remain being the losers. In reality, international trade takes
place in a market where exploitative relationship is apparent. Hence, trade may serve as a mechanism of
international inequality (Gerald Meier, 1995:462). International trade doesn't by itself necessarily work for equality.
A widening of markets strengthens often on the first hand the progressive countries whose manufacturing industries
have the leading positions and are already fortified in surroundings of external economies, while the
underdeveloped countries are in continuous danger of seeing even what they have (small industries and handicrafts)
outcompeted by cheap imports from the industrial countries, if they do not protect them.
The terms of trade are often unfavorable to poor countries. If left unregulated, international trade and capital
movements would thus often be the media through which the economic progress in the advanced countries would
create the backset effects in the underdeveloped world. International trade, though decisive for fundamental
development to take place, is very complex. The requirements to participate in international trade are diverse and
easily unaffordable to poor countries. The availability of and/or access for infrastructures in the form of ports,
railways, roads, etc. are important for international trade, which are not easy for poor countries to make it so. Initial
requirements to join the international market, tariff rates, quota restrictions, and so on are all the impediments for
active participation of developing countries in international trade and so to use it as a means for their development.
In response to the failure of the international trade to benefit poor countries, governments resorted to a twine
strategy known as import substitution (inward-oriented approach) and export promotion (outward-oriented
approach). With the exception of Britain at the time of the Industrial Revolution, and more recently Hong Kong, all
present day industrial and developing countries protected their incipient manufacturing industries producing for
domestic markets. There were differences, however, with regard to the arte and the form of protection. While
industrial countries relied on relatively low tariffs, a number of developing countries applied high tariffs or
quantitative restrictions that limited, or even excluded, competition from imports.
At the same time, high protection discriminates against exports through the explicit or implicit taxation of export
activities. Explicit taxation may take place in the form of export taxes while implicit taxation occurs as a result of
the effective protection on the exchange rate. The higher the rate of protection, the lower will be the exchange rate
necessary to ensure equilibrium in the balance of payments, and the lower the amount of domestic currency
exporters receive per unit of foreign exchange earned. However, high protection has inevitable adverse
consequences; where, for example, import prohibitions would certainly encouraging inefficient and high-cost
production of manufacturing industries. These all have largely to do with trade policy reform measures, which will
be discussed later in section 3.5 of this chapter.
4.3 Development and the Principles of Comparative Advantage

To discuss the notions of "comparative advantage", it would be important to start with forwarding a very plain
question; i.e. "what determines the commodities and services that a country will export or import?" The answer
relates to the fundamental forces that determine a country's comparative advantage. Comparative advantage is not
simply a nineteenth-century principle. It has been instead refined and generalized to modern conditions.
Different countries have different factor endowments such as climate, skilled laborforce, and natural resources that
vary between/among nations, which in group known as factors of production. Comparative advantage is based on
differing opportunity costs reflecting the different factor endowments of the countries involved. Given different
factor endowments, therefore, some countries are better placed in the production of certain particular goods than
others. In other words, recognizing all the factors of production, one element in the modern theory of comparative
advantage focuses on factor proportions in the production of different products in different countries.
The Swedish economist Bertil Ohlin emphasized that the basic determine of a country's comparative advantage is
relative factor endowment, or its relative factor supplies of natural resources, labour and capital (the inputs
necessary for production). If a country's relatively abundant factor is labor, then wages will relatively be low, and
the price of commodities that are also labor-intensive in their production will also be low. The country will then
have a comparative advantage in labor-intensive products. Beyond these differences, other differences also
contribute to a country's comparative advantage. These differences may be in technology, the quality of factors of
production, economies of scale, or in consumption patterns. In the application of this analysis, the Philippines
exports labor-intensive products such as textiles, clothing and footwear; Indonesia exports natural resource-
intensive products such as oil and timber; USA exports capital-intensive products such as chemicals, machinery and
aircrafts.
The comparative advantage theory assumes the existence of free trade, willingness to specialize, and unimpeded
factor mobility. Countries benefit if they specialize in the production of a good or service in which they have a
comparative advantage; i.e. a lower opportunity cost. Hence, comparative advantage is used to justify free trade and
oppose protectionism. Economic theory predicts that all countries gain if they specialize and can trade the goods in
which they have a comparative advantage. This is true even if one nation has an absolute advantage over another
country. Absolute advantage occurs when a country or region creates more production (increases productivity
without compromising quality) with the same factor inputs. Comparative advantage on the other hand exists when a
country has lower opportunity cost in the production of a good or service.
In a simple illustration, under free trade, of what would determine trade between England and Portugal in wine and
cloth, David Ricardo (1817) focused on the relative differences in labor productivity in producing wine and cloth in
these two countries. Even though Portugal is more productive ('better") than England both wine and cloth, giving
Portugal an absolute advantage in both wine and cloth, its labor is relatively more productive in wine than cloth.

