Download doc lecture 2 - 3 theories of dev

Theories of Development
2 meanings of development have been influential since the unofficial birth of
development studies in the post-WWII era (official birth came only in the
1960s with the founding of the Institute of Development Studies at the
University of Sussex):
1) Economic growth/development centered; and
2) Human development / social justice centered.
The economic growth paradigm was dominant from the 1940s until the 1970s,
when people-centered meanings challenged its hegemony;
Thereafter, while the relevance of economic growth has not disappeared, it is
commonly agreed that the goal of economic growth is to improve the lives of
people which is not necessarily the same thing as improving the wealth of a
nation i.e. while a nation may experience economic growth, this may not
improve the lives of the majority of its people—economic growth is necessary
but not sufficient for human development
Main theories that have been put forward to achieve development—we briefly
discussed the writings of Adam Smith and Karl Marx—Smith’s ideas are
associated with the market-oriented approach to wealth creation whereas for
Marx, the market-based logic of capitalism cannot be sustained because of the
economic inequalities it breeds—a communist revolution is inevitable in
countries where marked-based growth has succeeded most because it creates a
large majority of losers in workers—there are 2 other pre-WWII thinkers
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whose ideas are immensely important to development theory in the post-WWII
era:
1. List, a German writing in the late 19th century; and
2. Keynes, a British economist writing in the 1930s
Not to say that contributions by other economists and intellectuals are not
pertinent but that to get a handle post-WWII development theory, these four—
Smith, Marx, List, and Keyes—are perhaps crucial
Friedrich List is associated with the infant industry model (IIM)—his
understanding was that all nation states were not equal at any given time—so
for example, while Britain and some European countries had proceeded far on
the path of industrialization, others were still behind—the more advanced
states held an advantage over others and therefore Smith’s idea of a free market
economic system unhindered by the national state would favor the strong over
the weak and allow them to dominate—therefore, List reasoned that the weak
needed to protect and nurture their industries and their economy in general
until they had ‘caught up’ with the strong—once the international economic
system was made up of approximate equals, free trade was going to work well
for everyone and not just the strong states—Germany followed the Listian
approach to development in the 19th century as had Britain in the early decades
of the same—British cotton industry was protected by high tariffs from Indian
cotton manufactures in the early 19th century for as long as it did not become as
more competitive, after which free trade was practiced—in the 20th century, the
Listian model was followed by the East Asian countries to achieve their
economic miracle
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The other key contributor to our thinking on development issues is John
Maynard Keynes whose 1936 book General Theory of Employment, Interest, and
Money coincided with the economic downturn of the Great Depression—
Keynes disagreed with the notion that the market economy was self-regulating,
something which became obvious with the Great Depression—taking issue
with laissez fair capitalism, according to which economic recessions would by
themselves transition to a normally-functioning economy, Keynes proposed
managed capitalism where the hand of the state was necessary in economically
hard times—according to him, high unemployment could persist over the longterm and therefore government spending was necessary to create jobs which
would create demand for goods and services which would in turn stimulate
production which would mean factories would hire more workers—in other
words, a win-win situation could only be created through the judicious use of
fiscal policy—once the economy returned to normal, the state would once
again retreat from its activist role to prevent overheating of the economy—
Keynes’ main contribution was not just to call for government spending to
come out of recessions but that governments should even borrow to do so—
the borrowing, he argued, could be returned once economic growth resumed
and government earnings increased
Keynes may be considered the most important economic thinker of the 20th
century and his influence was evident not simply in Europe of the post-1930s
or the post-WWII era, but also across the world—furthermore, his ideas have
endured to this day—If you have followed Obama’s economic policies, you
may have noticed that government spending has been agreed upon as a
solution to the recession—the world over, countries affected by the crisis have
done the same: spend to get out of the recession
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It is because of Keynes, especially due to his emphasis on creating employment,
even full employment, that government spending in Europe and elsewhere
increased, not only to stimulate economic activity but also to address welfare—
the idea that state management of the economy was essential to keep national
economies in good health became widely accepted and came to be known as
the postwar Keynesian consensus
Theories of Development
