Contemporary Issues in Development Economics

B. N. Ghosh

• Publisher: Routledge
• Year: 2001
• eBook ISBN: 9781134530076
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

This new collection of articles puts the very latest issues in economic development under the microscope, exploring them from a variety of perspectives. Beginning with an assessment of the current state of play in development, the authors move forward to examine neglected issues such as human development, gender, brain drain, military expenditure and post-colonial theory. While analysing the problems of external debts, technology transfer and new theories of international trade, the relationship between developing and developed economies is fully explored. The book also examines the important topics of financial reform, structural adjustments and the role of the IMF in the new financial architecture. The highly respected contributors subject these critical issues to thorough analysis with suggestions towards resolving some of these problems, making this an indispensable book that researchers and students of development economics cannot afford to miss.

1 Development in development economics

B.N. Ghosh

Introduction

After the Second World War, the poverty and backwardness of some of the world countries became extremely conspicuous. Many reasons, including colonial exploitation, devastation by war, war-induced inflation and the like, could possibly be said to be responsible for such a sad state of affairs in many countries. It is precisely at this time that the subject of development economics (DE) came into being to study the problems of backwardness and underdevelopment of these nations. To be precise, DE started as a sub-discipline of economics in the early 1950s. However, over the decades it had a number of paradigm shifts, and the enthusiasm and gusto with which the subject took off in the 1950s and through the 1960s became somewhat mellowed in subsequent decades.

The basic objective of the present discussion is to make an assessment of what has really been learnt about development economics in the last fifty years or so. The discussion here is organised into five sections. Section one outlines the differentia specifica of development economics, followed by a taxonomy of basic theories of development and underdevelopment in Section two. Section three gives a brief analysis of the paradigm shifts of DE from the 1950s to the 1990s, and the visible change in the trajectory of DE will be discussed in Section four, and Section five will make some parting observations.

Differentia specifica of DE

Development economics was basically designed to theorise on economic backwardness of the less developed countries (LDCs) and apply the theoretical knowledge to the analysis of particular problems of underdevelopment, low income and poverty, and to find ways and means to solve these problems. The generalisations in DE are often based on hypothesis testing of microeconomic case studies (Stern 1989: 599).

DE is indeed a blend of many types of issues and questions, including the analysis of causation and its perpetuation, and policies towards solution of a host of problems relating to underdevelopment. The epistemic basis of theories of DE in general has been the broad manifestation of the syndrome of poverty and underdevelopment prevalent specifically in LDCs. The purpose of DE has been mainly to study the phenomenology of underdevelopment, and to prescribe appropriate policies to eradicate it. Theorising on development has been based on the study of the symptoms and diagnosis of economic backwardness. Theories developed by development economists have encompassed the theoretical underpinnings of empirical facts drawn across the board from socio-econo-political realms of life of many poor countries.

However, over the years, the area of investigation of DE has transgressed the boundaries of pure economics, and has trespassed into the fields of other allied disciplines. This is the reason why DE is often regarded as the subject of trespass. As a matter of fact, the fine line of demarcation of DE became increasingly blurred in the decades following the 1950s. At the present moment, it is indeed very difficult both conceivably and observably to pinpoint the precise scope and ontology of development economics. The subject has become over-expanded so much so that almost any type of study under the sun can be brought conveniently within the analytic umbrella of DE. Although this has produced certain positive externalities for the subject, it has also been responsible for its lack of specialisation, direction and focus. Be that as it may, the subject of DE has remained and is still popular especially among the students of Third World countries, though its importance and charisma among the doctoral researches might have been somewhat reduced in DCs, as Arthur Lewis has made us believe (Lewis 1984: 1).

The popularity of the subject at the academic research level has waned perhaps because of disillusionment with the subject as a problem-solving pragmatic discipline. In the early theories of development, there was some sort of permeating optimism that the subject would be able to take the LDCs out of the morass of penury and pauperism (Bhagwati 1984: 24). But nothing of that sort has happened in actual practice in the LDCs. In the words of A.K. Sen, the ‘would-be dragon-slayer seems to have stumbled on his sword’ (Sen 1983: 745). One should, however, note that while theorising has remained innocuous in DE, things may have gone haywire at the levels of policy formulation and its implementation.

Theorising on underdevelopment and development

Theories and strategies of development of LDCs have been based on theories of underdevelopment which were developed mostly in the 1950s and 1960s. There are basically two strands of thoughts and theories explaining economic backwardness: (i) structural-cultural theories and (ii) linear stage theories.