Portugal therefore has a comparative advantage in wine. England is less productive in both wine and cloth (absolute
disadvantage), but has lesser disadvantage (or comparative advantage) in cloth.
In essence, technological differences between England and Portugal result in relative productivity differences that
allow a basis for mutually profitable trade between the countries. In free market price system, Portugal would then
export wine and import cloth, while England exports cloth and imports wine. As a result, both countries can
consume their importable commodity at a lower cost than if each country tried to produce each commodity for
itself. The fundamental principle is that exports are the indirect means for securing the importable at a lower cost
than if the country tried to produce the importable commodity directly at home. Specialization according top the
comparative advantage results in an efficient international division of labor, giving each country a higher real
national income than it would have with no trade.
Comparative advantage is a dynamic concept. A country can lose or acquire comparative advantage overtime if
there is a change in relative efficiency as measured by opportunity cost ratios. Nations have a comparative
advantage in industries in which their firms gain a lead in technology, thereby allowing the creation of new
products or product improvements. An innovation based on new technology initially gives a country a temporary
monopoly position and easy access to foreign markets. For a period of time, the innovating industry may enjoy an
export monopoly as long as there is "imitation lag" in other countries. But eventually the technological gap is
narrowed, the imitation lag is overcome, and other countries may then acquire a comparative advantage in the
product. More generally, a product life cycle occurs. This cycle is based not only on technology, but also on the
changing mix of other inputs in the production process at different stages of the product's life.
The determinants of the trade structure may change so much over time that a country that initially imported a
product begins to substitute home-competing production for the import, becomes more efficient in its import-
substitution production and eventually acquires a comparative advantage for the mature product. As the
technological gap narrows and the imitation lag shortens, so too does the product gap. Through technological
change, there is a continually changing international division of labor. Changes in comparative advantage can be
expected to be even more rapid in the future as technological progress accelerates, imitation lags shortens, and
product life cycles speed up.
The product life cycle explains how comparative advantage of a new product is first acquired in the advanced
economy and then transmitted to less developed economies through trade and investment. The catching-up process
in the less developed describes the sequence from imports to imports substitution and eventually exportation of the
standardized product as domestic costs reach the international competitive cost threshold. The product life cycle
also explains some changes in comparative advantage. More generally, comparative advantage changes as a
country's factor endowment changes. Overtime, a country that is initially labor abundant may become relatively
labor scarce; a country that is capital scarce may become more plentifully endowed with capital. South Korea and

Taiwan, for example, have now reached a situation in which labor is relatively scarce and inexpensive labor has
disappeared. At the same time, capital has been accumulated, and more of the country's exports reflect capital
intensity. Comparative advantage can be gained or improved through:
 Investment in education and training,
 Investment in infrastructure,
 Research & development to improve competitiveness; i.e. to ensure lower unit costs, better product design,
and reliability,
 Lower inflation rates than competitors,
4.4 Development and Globalization
Globalization is not just a new phenomenon to the world; it is centuries old instead, which some writers trace it
back to the 15Th century slave trade. The difference is with the versions and features of globalization observed
overtimes in its historical development. The terms, aspects, scopes or dimensions and operational mechanisms of
globalization have been consistently changing until it reaches at its present feature. In its new version, the concept
of globalization has no doubt become a buzzword of the 1990s and beyond. Many writers have tried to provide
conceptual and contextual definitions for globalization.
Giddens (1990:64) defines it as the "intensification of worldwide social relations which link distant localities in
such a way that local happenings are shaped by events occurring many miles away and vice versa." According to
this author, globalization is the consequence of modernization. As a process, globalization involves the organization
of various courses of actions or happenings such as communication and business on a worldwide level, the
existence of "an awareness of the interrelations among people on the globe and recognition of the glob as finite and
limited." It reflects the increasing trend in which people are viewing the world as a single space (as one village).
Born of this process are other related terms that are becoming a commonplace in the social science literature such
as the global society, the global village, the global economy, and global citizenship, to mention a few. African
writers have attempted to analyze the process of globalization with the view to advancing two main arguments
(Mulinge and Munyae, 2001:101), namely:
First, the process of globalization itself represents nothing new as its agencies can be traced to the incorporation of
African economies into the world capitalist system through colonization. What may be said to be new may be the
concept itself and the current consciousness about the world as one. Consistent with this position, such writers posit
that globalization is, by-and-large, a new phase of colonization. It simply manifests a case of "old wine being
repacked in a new wineskin. As such it may be classified as "the third phase of colonization", the second phase
being neo-colonization"

