The Science of Economic Development and Growth: The Theory of Factor Proportions

The Theory of Factor Proportions

C.C. Onyemelukwe

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9780765606044
• eBook ISBN: 9781315500119
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

A theoretical framework aiming to facilitate study of development economics. The author presents his theory in three sections: how advanced nations developed; a proposed third dimension, in addition to labour and capital; and why capital accumulation is unnecessary, even potentially harmful.

1

Taking Stock

Robert Berg, chairman of the International Development Conference (a coalition of leaders of 125 U.S. associations and organizations concerned with U.S.–Third World development policy—the largest and oldest forum on development in the United States) declared at a private lecture in March 1999 that economic development was suffering a clinical depression. He should have said that economic development was clinically dead but on life support.

The 1998 edition of the UN publication World Economic and Social Survey makes sober reading. It concludes that “it is no longer clear that all the conventional [economic] growth policy measures and prescriptions remain valid” because “the world economy seemed to be on the cusp of a transition that was neither sought nor foreseen.”¹ This is a very serious indictment of economists and policy makers, for it is they who are responsible for a seeming failure of economic theory and practice.

After more than fifty years of economic development programs in developing countries, poverty is still very much with us. The gap between rich and poor nations has widened. Over 23 billion people earn less than $1 a day. Africa, for example, with a population in 1990 of about 500 million (a figure that is expected to double by 2010 and reach 2.8 billion by 2150) had an economic growth rate less than its rate of population increase, which means that living standards are falling. A rate of growth of output that raises per capita GDP by 3 percent a year in developing countries can be considered the absolute minimum needed over a sustained period to achieve even moderate levels of income per capita. According to the World Economic and Social Survey, only thirty-five countries managed this growth rate in 1997. Africa and Western Asia averaged 1.7 and 2.6 percent, respectively.²

In Latin America and the Caribbean, the prospects for sustained economic development are no better. In a 1996 World Bank paper titled “Dismantling the Populist State—The Unfinished Revolution in Latin America and the Caribbean,” S. J. Burke and Sebastian Edwards (then respectively the World Bank’s regional vice president for Latin America and the Caribbean and the Henry Ford II chair in international management at the University of California, Los Angeles) stated that although Latin America overcame the most pessimistic post-Mexican-crisis forecasts, “economic growth [i.e., for the region] was too anemic to prevent poverty from increasing. … An increasing number of people [in the region] are disillusioned and beginning to look at alternative policies.” They were of the view that disenchantment with economic performance was slowly generating “reform skepticism,” with a concomitant danger of antireform activism.³ After a brief decline in the late 1970s, the number of poor have increased steadily in the region since 1975; in 1996 approximately 165 million people in the region lived in poverty, and the figure is still rising.

As if this were not bad enough, 1997 witnessed the economic collapse of several East Asian newly industrializing countries (NICs), after decades of stunning growth rates. The bursting of this huge economic bubble returned millions of people to near destitution and poverty. The Asian “tigers” had been regarded by many economists as evidence that economic development strategies in developing countries can work. The World Bank and IMF lavished praise on these countries. There was no shortage of books and publications that have sought to provide theoretical and empirical reasons why the Asian tigers succeeded. But now the economists who endorsed the original strategies have sought to make everyone else, including fund investors, leaders of the Asian countries, and the countries’ institutions, the scapegoat.

On the heels of the Asian debacle, the international financial system nearly collapsed in October 1998. President Clinton at the time described the situation as the greatest economic crisis the world had witnessed in fifty years. It was the third major currency crisis in five years. According to the World Economic and Social Survey, the 1998 crisis showed that a major international financial market could fail in a major way. Yet just a year before this crisis, there was not only official optimism about the prospects of world growth but also a high degree of official confidence that the globalization-fostering economic policies of the preceding decade were beginning to have a positive effect.

The failure of development efforts in the developing countries, the East Asian crisis, and the economic problems in Latin America—all of which basically were the result of attempts by economists to reproduce the success of the so-called advanced economies, along with the 1998 currency crisis—are worrying because it means that economists do not have a full understanding of the basic processes through which the present advanced economies got to where they are.

