Understanding Development

Theory And Practice In The Third World

John Rapley

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135056131
• Edition: 1
• Topic: Physical Sciences
• Subtopic: Geography
• Index: Geography

First published in 1997. An introduction to the theory and practices of development in the third world, tracing the evolution of development theory over 40 years, and examining why so many of the benefits of development are still not shared by millions.

1

DEVELOPMENT THEORY IN THE POSTWAR PERIOD

Early in the summer of 1944, allied troop columns rolled eastward through France. Berlin lay on the horizon. World War II had entered its final phase and allied victory was just a matter of time.

Having begun to ponder the possible shape of the postwar world, the allied leaders held a conference to discuss the structure they would give to the world economy. This meeting took place at a hotel in Bretton Woods, New Hampshire. It began within a month of D-Day and lasted three weeks. The absence of the USSR signaled the imminent split of the world economy into two blocs, the Western and capitalist one, and the Eastern and state-socialist one. The Bretton Woods conference would provide the blueprint for the postwar capitalist economy.

The intellectual shadow of the leading economic thinker of the age, John Maynard Keynes, loomed large over the conference, and Keynes made important contributions to its proceedings. Chief among the concerns of the participants was the desire to create a favorable international trading environment. They wanted to put behind them the conditions that had worsened the Depression. Monetary instability and lack of credit had inhibited trade among nations and led governments to adopt protectionist policies when they could not pay for their imports. To this end the Bretton Woods conference gave rise to the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, which became known as the World Bank. In 1947 the Bretton Woods system, as it came to be known, was rounded out by the General Agreement on Tariffs and Trade (GATT). All were designed to create as stable and freely flowing an international trading environment as possible.

GATT was a treaty organization that aimed over time to reduce tariffs, or taxes on imports, thereby lowering the barriers to trade among member states. The IMF was set up to provide short-term loans to governments facing balance-of-payments difficulties, the problem a government encounters when more money leaves its economy through imports, capital flows, and spending abroad than enters it. In the past, governments had dealt with this problem by taking measures to reduce their imports, but this brought retaliation from the countries whose exports they were blocking. The IMF was to lend governments the money they needed to cover their balance-of-payments deficits, so that governments would no longer resort to the sort of tactics that set off protectionist spirals, reducing trade. Member governments would pay into the IMF and then draw on its deposits when necessary. The IMF later extended credit beyond its members’ resources. However, in cases in which governments repeatedly ran balance-of-payments deficits, the IMF was allowed to demand, as the price for further loans, government reforms to rectify structural problems in the economy—in effect, the IMF was to be the world economy's conservative and parsimonious banker, slapping the wrists of governments that had been careless with their checkbooks. The World Bank was created to invest money in the reconstruction of war-ravaged Europe. When it had completed this task it turned its attention to the development of the Third World.

Finally, to ensure that goods flowed freely across borders, the world needed a universal medium of exchange, a currency all participants in the economy would accept. Because the World Bank did not have the power to issue currency, the U.S. dollar filled the role by default. By U.S. law, every thirty-five dollars any individual or government accumulated could be exchanged for one ounce of gold, from U.S. gold reserves held at Fort Knox. In effect, this made the dollar as good as gold, and virtually all governments, including those in the Soviet bloc, were willing to accept U.S. dollars for payments.

The Bretton Woods conference failed to take Keynes's advice to create an International Trade Organization, which would have enjoyed more power than did GATT to enforce the compliance of member states, and would also have been able to stabilize commodity prices. No institution could discipline any government into improving its trade practices. As a treaty organization, GATT could only rule when member governments were entitled to retaliate against other governments; it could not end protectionism, though it could discourage it and give it some order. Importantly, GATT did not deal with nontariff barriers such as quotas. As tariff barriers fell, governments began using nontariff barriers to block trade, which undermined GATT. Keynes had also recommended that the IMF be able to pressure balance-of-payments surplus countries into opening up to trade. Instead, the IMF could only pressure those countries to which it made loans, namely, deficit countries. Pressure on surplus countries would have benefited the world economy by expanding trade, whereas pressure on deficit countries to curtail their spending slows the world economy.¹

THE IMPACT OF KEYNES IN THE FIRST WORLD

The Bretton Woods conference was concerned primarily with establishing a favorable international environment for economic growth, but Keynes's influence was evident in another way: His thinking had come to exercise a profound impact on a generation of political leaders. Keynes's recipe for economic development was accepted not only for the international system but for domestic economies as well. His vision of a smoothly running capitalist economy involved a much greater role for the state than had been tolerated in classical and neoclassical models of development, which had been more concerned with the free market.