Second, with particular reference to Africa, the goal of globalization and sustainable development stand in
diametrically opposite sides. They argue that just like colonization never resulted in any meaningful development
of former colonies, the concept of globalization should not be expected to generate any sustainable development for
these disadvantaged nations. This is particularly the case given that the process of globalization is geared toward
the entrenchment of the same forces, processes and structures that hampered the development of Africa under
colonial rules.
As it was alluded earlier, globalization is an emergent concept reflecting "people's experiences of the properties of
an accelerating phase of the level of social integration comprising the bonds between nation states." Theorists of
globalization view the world as moving into, or already having entered, a new phase. According to Hirst and
Thompson (1996), "...we live in an era in which the greater part of social life is determined by global processes, in
which national cultures, economies, borders are dissolving." According to Mohamed Salih (2001:62) the
globalization that occupies our minds today is a product of advanced industrial capitalism, which reaches the world
through four areas: (a) trade, (b) production, (c) finance, and (d) technology. These being the major means,
globalization has various forms or aspects in which it has manifested itself to represent the "third phase of
colonization".
1) The spread of ICTs: The process of globalization has been accompanied by the spread of information and
communication technologies (ICTs) that have broken down the social distance between the former colonizers
and their former colonies that resulted from de-colonization. Technological developments have revolutionized
communication and information provision, diffusion and storage and enabled broadcasters and
telecommunications operators to extend beyond their national boarders. While physical distance between the
two may be great, ICTs have facilitated social closeness. Television, in particular, has played an important role
in bringing instantaneous images of events to people, thus broadening and relativizing local experiences. With
globalization, distance no longer matters when it comes to staying in touch with other nations of the world.
2) The growth of common culture: the second aspect of globalization is the growth of common culture through
which the world market of popular music, film, fashion, entertainment media and other consumer goods have
emerged. These cultures are enhancing the cultural domination established through information transfer by
continuing the replacing of indigenous traditions, practices and consumption patterns and trends that
commenced with colonization. As popular culture becomes the same wherever people go, their perception as
member of the global society becomes strong. And the more people consider themselves to be members of a
global community, the more they are likely to support global voluntary organizations.
3) The political realm: This being the third aspect of globalization, one may cite the birth of "campaign
organizations" or pressure groups focusing on women's issues, environmental problems, disarmament, human
rights and other social developments as efforts in this regard. The Red Cross, Amnesty International,
Greenpeace International, and Transparency International are good examples of such bodies that assume a
worldwide profile. Of particular significance to the globalization of politics is the push for representative