Economic development, as a field of study (sometimes called development economics), is concerned with the problems, processes, and policies in poor countries (sometimes called underdeveloped, developing, or Third World countries) in connection with their possible transition into developed economies. There has been a tendency to regard development economics as a distinct field of economics. Srinivasan has, for example, stated that “as long as there are countries that have not made the transition to the status of developed countries, development economies will continue to exist.”⁴ Some universities have created subdivisions in their economics departments specializing in development economics.⁵

There is a degree of uncertainty among economists as to what the relationship between development economics and the economics of advanced economies should be. Meier said of this relationship, “Although it cannot be gainsaid that the problems of underdevelopment are different in degree … and to some extent in kind … from those encountered in developed countries, nevertheless, it would be overreaching to conclude that entirely different tools and principles are needed to analyze these problems.” He asserted that progress made in development economics has been within “the framework of traditional economic analysis.”⁶ On the other hand, Myint claimed that early development economists believed that a great deal of existing Western economic theory was so “bound up with the special conditions of problems and preconceptions of industrially advanced countries that large portions of it have to be abandoned before we can come to grips with the problems of underdeveloped countries.” Myint preferred to “improve the applicability of existing theory to underdeveloped countries.”⁷ Neither is particularly clear what the relationship between development economics and the economics of advanced economies should be. The issue of which tools to use in analyzing an underdeveloped economy as distinct from an advanced economy becomes important only after we are clear what the relationship between the two types of economics should be.

The closest analogy to the relationship between a developing economy and an advanced economy involves the development of a human being. A human is conceived in the womb as an undeveloped being, is born, and grows to an advanced age. At each stage we are dealing with the same individual, with the same basic personality, if you will. One cannot fully understand the outward features of this individual without understanding the process of conception and growth process.

It is clear, therefore, that those who treat development economics as separate from the study of advanced economies are wrong. Growth theory has unfortunately been seen as dealing more with advanced economies and has been faulted because it does not address “origins.” Growth from a state of underdevelopment to advanced development is one process. Economic development theory and growth theory therefore are different names for the same process, which encompasses both the maturation of poor economies and the challenges that face advanced economies. Economic development can be understood only as part of a comprehensive growth theory, and there is no separate economics of underdevelopment.

The basic idea of the continuity of the economic development/growth process is the essence of Rostow’s stages of development in his book Stages of Economic Growth. In this historical analysis, Rostow concluded that “it is possible to identify all societies, in their economic dimensions, as lying within one of five stages.” He said that “these stages have an inner logic and continuity. … They constitute, in the end, both a theory of economic growth and a more general, if still highly partial, theory about modern history as a whole.”⁸

Barro and Sala-i-Martin have observed that growth theory “died as an active research field by the early 70s” and that “the fields of economic development and economic growth have [since] drifted apart and the two areas became almost separated.”⁹ This separation is precisely why much that has gone on under the rubric “economic development theory” is defective.

The weaknesses in existing development theory and growth theory have their origins in earlier times. Krugman observed that “once upon a time there was a field called development economics … [which] attracted creative minds and was marked by a great deal of intellectual excitement. … [T]hat field no longer exists.” Krugman concluded that “between 1960 and 1980 high development theory was virtually buried, essentially because the founders of development economics failed to make their points with sufficient analytical clarity to communicate their essence to other economists, perhaps even to each other. Only recently have theorists in economics made it possible to reconsider what the development theories said, and to regain the valuable ideas that have been lost.”¹⁰

The same pessimism about the state of development theory is highlighted in a 1996 book aptly titled The Rise and Fall of Development Theory, by Colin Leys (a man who has been intimately involved in development theory for over three decades).¹¹ Leys is of the opinion that development theory is now at an impasse. According to him, development theory basically held that governments of underdeveloped countries could initiate and implement economic plans in order to catch up with advanced countries, but recent changes toward globalization of the world economy, in which capital can flow where it wants, have curtailed the ability of these governments to manage their economies and tackle poverty. As early as the end of the 1950s, Leys says, “the original optimism that this approach [development theory] would yield rapid results had begun to evaporate and the limitations of development economics as a theory of development were beginning to be exposed.”¹²

Given the widespread disenchantment with development theory, some people have advocated the abandonment of the concept of development. Others have denounced the idea of development as a Western concept meant to impose Western ideas of progress on others as ideologies of social control dressed up as a doctrine of improvement. As Leys writes, “The thinking seems to be to stop wanting development,” and we should rather “devote ourselves to deconstructing the meaning buried in its subtexts, and expose the masculinist, linear, repressive project hidden beneath its surface.”¹³ There has been a turn away generally from what often have been called “grand narratives.” This has left the field of development studies at something of an impasse.¹⁴