Structural-cultural theories seek to explain underdevelopment in terms of structural factors such as rigidities and inelasticities in the supply of factors, sub-optimal occupation structure, and the inability of the economy to respond to price mechanisms to increase agricultural output and thereby to contain inflation. Underdevelopment in these countries is also explained in terms of market imperfections and sub-optimal allocation of resources. The structural-cultural models also view institutional rigidities responsible for the proliferation of dualism of various types, such as sociological dualism (Boeke), ecological dualism (Geertz), financial dualism (Myint), technological dualism (Higgins) and foreign enclave dualism (Myint) as important constraints for economic development. A dualistic structure makes interaction among the entities difficult, and stands in the way of progress. Myrdal demonstrates how a growing sector generates backwash effect for the underdeveloped sector or region. The spread effect of growth/development cannot often be absorbed by the backward sector owing to structural-cultural inhibitions and insulation.

Due to structural inflexibilities, structural adjustment necessary for development often becomes impossible. In the context of limited capital, both physical and human, limited or no modern technology, fixed factor proportions existing in backward economics (Eckaus) lead to overt and covert unemployment and underemployment, particularly in labour-surplus economies. All these may end up with the situation of low income, low saving, low investment, and low income again. This creates a system that begets a vicious circle of poverty among poor nations (Nurkse). Lack of adequate stock of capital and of modern technology stands in the way of exploitation of resources which may be abundant in many backward economies. Considered from a different perspective, limited income, consumption and demand are said to be primarily responsible for limited market investment, employment and income. Thus, both demand and supply sides of the vicious circle can substantiate the fact that poverty generates poverty. Hence, the maxim: a country is poor because it is poor.

socioeconomic behaviour of people in LDCs remains highly culture-bound, and the traditional cultural milieu is found to be partly responsible for economic backwardness. People have low aspiration (Mellor) and limited target level of income, giving rise to backward-sloping supply curve of labour, low productivity, unemployment and underemployment. Too much dependence on fate, and metaphysical belief in other-worldly pursuits, coupled with indifference and ignorance of the materialistic economic calculus, creates a mind-set that easily tends to neglect the importance of population control in LDCs. Needless to say, a very high rate of growth of population has been looked upon as a factor primarily responsible for low per capita income and poverty.¹ The low-level equilibrium trap (Nelson) is found to be one of the main reasons for the perpetuation of economic backwardness. Many theories of development have come to the conclusion that sporadic, inadequate and unbalanced sectoral investment cannot give a sufficient boost to creating a situation of sustainable development. Value system, institution and culture can indeed, to a great extent, be regarded as the basic constraints on growth and development.

Another way in which culture is looked upon as an associated factor impeding economic development is the culture of foreign domination and dependency. The international structuralist model has two main versions: the false paradigm version (Todaro 1977: 91–2) and the colonial dependency models (Samir Amin, Gunder Frank, Emmanuel, Dos Santos, Marini and others). The false paradigm version contends that the advice given by international institutions on economic development of the LDCs is harmful. There is a kernel of truth in the paradigm which is being recognised presently by the Southeast Asian countries which recently went for IMF bailout packages. The dependency theories in general have brought home the fact that the so-called backward countries were indeed rich countries in terms of resource endowments, and that the resources from these foreign-dominated colonies (periphery) had been transferred to the exploitative foreign colonial powers (centres). Dependency has created international dualism that has exacerbated the economic distance between DCs and LDCs.

The distinguishing point of many dependency writers is that they treat the social and economic development of LDCs as being conditioned by external forces: the dominance over LDCs by other powerful DCs. As Gabriel Palma asserts, the most distinguishing feature of dependency theory is its focus on the interplay between internal and external structures in the analysis of underdevelopment (Palma 1985: 139). The main line of analysis of the dependency model is based on two approaches: (i) a surplus extraction approach and (ii) an unequal exchange approach. Frank and Amin, among others, show that the present-day LDCs are underdeveloped because their surplus resources have been taken away by the DCs. Emmanuel and others maintain that there is unequal exchange between DCs and LDCs, and that there is a transfer of value from the latter to the former. LDCs are compelled to sell their goods at prices below their values, and purchase goods from DCs at prices above their values. In the international interaction at many levels, the exploitation still continues unabated. In the pre-industrial revolution period, the DCs used to take away resources from their colonies in the form of physical capital, while in the post-industrial revolution period, they have been draining the human capital resources (brain drain) from LDCs (Ghosh 1999: 46).

The second strand of thought explaining underdevelopment is in terms of linear stage model mainly popularised by W.W. Rostow (1960). However, prior to Rostow, Karl Marx in his theory of social formation pointed out that there were three important stages of social and economic development that one could encounter before entering into the most progressive stage of capitalist development. These three stages were: primitive communism, slavery and feudalism. In a five-fold classificatory schema of stages of growth, Rostow observed that the LDCs were backward as they were not yet prepared to enter into the stage of perceptible development (take-off) due to lack of required level of saving and investment.² The LDCs are dominated by traditional societies and some of them were passing through the stage of pre-conditions for take-off. Thus, to Rostow, each country has to graduate through the natural stages of backwardness before it can finally attain the stage of economic development.