democracy in the developing countries that was ignited by the end of the cold war, as marked by the
disintegration of the USSR.
4) The Economic perspective: central to globalization is the notion of the rapid process of economic integrations
and relationships across countries. This is perhaps its most important component because it is the driving force
toward the cultural and political globalization. Economic globalization involves the internationalization of the
world economy. Those who support this view argue that uncontrollable market forces and truly transnational
corporations (TNCs) have come to dominate the basic dynamics of the world global economy. The relative
cheapness of transportation and the efficiency of modern shipment systems have combined to ensure that some
similar goods are available the world over because of globalization. This has been accompanied by global
spread of manufacturing and sales as corporations establish their bases the world over.
Some writers, however, tend to disagree that globalization is not a creation of the 1970s. Though the enhanced
internationalization of the economic relationships (trade, capital flows and the monetary system) has been seen
since the 1970s, it by itself does not represent a new or unique phenomenon. Instead, the general features of
economic globalization were there since the 1860s, the time when modern industrial technology began and
through which many African, Asian and Latin American countries were put under European colonization.
5. The Sustainable development: the term 'sustainable development' and its associated notions of sustainability
assumed international prominence. The concept refers to "a form of socioeconomic advancement which can
continue indefinitely without exhausting the world's resources or overburdening the ability of natural systems to
cope with pollution. It is development that meets the needs of present generation without compromising the ability
of future generation to meet their own needs'. With this understanding of sustainable development, the next focus
should be on examining how globalization has helped or impeded achievement of the same by developing nations.
The analysis, whether globalization has had an enabling or impeding effect on the development Third World
countries, we may base ourselves on the 'features' and 'mottos', or more generally known as the 'trade tags' of
globalization leveled by industrialized countries; that it means equal terms of trade, equal advantages or
opportunities, and maximum social and economic gains available for all countries or contracting parties.
In reality, equality in all these respects is a dream for developing nations. The objective conditions would falsify or
circumvent such 'equality'. There are contradictions inherent in the process of globalization that make sustaining
development a daunting task for most developing countries because of a number of internal and external factors
such as:
1) Developing nations are approaching or joining globalization with huge debts or massive deficits,
hyperinflation, and capital flight that tie down the limited resources that could be invested to imagine a
production environment that would eventually sustain better living standards. Rather debt settlement
arrangement enslaved poor countries to accept the proposals of the developed ones.
2) Absence of significant entrepreneurial class or even middle class that can invest in productive development
ventures, which has been accompanied by the severe brain drain. This has been accompanied by the fact that

the development process in LDCs to be foreign-oriented with foreign corporations producing goods to be
consumed outside these countries.
3) Weak and crumbling infrastructure has been also the major constraining factor for LDCs to reach in all their
own territories for utilization of potential resources and thereby become competitive in the global market.
4) Incompatible institutional setup and legal framework, deep-rooted corruption and mal-administration have all
impaired economic efficiency, stifles local initiative and enterprise, and depletes the resources that are
necessary for social and economic development to take root. This further was accompanied by a declining
pattern of government expenditure on social welfare programs and reductions of the public sector.
5) The massively implemented Structural Adjustment Program (SAP) and Civil Service Reforms (CSR)
imposed by the IMF and the WB have resulted in high transitional costs over LDCs, such as shrinking of the
size of the public sector and the accompanied retrenchment of employees.
For Third World writers, globalization is leveled as the third phase of colonization. What perhaps distinguishes
globalization as a form of economic imperialism from the 19 th and 20th centuries is that the colonial powers are no
longer competing among themselves, but working more or less in unison. The existence of a united Europe, the
demise of East-West division are all pointers to coming together of what were once competing imperial powers
during the age of colonization. To understand how globalization manifests the rebirth of colonization, we need to
reflect on its various components or aspects and assess their consistency with the colonization agenda. The first of
such components is the globalization of communication. Globalization has enabled former colonizers to recapture
and entrench the continued social, economic and political domination of former colonies. They can now easily
contact their physically distant former subjects and carryout many forms of economic, social and economic
transactions through the advent of communication technologies.
Although some writers try to say, as mentioned earlier, that globalization and modernization are quite distinct
phenomenon, those who critically review the historical patterns of the two do not see them really as having much
difference. Instead, globalization is considered as the extension of modernization. Globalization has also its own
reflections of the cultures of societies. Though a truly global culture should be an amalgamation of different world
cultures, in reality it has involved the eclipsing of Third World's cultures by Western culture. With reference to the
political component of globalization, European states have established western-type of governance structure and
formal mechanisms in the name of 'democratization of the Third World' conducive to the exploitation of resources
for the benefits of the west. Therefore, the west hopes to restore a political semblance of what was once achieved
through the 'strong' political administration of colonialism.
In summary, the characteristics of the process of globalization make the attainment of sustainable development
difficult in TWCs for a number of reasons, such as:
(i) Just as colonization, globalization has marginalized TWCs by not producing a shift of investments and
employment from the advanced to the developing countries. In deed, the contemporary international