Others have been so taken by the diversity among poor countries that they are sure successful economic strategies cannot be the same in different countries. Todaro concluded, for example, that “economic policies will naturally be different for countries with large public sectors and ones with sizable private sectors. In economies dominated by the public sector, direct government investments and large rural works programs will take precedence whereas in private-oriented economies, special tax allowances designed to induce private businesses to employ more workers might be more common.”¹⁵ Griffin stated, “It is clear that there are many paths to development although some no doubt are more circuitous than others.” “Enough time,” he claims, “has elapsed and enough data are available to make it possible to test the strength and limitations of most widely advocated strategies of economic development against actual practice.” He identified and discussed in some great detail what he called six broad strategies of economic development.¹⁶

Works such as Griffin’s have encouraged empirical studies in development economics. In 1991 Booth declared that empirical research had begun to show potential for fresh theoretical initiative and allowed theory to be sensitive to the great diversity of situations in the Third World. He was of the view that empirical work is more relevant than general theory to the concerns of people engaged in practical development work.¹⁷ However, it was a mistake for Griffin, Booth, and other economists like them to regard empirical work as a substitute for general development theory. Empirical studies need a general theory to inform them.

In the remainder of the chapter we will discuss postwar trends in development theory, which can be grouped broadly into five categories: the positivist orthodoxy of the 1940s and 1950s (Harrod, Domar, Lewis, Rosenstein-Rodan, Nurske, Hirschmann, etc.), the modernization/rational choice schools of the 1960s and 1970s (Apter, Huntington, Almond, North, etc.), the dependency school of the early 1970s (Frank, Cardoso, Sunkel, Beckman, etc.), the neoliberal school of the 1980s (Bauer, Belassa, Little, etc.), and the endogenous growth theory of the 1990s (still in vogue).¹⁸

Much of the poor circumstances of present-day Third World countries and their present relationship with the industrialized nations today are due to these theories. We will show in what ways they are deficient and demonstrate that none of them is based on scientific reasoning. In particular, we will show that the lack of progress in economic development theory is not due just to globalization, as Leys claims; that these theories derive either from assumptions that are not backed up or from reasons that are not economic, and in some cases the theorists were simply reacting to prevailing economic problems of the time; that there has been a rush to adopt quick-fix solutions, in which theorists seek to reproduce outwardly observable features of advanced economies in poor countries; and that although earlier theories may seem to be discarded in favor of newer ones, in fact basic concepts are often recycled and presented as new ideas. So one is compelled to conclude, despite appearances to the contrary, that not much has really changed in the theorizing on growth and development. It is hoped that the following review of these theories will set out the theoretical challenges facing us in the next chapters.

Positivist Orthodoxy

Lewis’s 1954 seminal article on the labor surplus economy in poor countries was aimed at the goal of raising rural productivity and transferring underutilized labor out of agriculture into industry.¹⁹ Economists had noted that as development proceeded over the decades, employment in agriculture tended to decline while employment in industry rose. Development economists used this empirical observation to support the Lewis strategy even in the short run.²⁰

Lewis’s approach was reinforced by two observations about agriculture: that productivity is substantially lower in agriculture than in industry,²¹ and that agriculture provided fewer linkages to other sectors than industry.²² So the shift of workers to industry, along with increased capital investment, was supposed to provide a big boost to overall growth. This kind of thinking encouraged planners who wanted to quicken the pace at which resources were moved from agriculture to industry—a justification for government intervention and leadership.

Lewis was writing at a time when a number of factors were at work. The roots of market pessimism go back to the immediate postwar period. The Depression had destroyed confidence in market capitalism. Keynesianism was a growing force in economics during this period, and it too suggested government intervention to maintain strong economies. The Marshall Plan and the recovery of Europe following the war required reconstruction planning by the recipient governments. At the time, the example of...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Tables and Figures
• Preface
• 1. Taking Stock
• 2. Science and Economic Development
• 3. Theory of Factor Proportions
• 4. Is the Technology There?
• 5. International Trade Versus Economic Development and Growth
• 6. International Factor Mobility
• 7. The World Economy and Globalization
• 8. The U.S. Economy: A Historical Perspective
• 9. New Economy: Third Industrial Divide
• 10. Conclusion
• Notes
• Index