Classical political economy, whose key contributors included Thomas Malthus, David Ricardo, and J. B. Say, and whose most lasting expression is found in Adam Smith's Wealth of Nations, stressed the role of the free market and individual liberty in economic success. Individuals, unfettered by state interference, would use their ingenuity to the greatest extent. Division and specialization of labor would allow resources to be used in the most efficient and productive manner possible. If all individuals pursued their narrow self-interests, all of society would benefit inadvertently. State interventions to relieve poverty would inhibit initiative, and would stifle investment because they would rely on increased taxes. Therefore, the prescribed role for the state in the economy was a minimal one. Smith identified only three functions for the state to perform: defense of national sovereignty, the protection of citizens’ rights against violation by one another, and the provision of public or collective goods. Public or collective goods are those that society needs but the market will not normally provide because the gains are so widely dispersed. An example is traffic signals: Almost everyone depends on them, but no individual will bear their cost. The state fills the gap by exacting a small payment from everyone in order to cover the cost of installing traffic signals wherever they are deemed necessary.

The other important feature of classical political economy was its conception of citizens’ rights, which it was the state's task to defend. Classical political economy, along with classical and neoclassical liberalism, conceived of individual rights in negative terms. Citizens enjoyed certain liberties from coercion, such as freedom to practice religion, trade, and economic enterprise, and these could not be violated by either the state or other individuals. Citizens did not, however, possess positive rights, that is, rights to something, whether it be employment, housing, education, or the like. This conception of rights emerged only with the development of modern liberalism, and has always been rejected by neoclassical thinkers. To the latter, freedom has always meant simply freedom from physical restrictions imposed by another person or by the state. The price of this negative freedom is inequality: Because people have different aptitudes, endowments, and inheritances, some will prosper and others will not. Neoclassical thinkers, along with their classical forebears, have always insisted that it is not the state's task to redistribute resources to equalize society. They contend that, in fact, the least well off in society benefit more from this inequality—because it speeds up economic progress, which in turn benefits them—than they do from an egalitarian society that inhibits economic progress.

At any rate, classical political economy saw the capitalist system as a complex and delicate mechanism that could easily break down once the state started meddling with it. Left to itself, the free market was seen to be self-regulating: Even when it appeared to have broken down, it was still functioning and would repair itself naturally. Hence the term laissez-faire capitalism, which means precisely a capitalism which is left alone. For example, in an economic depression there is a slowdown of economic activity and widespread unemployment. The economy appears to have stopped functioning. But classical political economy, and the neoclassical economics this tradition spawned in the late nineteenth century, sees a silver lining to the gray cloud. With so many people unemployed, there are more people competing for fewer jobs; they must offer to work for less than their competitors. Thus, labor prices drop, and employers respond by hiring more workers. More workers with more money to spend translates into increased demand for goods and services, which in turn causes producers to expand their activity, which compels them to hire more workers, and so forth.

Keynes had no problem with the market economy. He liked the machine, but judged it to be in need of improvement if it was to operate well. In particular, Keynes took issue with the conventional economic assumption that during a downturn, labor prices drop, causing employers to hire more workers and thereby mop up unemployment. The Depression led Keynes to believe that high unemployment could persist indefinitely. He advocated the use of fiscal policy—government spending—to deal with recession. This was an instrument that virtually all governments were then loath to use. (Even Roosevelt's New Deal eschewed deficit spending, which Keynes favored.) By building roads and dams, for example, a government could create jobs, which in turn would create more demand for goods and services, which would cause factories to increase their output and then to take on more workers, and so on in an upward spiral. Once good times returned, the government could prevent the economy from overheating by taking money back out of it. In short, Keynes's prescription for improving the capitalist economy was for governments to save in good times, spend in bad.