economy is far from being genuinely 'global'. It is still dominated by the developed world of the Western
Europe, Japan, and North America. The TWCs remain primary producers of raw materials and are still
dependent on the industrialized nations for markets and investments.
(ii) Globalization of the economy represents an extension and strengthening of the exploitative links established
between TWCs and the West during the time of colonization. Participation in the global economy does not
occur on an equal basis and the global market is also not a market of equals. Some rich nations enjoy a
comparative advantage over the majority poor nations. In this market, the economically powerful nations will
continue to control the price of commodities and the general terms of trade. The process of globalization is
more likely to aggravate the core-periphery economic relationship posited by dependency theorists.
(iii) Globalization has created the socialization of a "beggar mentality" or a culture of dependency among LDCs
on the West by agencies such as IMF, WB, USAID, CIDA, NGOs, etc. in the dependent scheme of things,
the West, which is actually dependent on LDCs has socialized the poor people to believe that the former is
needed more than they need the latter.
(iv) Closely related to the point raised in (iii) above is that, "the specific basis of the global capitalist system in the
Third World is to promote consumerism among people with no regard for their own ability to produce for
themselves, and with only an indirect regard for their ability to pay for what they are consuming", this is
another pointer of that economic globalization is unlikely to unleash sustainable development for TWCs.
Such an outcome of globalization of manifest renewed attempts to entrench exploitations of cheap labor and
raw materials of the developing world and rejuvenate the colonial agenda.
(v) Still related to the preceding argument is that the globalization of business emphasizes development through
multinational corporations. Through it, huge capitalist corporations have been able to extend their
processing/manufacturing and marketing efforts throughout the world with the objective of maximizing
profits by taking advantages of cheap labor, material and lack of environmental and other forms of
regulations that would restrict their careless operations. This form of development has little economic
benefits for the developing countries as most of its benefits only go to the industrialized nations. Hence,
globalization furthers the exploitative relationship of the poor and rich countries, which was set in motion by
colonization.
Tip:
The Six Myths of Globalization
1. Globalization is not a new phenomenon, it has been there with colonialism but reinforced now in
indirect forms ("third generation colonialism").
2. Globalization is only about economics.
3. Globalization brings everyone together in a "Global Village".
4. Globalization makes the nation-state irrelevant.
5. Globalization is inevitable and irreversible.
6. Globalization is promoted today by three key actors that include multinational corporations,
financial and capital markets, and the information and computer technology.

4.5 Development and Reform/Change

Reform in the context of development is a very broad term; encompassing changes in different national as well as
sectoral policies, strategies, approaches and so on. It is a recent practice for most developing countries to massively
engage in reform activities of various fronts. The reform, or sometimes called "change", proposals have been by-
and-large prescribed by bilateral and multilateral donor communities but little by self-initiative of the governments
of developing countries. There are different policy reform packages, which have been implemented by most
developing countries ever since early 1980s.
Reform is essentially the transition from inward to outward orientation. The more inward-oriented the original
policies, the greater will be these shifts and the costs associated with them. The pattern of transition may need to be
designed to suit specific national situations. The more rapid and fundamental the policy change, the greater is
assumed to be the immediate benefits to the economy. But there is also a greater likelihood that more people will
face transitional costs as workers are displaced from old jobs and firms abandon old activities. Reform is often
encountered by many challenges. The problems of transition make the design of policy reform important. Policies
should best be selected, phased, and sequenced to gain the benefits of reform while minimizing transitional costs
and political resistance.
(I) Trade Policy Reform
Trade policy reform is closely related to reform of other economic policies. In particular, the exchange rate and the
way domestic inflation affects it in real terms are crucial to competitiveness in import substitution and export
activities. In turn, these are influenced by domestic fiscal, monetary, and credit policies and by policies affecting
capital flows. Often it is protected manufacturing activities whose profitability is most threatened. Reform as the
conventional instrument of trade policy can be discussed under three headings: replacing quantitative restrictions
with tariffs, reforming tariffs protection, and the direct promotion of exports.
(a) Replacing Quantitative Restrictions with Tariffs

