a) CLASSICAL AND NEO-LIBERAL

DEVELOPMENT THEORIES
 Outlines
• Adam Smith free market/classical
economics
• Keynesian
• Development aid
• Structural Adjustment Policies
• Summary
 Classical Development Theories
• Classical development theories emerged from the
foundations laid by Adam Smith in 1776.
• Greater attention to be paid to production in
economic development.
• Divisions of labour would help improve
productivity and therefore economic growth and
wealth creation.
• Adam Smith argued, that the operation would be
regulated by the ‘invisible hand of the market’
rather than by the state.
• Smith’s work is still very influential today because
of his theorizing about the role of the market in
economic development.
• Another highly influential classical economist was
David Ricardo who advocate free trade and
developed the theory of ‘comparative advantage’.
• Countries should concentrate on producing and then
selling the goods that they had an advantage in
producing because of their assets, such as land,
mineral resource, labour, technical or scientific
expertise.
• Generally, classical economists’ belief in the market
as a mechanism for maximizing efficient resource
use and human well-being.
• However, this was challenged later on due to
economic depression in USA.
 Keynesian Development Theory
• His argument was that the free market, was not
necessarily the positive force.
• Keynes argued that the key to growth was real
investment, i.e. investment in new (rather than
replacement) infrastructure projects.
• This investment, he claimed, would have a positive
effect on job creation and the further generation
of wealth, through the multiplier effect
• Keynes proposed that government has to
intervene in infrastructure development and
monitory policies (such as adjusting interest rates)
which in turn ensure economic growth.
• Government has key role in economic growth
 International Aids
• Flows of international aid from North to South were
part of the policy responses to modernization theory
in relation to development in the post-war period.
• The poorer countries of the world were regarded as
lagging behind on the path of economic
development, being largely agricultural and lacking
the autonomous capacity for investment and
economic growth.
• International aid was governed by ‘top-down
development’ was advocated because policy-
makers believed that this development path had
worked in the North so could work elsewhere.
 Debit Crisis
• In the 1980s, the world experienced a debt crisis in which
highly indebted Latin America and other developing
regions were unable to repay the debt, asking for help.
• The problem exploded as Mexico declared inability to
service its international debt, and the similar problem
quickly spread to the rest of the world.
• This problem aggravated by failure of commodity prices
which poor regions are dealing with.
• In the late 1970s commodity prices fell so reducing the
export earnings
• Thus, a decline in world commodity prices was
catastrophic for poor nations.
• This fall in commodity prices was exacerbated by global
recession in the early 1980s, which led to industrialized
countries implementing greater forms of protectionism
such as increased import tariffs, again making it harder
for Southern countries to export their goods.
• In addition, interest rates went up and millions of dollars
of savings were moved by investors to what were
regarded as ‘safer’ countries through the process of
‘capital flight’.
• To counter this, macroeconomic tightening and
"structural adjustment" (liberalization and privatization)
were administered, often through the conditionality of
the IMF and the World Bank.
 Structural Adjustment
• Structural adjustment programs (SAPs) are a package of
economic and institutional measure designed to solve
macroeconomic problems in developing countries by
reducing government intervention in the economy.
• The idea is meant for correcting the borrowing country’s
deficits and opening the country’s economy to the global
market.
• SAPs encompass a series of government-led policies
which are aimed at reducing the role of the state in the
running of the national economy.
• SAPs usually include two categories of policies which can
be classified as stabilization measures and adjustment
measures.
• The stabilization policies include policies such as stopping
increases in government-sector wages, cutting back on
government expenditure and devaluing the currency.
• Adjustment measures include opening up the national
economy to foreign investment, reforms in the tax
system and privatization.
• However, in most cases, SAPs proved to have very serious
consequences.
 poverty levels increased as real wages went down,
 unemployment increased and the cost of living rose.
 marginalized gender and environmental issues.
• Generally speaking, SAPs, though, may not have
caused poverty in a direct sense; they certainly did
not lead to poverty reduction.
• SAPs focused on a global poverty reduction agenda,
led the World Bank and IMF to reshape SAPs in the
late 1990s.
• Neo-liberal adjustment policies are still a key part
of the organizations’ conditions for lending funds,
but greater attention is paid to the needs of the
poorest people in society.
• Rather than one size fits for all approach, the
diversity of national situations is acknowledged.
 Summary
• Starting in the second half of the 20th century, neo-liberalism
became increasingly prominent as a form of governance in the
world.
• Originally, the roots of neo-liberalism were planted by a classical
political economy theory which advocated for markets (and thus
people) to be completely liberated from any type of governmental
interference.
• This type of economic theory began to be adopted in the West
throughout the 1800s and into the early part of the 1900s.
• The Great Depression of the 1929 to 1933 and the development of
Keynesian economics, though, temporarily slowed down the
advancement of liberal economics.
• In recent decades, however, there has been a revival of neo-
liberalism on the glob as countries around the world now either
choose or are forced to engage in neoliberal governance.