Keynes was not the first to advise governments to spend their way out of recessions. However, his innovation was to call on governments to borrow, if necessary, to pump money into the economy.² The loans would be repaid later from the earnings generated by a newly robust economy. Neoclassical theorists worried that such public spending would worsen inflation, as more money would chase fewer goods. But Keynes argued that this expansionary fiscal shock would not cause inflation because increased investment would occur along with increased demand. It all heralded the advent of managed capitalism; this revolution in economic policymaking overthrew the doctrine of laissez-faire capitalism that the Depression had discredited.

In the late 1940s, governments in Western Europe and North America started taking Keynes's advice. By then, the USSR had begun to consolidate its hold on Eastern Europe by establishing puppet regimes in the six countries it had liberated from Nazi rule (East Germany, Poland, Romania, Bulgaria, Hungary, and Czechoslovakia). This solidified the iron curtain that Winston Churchill said had fallen across Europe, dividing it in two. It was becoming obvious that the new Soviet bloc was not going to join the economic order prescribed at Bretton Woods. The dust was slowly settling on Western Europe, though, even if the future looked uncertain immediately after the war, especially with communist parties threatening to take power in Italy, France, and Greece. Capitalism only firmly reestablished its hold on Western Europe when the United States instituted the Marshall Plan, whereby it injected billions of dollars into the reconstruction of Western Europe's ravaged infrastructure. At the same time, liberal democratic parties committed to a more equitable social order came to power in Western Europe.

What emerged in the politics of Western Europe, and indeed in virtually all the developed capitalist countries, has come to be known as the postwar Keynesian consensus. Not only did this innovation safeguard capitalism, it also won the support of the Western world's working classes. Western governments made full employment a top priority, along with improved social benefits such as public education, housing, and health care. Postwar capitalism was to be both redistributive and managed. Western governments, through nationalization of declining or important private companies, regulation of the economy, public spending, and other means, involved themselves far more deeply in the management of their economies than ever before. In its new version, capitalism was to be not only more efficient, but indeed more humane. It was a recipe for social peace like none seen before: Investors would grow richer—Keynes himself had grown rich on the stock market—but so too would workers, and poverty would become a thing of the past. Scholars proclaimed that correct economic management would prevent there ever being another Depression, and that the high growth rates that followed in the 1950s were a permanent feature.³ All of this was possible because the ingredient missing from earlier capitalism—an appropriate interventionist role by the state—was now in place.

THE EMERGENCE OF THE THIRD WORLD

This was the political and intellectual climate into which the Third World was born at the end of World War II. The industrial world had polarized between capitalism and Soviet communism, while a new form of statist liberalism had taken hold in the capitalist West.

The term “Third World” originally denoted those countries that were neither advanced capitalist (the First World) nor communist (the Second World). In practice, Third World came to refer to all developing countries, including those that called themselves communist.

A number of features characterize Third World countries. First, by comparison with the advanced capitalist economies of Western Europe and North America, their per capita incomes are low. This poverty translates into shorter life expectancies, higher rates of infant mortality, and lower levels of educational attainment. Typically, a high proportion of the population is engaged in agriculture. The secondary, or manufacturing, sector occupies a relatively less important place in the economy than it does in the First World, and exports come mainly from the primary sector (the cultivation or extraction of natural resources, as in farming or mining). Such a characterization, of course, fails to capture the great variety within the world. Some rich countries, such as Canada, are relatively underindustrialized, relying on primary exports for their wealth. Some poor countries have made remarkable strides in improving health and education. Yet as a rule, there is a correlation between national income and a country's ability to improve the social indicators of its citizenry. With the exception of the few countries endowed by nature with an abundance of natural resources, there is also a correlation between industrialization and growing national income. There are factors other than economic that are c...