It is broadly accepted that the shift from non-tariff barriers to tariffs is a move toward a more open trade policy.
This is so for two reasons. First, tariffs are generally less protective than quantitative restrictions (although it is
possible to have tariffs set so high that they prohibit imports). Second, a tariff is a price instrument, not a quantity
instrument. As a result, tariffs are more “transparent”; changes in foreign prices are reflected more readily in the
domestic economy. Quotas, by contrast, uncouple national economies from the world economy. In many cases a
shift from quotas to tariffs has been a key element in the early stages of trade policy reform. This suggests that in an
economy in which trade is regulated largely by quantitative restrictions-and this is true for most economies in

which trade is severely restricted- a liberalization policy should start with a shift from the use of quotas to the use of
tariffs, even if it means very high tariffs….
(b) Reforming Tariffs

The movement toward greater neutrality has two dimensions: the lowering of the average level of protection and
the reduction in the average dispersion, or variance, of protection. If the dispersion of tariffs is not reduced as the
tariff average is reduced, the tariff structure may not become more neutral. Indeed, a reform that reduces tariffs on
intermediate and capital goods but leaves intact those on final outputs could increase effective protection- the level
of protection afforded to domestic value added-even though it reduced the average level of tariffs.
(c) Direct Promotion of Exports

The logic of trade liberalization is that the tariffs should be as low as possible. As long as the average tariff is not
zero, an element of discrimination against exports remains (unless they are equivalently subsidized). The
experience of many countries show that export growth can be achieved in the presence of significant import
protection, as long as governments can prevent the real exchange rate from appreciating. Where significant import
protection remains, governments might consider offsetting the discrimination against exports with administrative
measures to provide imported inputs at world prices or with subsidies. Directly promoting exports in this way may
also help to form a constituency for continued protection. But it may come to be seen as a long-term alternative to
further import liberalization.
Direct export promotion is a difficult alternative to cuts in import protection. It raises administrative problems and
often requires significant budgetary resources. Like any other selective intervention, it will also encourage rent
seeking. Above all, the risk of GATT disputes and of countervailing duties in importing countries has made direct
export promotion increasingly unattractive.
The Lessons of Trade Liberalization
Trade policy reform is complicated. It is closely linked to liberalization in capital, labor, and domestic product
markets and to macroeconomic policy. It is partly a political process, in which credibility and expectations play an
important role. Feasible policy choices may be vulnerable to changes in the international environment. Because of
this complexity, there is no single optimal path to reform. But there are, nonetheless, lessons to be drawn from
previous attempts.
 Trade liberalization must involve large shifts of resources, but it has not always raised unemployment by as
much as is commonly supposed.
 Strong and decisive reforms have carried greater credibility and have been better sustained than more timid
reforms.
 Replacing quantitative restrictions with tariffs is a useful first-stage of trade liberalization.

 Providing a realistic real exchange rate is vital to the successful introduction of trade reform. Keeping it stable
is essential if the reform is to be sustained. All this requires a macroeconomic policy that manages inflation
and the nominal exchange rate so as to keep domestic costs in line with world prices.
 The scope for successful trade liberalization depends on complementary reforms in the domestic economy-
especially in financial and labor markets.
Overvalued Exchanges Rates and Balance of Trade

Trade policy is frequently influenced by a country’s foreign-exchange rate. An overvalued exchange rate has an
anti-export bias. Moreover, if a country’s exchange rate is overvalued and its current account deficit is not being
financed by an inflow of foreign capital and foreign-exchange reserves are low, the government is likely to resort to
import controls. Although economists may recommend other policies to correct the imbalance of payments,
governments too often resort to trade restrictions to ration the excess demand for foreign exchange. If import
restrictions are later to be removed, devaluation may be necessary to enable offsetting trade liberalization. Without
devaluation, the reduction in tariffs or quotas will worsen the balance of payments.
Stabilization-cum-Liberalization Programs
These programs involve the liberalization of external trade, decontrol of domestic financial markets, and
liberalization of capital flows from abroad. The timing and sequencing of these liberalization measures have
differed among countries. But, more attention to the sequencing of policies is essential for the success of the
program. According to Meier (1995:499), the most successful development histories are those in which a country
very early on switched from an import substitution-led towards an export-led development strategy.
(II) Definitions of Policy Reform Packages