1. Development economics
2. Modernization theory
3. Dependency Theory
4. Neo-liberalism
5. Developmental states
These theories shaped two broad policy responses on the part of states:
1) state-led development or import-substitution industrialization (ISI) and
2) neoliberalism
These policy responses assigned different roles to the state and the market or a
different equilibrium between the state and the market – the debate has largely
been over a) how much state and b) how much market – however, since the
1980s, a third dimension has become more relevant c) the nature of the state –
this is something for extended discussion later
Development Economics
Development economics was inspired by Keynesian ideas and while originally
designed to address recessionary turns in the capitalist system, the larger ideas
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were found applicable to newly independent poor states – states needed to play
an active role in developing countries by investing in capital and technology
and through macroeconomic policies such as higher public spending (in areas
such as health and education) and expansion of credit – the goal was to
stimulate demand and accelerate economic growth so that developing countries
could ‘take off’
Modernization theory
The roots of modernization theory are ideological even though it also proposes
an economistic approach to addressing development
Walt Rostow’s The Stages of Economic Growth: A Non-Communist Manifesto (1958) is
considered the first original contribution to this approach – its subtitle clearly
suggests its ideological bent, written as it is at a time when the Cold War was a
reality
The central tenet of Rostow’s theory is that with economic growth, all societies
experience a transition from a traditional to a modern society – traditional
societies are agricultural, with low levels of technology and economic growth,
and low consumption – modern societies are the opposite – this transition had
already occurred in the West and it could be brought about in the non-West
with the help of the West – on the side, of course, doing so would save the
Third World from communism
Later modernization theorists like Seymor Martin Lipset built upon these ideas
– Lipset in fact gets the credit for being the most well-known modernization
theorist – served as the president of both APSA and ASA – modernization
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theory is said to have brought about the so-called behavioral revolution since
its focus was not on what ought to be but what was true
Modernization theory, while supposedly grounded in history since it was based
on the historical experience of the West, was in a reality grounded in partial
history – neglected the historical experience of colonialism which had a
profound impact on both the West and the non-West –modernization theorists
optimistically assumed that the non-West could imitate the historical experience
of the West and the main ‘burden’ of the West was to facilitate that transition –
in some ways, modernization theory represents a 1960s version of the white
man’s civilizing burden – to be fair, however, almost all development theories,
and our own understanding of development, carries a similar burden
Variants in the modernization framework identified different sets of problems
in the Third World—some economic, others social or even cultural
Dependency Theory
The optimism of the modernization theory that the Third World could become
the First World was taken to task by Dependency theorists who questioned the
nature of the relationship between the developed and the developing countries
– while modernization assumed a beneficial relationship between the West and
the non-West, dependency challenged the terms and outcomes brought about
by the unequal nature of the relationship
The roots of dependency theory go back to a book written in the 1870s by an
Indian Parsi Dadabhai Naoroji in a book called Poverty and Un-British Rule in
India – Naoroji proposed the so-called “drain theory” which showed that the
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relationship between the British colonial power and India had resulted in a
drain of wealth from India to Britain
The earliest expression of dependency theories took the form of structuralism
but dependency theory per se built upon and exaggerated to some extent the
nature of the relationship between developed and poor countries
The clearest expressions of structuralism came in the writings of Raul Prebisch
and his “terms of trade” thesis – essentially, the developed countries exported
manufactures and the developing countries exported primary goods and were
typically mono-cultural – over time, the prices of manufactures outstripped that
of primary goods so that developing countries had to spend more (export
more) to import the same quantity of manufactures – the trade imbalance hurt
their economies – the solution was to change the economic ‘structure’ of the
poor countries – from primary goods producing to manufacturing – in other
words, industrialization was the only solution to address this structural
imbalance between the rich and poor countries—and of course, state
intervention or action was required to push industrialization—Prebisch went
on to lead the UN Eco Comm for Latin America (ECLA) which was created in
1950 in Santiago, Chile, and its journal CEPAL Review is still widely read
The link between structuralism and dependency was first made by Paul Baran