The requirements for development are indeed multi-dimensional, and hence, different theories had to focus on different issues and dimensions. However, it is recognised by all that the most essential need for development and growth is capital accumulation and investment, reminiscent of the classical theory of growth. Many economists including Harrod, Domar and Ragnar Nurkse harped on the need for investment for accelerating economic growth. Harrod and Domar's theory provided a formula for measuring growth: growth is measured by the reciprocal of capital-output ratio times the rate of investment (or saving). The formula is handy and simple, and was later on used both as a growth model and as a planning model. The importance of investment lies in the dual functions that it performs: income generation and capacity creation.

The threshold theory suggested that investment would have to be of a critical minimum amount (Leibenstein) so that growth-retarding factors like population explosion and so on can be swamped out by the growth-inducing factors. In this connection, Rosenstein Rodan suggested the theory of big push, and Ragnar Nurkse and H. Leibenstein separately put forward the view that what was essential for sustained development was the strategy of balanced growth for making investment in different sectors mutually supportive. Hans Singer, however, maintained that balanced growth doctrine is applicable only to subsequent stages of sustained growth rather than to the breaking of deadlock (Singer 1958: 10). That investment is the kingpin of growth was also acknowledged by H.W. Singer, W.W. Rostow and Robert Hirschman. But Hirschman prescribed the strategy of unbalanced growth, for he believed that investment in some strategically selected leading sectors creates further investment opportunities, and growth gets momentum through a process of communication from growing points to the stagnant points. However, it was soon realised that the debate between balanced growth and unbalanced growth was based on false consciousness, for there are many common grounds between these so-called two strategies. Paul Streeten (1959 and 1963) contended that it was possible to reformulate the choice between balance and imbalance. As a matter of fact, balanced and unbalanced growth need not be mutually conflicting, and an optimum strategy of development should combine some elements of balance as well as imbalance (Mathur 1966: 137–57).

For quite some time, the discussion on saving/investment became a prominent issue in DE. Ragnar Nurkse expressed his note of optimism for LDCs by pointing out that, although these economies contained a huge amount of disguised unemployment and surplus labour, the stock of redundant labour could be utilised for rural capital formation, and disguised unemployment implied disguised saving potential. However, whereas Nurkse prescribed the strategy of shifting the surplus labour from rural to urban areas, Gunnar Myrdal found the strategy to be quite counterproductive, because the industrial sector in LDCs did not have sufficient pull factor, and could not create sufficient job opportunities for rural labour. Some of the LDCs in Asia did emphasise the development of agriculture for food and fibre, but the realisation of saving potential could not be translated into action. Some of the Southeast Asian countries, prominently Malaysia, placed more emphasis on industrial development and followed a Preobrazhensky-type of model of squeezing agriculture. And labour was withdrawn from agriculture for the development of the industrial sector: the Lewis model was in operation. However, this was not a suitable strategy for the labour-surplus economies of Indonesia, India, Pakistan and Bangladesh.

The question then precisely becomes tangential to the choice of technique. The debate between capital-intensive vs. labour-intensive methods of production became a lively issue in the past, and A.K. Sen made an attempt to resolve the debate by pointing out that no technique of production is always distinctly superior to the other and that there is nothing like a once-for-all choice of technique (Sen 1962: 57).

Harking back to the crucial question of investment, the main pressing issue that was identified was: how to increase saving and investment for higher rate of growth (Rostowian take-off)? Nurkse observed that investment was limited by the extent of the market. Chenery and Strout discussed, in their two-gap model, the two constraints to development, namely, saving constraint and foreign exchange constraint. Since endogenous possibilities for augmenting saving and trade were found to be rather bleak, many theories in DE proposed the importance of foreign aid and foreign trade. Trade was regarded as important not only as a channel for goods and services but also as a channel for new ideas and technology. Many countries adopted the twin policy of export promotion and import substitution, and Schumpeterian risk-takers and innovators got the reward (Bhagwati 1984: 30).

Nevertheless, in the process of interaction through the foreign sector, some countries opened up more than the others and allowed different degrees of liberalisation and privatisation through multinational capitalism and foreign direct investment. Although foreign technology could not be transferred fully to the newly industrialising economies for various reasons, improved technology was made available to augment production and exports.³ All these made it possible to realise a growth rate of between 8 and 9 per cent per year in the Asia Pacific re...

Table of contents

• Cover Page
• Routledge studies in development economics
• Title Page
• Copyright Page
• Tables
• Figures
• Contributors
• Prefatory note
• Introduction
• 1 Development in development economics
• 2 Human development, military expenditure and social wellbeing
• 3 The problem of brain drain
• 4 Gender and development: Transforming the process
• 5 Food security in developing countries
• 6 External debt, government expenditure, investment and growth
• 7 The pure theory of international trade, globalization, growth and sustainable development: Agenda for the future
• 8 Knowledge, technology transfer and multinational corporations
• 9 The International Monetary Fund: Functions, financial crises and future relevance
• 10 Economic development and environmental problems
• 11 Globalization as Westernization: A post-colonial theory of global exploitation