Below are policy prescriptions or policy reform packages, which by-and-large emphasize economic reforms.
‘’Economic reform’’ is a broad term, encompassing different strategies and policy approaches to economic
development. The following definitions help to relate the various concepts to one another:
1. Economic reform: Changes in government policy, institutional structure, or administrative procedures
designed to alter economic activity and improve performance.
2. Stabilization: Correction of imbalances in foreign payments, government budgets, and the money supply,
with the aim of controlling inflation and otherwise reducing macroeconomic instability.
3. Structural adjustment: Reforms aimed at changing the structure of production (to-wards tradable goods)
and consumption (to-wards non-tradable goods) and increasing the efficiency and flexibility of the economy.
Stabilization is generally considered a precondition of longer-term structural adjustment policies.
4. Outward-looking (oriented) strategy: A complex of policies in which export expansion is the engine of
economic growth and development. Policies in this strategy can employ market forces or government
interventions. But have in common the establishment of incentives for export growth (and efficient import

substitution). With pivotal domestic prices closely related to world prices closely related to world prices.
Structural adjustment is often designed to achieve an outward-looking economy.
5. Liberalization or deregulation: A subset of structural adjustment, dealing with removal of government
interventions of all kinds: price controls. Quantity restrictions, investment and import licensing, and other
barriers to entry.
6. Privatization: The sale of government owned corporations to private investors and the contracting of
formerly governmental functions to private agents.
7. Budget rationalization: Reforms to bring government’s resources more closely into balance and to make
them more productive in support of economic growth.
8. Institutional reform: Changes in government (and sometimes private) institutions that make it possible for
economic reforms to work, predominantly involving shifts away from administered controls towards
mechanisms that support private activity.
The genesis of the case for economic reform, especially the liberalization agenda, is the neoclassical paradigm of
competitive markets. Competitive markets require economic agents, but none of which has no power to control
prices and no government interventions. Under these ideal conditions, the value of output is determined jointly by
the buyers (consumers) and sellers (producers) of goods and services and factors of production. In real economies,
markets deviate from this idealized model in many ways.
First some firms gain market power, defined as "the ability to influence prices and raise profits within limits by
restricting output". These monopolies and oligopolies can arise either through market forces, as economies of scale
encourage larger size, or through policies that protect large firms from international or even domestic competition.
Second, external costs of production, such as pollution or the overuse of natural resources, are borne by society at
large but not by firms. Because firms do not pay the full cost, they produce more than society considers optimal.
Third, and conversely, firms under-invest when some benefits, available to society at large, cannot be realized by
the firm that creates the benefits. Irrigation schemes that combine flood control and recreational facilities provide
such external benefits, as do firms that train new workers who later leave to work elsewhere. Fourth, quantum
change in economic structure that may eventually enhance growth, such as the development of heavy industry, may
never be profitable in markets that necessarily reflect current structure and discourage infant industries. Fifth, in
developing countries, market institutions are themselves poorly developed and do not function efficiently: indeed,
large segments of the population are excluded from some important markets. Sixth, government may have policy
goals, especially concerned with self-sufficiency, income distribution, and poverty alleviation, that are not well
served by markets.
Neoclassical economics prescribes corrections for some of these market failures. Monopolies can be regulated or
forced to compete with imported goods. Firms can be taxed or subsidized, and in some cases regulated, to correct
for external costs or benefits. Infant industries can be protected or subsidized until they mature and become
competitive. Governments can promote private institutions to improve market performance. Government itself can