in his book The Political Economy of Growth published in 1957—Baran himself
was inspired by more traditional Marxist theories of imperialism such as those
proposed by Lenin in Russia—according to Lenin, imperialism was a necessary
means for advanced industrial states for their capitalist projects—colonial
powers competed with one another to dominate and exploit the resources of
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the Third World and the only way to end this domination was through
socialism—in Baran’s time, colonialism was already coming to an end and what
he argued was that the advanced capitalist countries—and more specifically, the
ruling bourgeoisie and multinational companies—conspired with the landed
elites of poor countries to keep the masses poor—there was, despite the end of
colonial rule, a continued transfer of surplus from the poor to the rich
countries—the solution: a socialist revolution
What you see in these arguments is the exact opposite of the ideas put forward
by development economics and modernization theory—so for example, if the
state was seen as capable of pushing industrialization by development
economics theory, Marxian theories questioned the willingness of Third World
elites, who were seen as allied to First World elites, to do more than the
minimum required to benefit their own interests—while both development
economics and modernization theory assumed that a better world was possible
through Western intervention, Marxists made the opposite argument
The broad contours of the dependency theory or, because there are quite a few
variations of dependency theory, dependency theories is that the nation state is
not a suitable unit for analysis—rather, to understand the specific situations of
the First and the Third World, we have to look at the international system
which consists of the core and the periphery (over time, dependency theorists
also recognized the existence of the semi-periphery consisting of those
countries where some industrialization had taken place—in the past, Western
imperialism condemned the Third World to poverty—in the present the
development of underdevelopment in the Third World was due to the unequal
relations between the core and the periphery which locked them in a
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relationship of “classical dependency”—the key actors in this process was of
course the industrial class in the core countries and the landed classes in the
periphery who were nothing more than their agents—it was in their common
interest to keep the periphery dependent on the export of primary goods
An important revision in the dependency paradigm came about with the
recognition that while many countries in the Third World remained primary
goods producing countries, others undertook industrialization to a greater or
lesser degree—F H Cardoso and Falletto came to be associated with the term
“dependent development” because they argued that industrialization and
development could come about despite dependency—this was because 1)
Third World elites were not passive agents but also had their own interests; 2)
As advanced countries began to engage in more sophisticated manufacturing
activity, there was room for manufacturing low-end industrial goods—the
evidence from Latin America and also to come extent from countries like
Turkey and Egypt showed that dependent development was a possibility
The emergence of East Asian tigers essentially falsified dependency theory—
while many of the historical conditions in East Asia were specific to the region,
it was also true that countries like South Korea had in fact industrialized and
even taken advantage of their close relationship with the core countries
The central problem of dependency was familiar—just as modernization theory
was guilty of over-determinism, the notion that economic growth and
development was inevitable with Western involvement, the same was true of
dependency which argued that underdevelopment was the only outcome
possible in the context of core-periphery relations
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One of the intellectual responses to dependency was the example of East Asia’s
success with development – and one of the lessons drawn from East Asia’s
success was that underdevelopment was not due to trade relations but to the
absence of sufficient trade between the West and the non-West—East Asian
countries, and before them Japan, were identified as trading states who had
traded their way to high levels of economic growth and development—of
course, this was an incomplete version of the East Asian success story and we
will discuss it after we have discussed the neoliberal response to the economic
crisis of the 1970s
Neoliberalism
Neoliberalism—neoclassical economics—is associated with the ideas of Milton
Friedman and other “freshwater” economists at the University of Chicago and
other premier universities in the US—the adoption of neoliberal economic
policies was a response to deteriorating economic conditions during the 1970s
which eventually peaked in the early 1980s with a recession—just as Keynesian
ideas were adopted from the 1930s on at a time of economic crisis, similarly,
neoliberalism found its takers at a time of economic decline—in some ways,
Keyensian ideas had gained acceptance due to the failure of free market policies
of the past—in the late 1970s and early 1980s, neoliberal ideas gained currency
because of the perceived failures of Keynesian ideas
The 1970s was a turning point in international political economy—why?