invest in infrastructure that supports private activity. Though distributional goals sometimes conflict with
productivity and growth, especially in the short term, interventions can often be designed to mute such conflicts in
the medium to long term. When interventions are necessary to correct for market failure, neoclassical economics
suggests a set of priorities:
(1) Try first to improve or enhance the way markets work by providing infrastructure and promoting market
institutions,
(2) Prefer market based mechanisms, such as taxes, subsidies, and administered prices, over quantity controls,
such as import bans or credit allocations; and
(3) When regulations are necessary, use them sparingly and target them carefully. Thus, neoclassical economics
accepts the need for some intervention, including some regulation, to overcome market failure and achieve
optimal outcomes.
However, governments in developing (and many industrial) countries have often intervened to a much greater
degree than these neoclassical guidelines suggest. For a variety of reasons, including attempts to correct for market
failures, enhance growth, and improve income distribution, governments control and frequently distort foreign
exchange rates, interest rates, wages, prices of essential commodities (especially food), the quantity of imports,
credit allocations, and many other market variables. Governments also enter directly into production, establishing
firms that are insulated from the rigors of market competition. Although such interventions may sometimes
succeed, typical interventions are either poorly designed to achieve government’s goals or poorly implemented.
Any regulation establishes incentives for rent seeking and corruption, as private agents try to circumvent the rules
and civil servants gain the ability to earn income from their administration of regulations. When government
actions become more important than market forces in determining incomes, economic agents have less incentive on
seeking governmental favors. Interventions of this magnitude almost always work against productivity and
economic growth. For these reasons, interventions often work against the distributional and other policy aims they
are meant to achieve.
(III) Structural Adjustment

A complete reform package, derived from the neoclassical paradigm, contains five components:
1. Freeing markets to determine prices (“letting markets work”);
2. Adjusting controlled prices to scarcity values (“getting prices right”);
3. Shifting resources from government into private hands (privatization);
4. Rationalizing government’s remaining role in development (budget rationalization); and
5. Reforming institutions to carry out government’s new role.
The crux of neoclassical reform is to free markets as completely as possible to equate supply and demand, thus
allowing prices to reflect opportunity costs. Transactions made under these prices would move goods and factors
towards maximum output and an optimal rate of growth. Governments would intervene only to improve markets by

regulating monopolies, taxing or subsidizing external costs and benefits, protecting infant industries, investing in
infrastructure, and developing new market institutions.
Even the staunchest advocates of reform accept that some prices will be controlled by governments, especially
exchange rates, possibly interest rates, and the prices of basic foods. But price controls should be kept to a
minimum and in no case ought governments to control quantities. Several writings affirm the importance of the
SAP. Its main elements in clued:
1. Trade reform: eliminating controls over imports, reducing tariff levels, achieving a more uniform tariff
structure, and subsidizing nontraditional exports:
2. Reducing restrictions on foreign investment;
3. Fiscal Reform: adjusting the exchange rate to establish and then to maintain the profitability of more promote
export industries and to compensate for part of the reduction in protection from competing goods;
4. Financial reform: adjusting interest rates to levels above the rate of inflation, in order to eliminate the excess
demand for credit, or, preferably, freeing credit markets to determine interest rates, and promoting new credit
instruments and institutions;
5. Removing minimum wage controls and other regulations that artificially increase labor costs, or at least
permitting inflation to erode the real value of these costs;
6. Freeing or at least adjusting prices on farm products to encourage investment and increased productivity in
agriculture; and
7. Generally eliminating controls over prices and otherwise reducing regulations that inhibit market behavior.

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Theories and Politics of Development (PADM 1053)

Why Do We Need to Study and Realize Development?

1.1 Meaning and Dimensions of Development

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In addition to improvements in productivity/outputs and incomes, it typically involves radical changes in

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1.2 Objectives of Development

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1.3 Measures of Development

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 Justice and equality

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What do theories try to do?

Development theories seek to explain and predict how:

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2.1 Development From Above Paradigm

(i) Perroux (1955): Growth Pole

(ii) Myrdal (1957): Cumulative causation

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(iii) Hirschman (1958): Polarization and Trickle Down

(iv) Friedmann (1972): Core-Periphery

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2.2 Development from Below Paradigm

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(i) Agropolitan Development

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(ii) Self-Reliant (Endogenous) Development Theory

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(iii) Need-Based (Community-Based) Development

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 Involving agents or organizational groups (“instruments”),

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2.3 Theories That Share the Features of the Two Paradigms

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 Migration of people, in their capacities as both consumers and workers; and

(ii) Export-Base (Staple) Development Theory

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(iii) Entrepreneurship Theory

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Summary of the Two Schools

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4.1.1 Objectives and Requirements of Aid

What are or what should be the objectives of aid?

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Are there aid allocation criteria?

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4.1.2 Types/Forms of Aid

(ii) Hard versus Soft Aid

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(iii) Project Aid and Program Aid

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4.1.3 The Failure of Development Aid

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