The Bretton Woods system that was created at the end of WWII collapsed in
the wake of America’s growing deficits emerging from trade and costs of the
Vietnam War—the meeting at Bretton Woods, NH, in 1944 between the Allied
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leaders was intended to create a favorable international environment for
economic relations, especially trade—almost all major international economic
institutions such as the IMF were conceived during that meeting—to facilitate
trade, the US dollar was accepted as the universal medium for exchange—the
US dollar was pegged to gold at 35 dollars to an ounce of gold and could be
readily exchanged from the reserves held at Fort Knox
BY the early 1970s, the US did not have enough gold to back up the dollars as
it accumulated growing deficits and it broke the dollar’s peg to gold—now, all
currencies floated freely creating great uncertainty about their real value
Then, the oil-producing countries got together and dramatically raised oil prices
twice in the course of the 1970s—there was an accumulation of excessive
money in US private banks who became only too eager to lend it to anyone
who wanted it at low though variable interest rates—this meant that many
Third World countries borrowed heavily to take advantage of low interest rates
in order to boost economic growth—however, these borrowings became a
heavy burden by the 1980s as the Reagan administration came to power in the
US and applied neoliberal policies, tinkering first with interest rates and raising
them—the so-called debt crisis hit the Third World hard, especially Latin
America, but also African countries
The neoliberal critique of the economic crisis focused on:
1. The ‘structural’ differences between the West and the Third World were
irrelevant – individuals were driven by the same market rationality –
trade without barriers was good for economic growth – preached trade
optimism against trade pessimism;
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2. Excessive state intervention which promoted directly unproductive
activities and rent seeking behavior – states were undertaking
industrialization when their comparative advantage lay somewhere else;
in doing so, they were promoting the interests of a few industrial groups
or public sector employees at the expense of the majority; inefficient and
unproductive industries were weighing down economic development;
3. Urban bias – rural neglect;
Among the key differences between Keynesian economics and neoliberalism
were:
1. Neoliberals favored monetary policy over fiscal policy; and
2. which translated into a minimal role for the state in the economic
process;
3. From a human development perspective, Keynesian economics favored
high social spending through taxation the neoliberals favored lower taxes
and expected individuals to address their social needs through higher
incomes
One of the neoliberal ironies was that while they proposed a rolling back of the
state, guess who was going to be responsible for doing so? The same state! So
the discredited state which had mismanaged economic development for several
decades was going to be responsible for its own effective management –
known as the “state paradox”
As the 1980s drew to a close, and the limitations of the neoliberal response to
the economic crisis began to be exposed, attention turned to the role of the
state – the World Bank finally recognized and acknowledged in its 1991 annual
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reports that one of the main reasons why East Asia had surged ahead and the
rest of the non-West fell behind was due to the role played by the state—in the
past, analysis of East Asian success had emphasized their export-led growth
model and neglected the role played by the state in promoting either 1)
inclusive economic growth; and/or 2) human development promotion
initiatives in health and education—East Asian countries followed Listian
principles just as European countries had in the early phases of their
industrialization
The Developmental States
So – by the early 1990s, the more sophisticated analysis of what had gone right
and wrong with the development process returned to the state, irrespective of
whether they were coming from the right or the left – indeed, reform of the
state has become one of the key themes since the 1990s
The Politicized State – prone to political instability / regime change –
responsive to most well-organized social groups and not others – typically has a
weak developmental orientation but also populist tendencies
The Predatory State – where those who have ‘captured’ the state seek to
maximize profits for their own ends – a state which exploits its citizens to
secure ‘surpluses’ for itself – the exact opposite of developmental state
The Autonomous State – a state that is ‘separate’ from society and is not
influenced by pressures from social groups – the idea of an autonomous state
figures in Marx’s writings as well – in theory, such a state would implement
policies for the public good but its definition of ‘public good’ is likely to be
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different from how society understands public good – societal input is
minimum
Embedded autonomy – associated with Peter Evans – a state that borrows the
best of ‘autonomy’ and embeddedness (refers to links between state and
society)—developmental states are characterized by embedded autonomy
where they are autonomous of the influence of the most organized and
powerful groups and yet, because of their strong links to society, are responsive
to the public good
(Further discussion on developmental states in lecture on ISI)
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