Development Economics

I INTRODUCTION

Development Economics, the branch of economics dealing with the development of economies. How do economies change from simple forms of organization and production to complex modern ones? This is the subject of development economics. Originally men and women lived in small, self-sufficient communities, dependent on things they found in their environment—if food, fuel, or materials ran out, they would simply move on. One of the first main social and technological developments was the transition from a nomadic way of life to agricultural cultivation in settled communities, from which began societies as we know them today.

Economists distinguish between growth, by which they basically mean more of the same—more goods and services; and development, growth with structural and technological change. Typically, in the early stages of development economies have most of their production and labour force in agriculture; later, the manufacturing and service sectors bulk larger. (“Services” include government, defence, construction, transport, finance, insurance, banking, and the like, as well as the work of people who do not produce physical objects like cars or radios, apples, and oranges—accountants, lawyers, teachers, hairdressers.)

An important feature of the development is when goods and services enter into markets and monetization. People have always eaten; but as they have meals away from home and pay for restaurant services, a restaurant sector grows up which enters into what is measured as the gross domestic product. The process of development includes specialization and the “division of labour”: as people take on specialized economic functions and the scale of production increases, the output of each person, or her productivity, rises. This type of organizational change is as important a part of technological progress as a mechanical invention or scientific discovery.

Another key feature is poverty; whole economies can be poor, or they can grow but still leave large sections of their people in poverty. In the second half of the 20th century, a strong awareness grew up of the difficulties of a large number of countries in the developing world, most of them former colonies of the industrialized nations. Development economics became more or less synonymous with the study of how these countries could progress out of being poor, or out of experiencing widespread poverty. Likewise, economic historians, who had long examined how the industrialized countries achieved their material advance, appreciated that these countries too were once “underdeveloped”—much of economic history became the history of economic development.

II ACCUMULATION AND INDUSTRIALIZATION

Theories of growth and development abound. The most basic ones stress the accumulation of the principal factors of production: labour and capital—the other main factor, land, is there to begin with. Capital is accumulated by savings. The theory rests on the idea that the more capital there is for each person, the more he or she produces. Someone can dig so much with his hands, more with a spade, more still with a mechanical digger. Obviously, it is not just a question of how much capital, but what kind of capital and how effective it is—hence the importance of technology. Today theory also pays a great deal of attention to “human capital”—not just what is invested in machines and infrastructure, but in people: the education and health of a population have a lot to do with the productivity of labour.

Theories of accumulation were closely allied to those of industrialization—for many development thinkers, and particularly for developing world intellectuals themselves, industrialization was almost synonymous with economic development. In the 1960s and 1970s, as developing countries were overcoming colonialism and achieving independence, the industrial countries appeared to have all the advantages in the world economy. It was they who had colonized the developing world; and the colonial powers appeared to have kept the developing world down by pushing them into primary commodity production, producing the raw materials which the industrial world wanted, and hindering their attempts to become manufacturing economies. The development debate divided between a range of more or less radical views, which stressed the difficulties faced by developing countries in the world economy, and more orthodox views, which stressed the potential for development from within, helped if necessary by the industrialized countries.

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III MARXISM

Karl Marx himself wrote little directly on development but was certainly an influence on thinking about it—though only through some of what he wrote. Marx held that capitalism would help development by breaking down the obstructive precapitalist “modes of production” which he believed to prevail in the colonies. This was part of his stage theory, in which economies inevitably progressed from capitalism to socialism to communism. More influential in development thinking were his views on class relations and exploitation, and the “extraction of surplus” and its importance to the accumulation of capital, all representative of Marxist economics.

IV DEPENDENCY THEORIES

There were also less Marxist but still radical views known as “dependency” theories, particularly prominent in Latin America, but common elsewhere. They stressed how markets favoured the industrialized countries, which continued to get raw materials cheaply from the developing world, owned the technology developing countries needed, and had the economic power to admit exports from the developing world only when it suited them. Such views gave a strong bias in the development world to a belief in the virtues of autonomous development. Developing countries could only grow behind protective barriers which kept out exports from the industrialized world; investment by multinationals would mainly harm them and was regarded with suspicion; and since markets would not generate adequate growth and structural change, governments had to have a major hand in planning and promoting the economy, including public sector enterprises to undertake the investments that the market would not provide. For some thinkers, even foreign aid was suspect, a “neo-colonial” instrument to preserve the dominance of the industrial countries and make the world safe for capitalism.

V “ORTHODOX” THEORIES

Quite opposed to all this were the standard views of most Western economists: markets played a mainly positive role in development, and developing countries’ policies of interfering with them were largely self-defeating. In particular, attempts to hold agricultural prices down and force savings out of farmers (“surplus extraction”) were destructive of agricultural growth—economic history showed this growth to be important even for industrialization; and while markets might not generate the kind of development these countries wanted, their governments were often incapable of the tasks they took on. Foreign investment helped growth and the transfer of technology. Foreign aid supplied the additional savings and foreign exchange which poor countries could not generate themselves.

VI INTERNATIONAL ASPECTS OF DEVELOPMENT

Radical views entered into the Cold War aspects of development. There was competition between the West and the Soviet bloc for the allegiance of the developing world, and the rhetoric of exploitative versus benign capitalism played its part in it. But many developing countries wanted to separate themselves from this competition. A movement grew up, much of it organized in an official body known as the Non-Aligned Movement, reaching its height in the 1970s. There was a demand for a New International Economic Order in which the inequities of the world economy as the developing world saw it would be corrected. When the power of the oil-producing countries, who identified with the developing world, was at its height, it looked as though the developing countries might have some leverage to get what they wanted.

But eventually the oil price collapsed, and related swings in financial markets produced a problem of international indebtedness which both weakened and divided the developing world. At the end of the 1970s a new set of world leaders—Ronald Reagan, Margaret Thatcher, Helmut Kohl—brought a new conservatism to international debate, and the kinds of international cooperation implied by the New Economic Order went off the map of political possibility.

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VII THEORY AND REALITY

If one looks at the developing world today, there is a huge range of national experiences. At the better-off end of the spectrum are the successful economies of East and South-East Asia, some oil-rich countries of the Middle East, and some Latin American countries. At the poorer end are the big countries of South Asia—Bangladesh, Pakistan, and to a lesser extent India—and most of Africa south of the Sahara. What has produced these outcomes? It certainly is not just a matter of where they started from. South Korea, one of the most successful countries today, was regarded as a hopeless case in the 1950s. Argentina in the 1930s had very similar living standards to Australia and a quite similar economic structure, yet Australia today is far more prosperous. Many African countries were going backwards in development terms in the 1980s and 1990s and were actually worse off than they had been in earlier decades. Their population growth, unlike most of the rest of the world where it was declining, continued at very high levels. Few of the broad theories of development really explain this varied experience, though they have all contributed useful insights.

The success of the East and South East Asian economies has been a powerful influence on thinking since the 1970s and 1980s. These countries did not accept the pessimism about exports of most of the rest of the developing world; despite the protective barriers erected by industrial countries, they managed to generate rapid expansion of exports of manufactures by skilfully selecting products and markets—with this came fast economic growth, first for the “four tigers”, Hong Kong S. A. R., Korea, Singapore, and Taiwan, now being followed by others such as Indonesia, Malaysia, and Thailand. It became obvious that “dependency” did not prevent their development. So why could not others follow suit?

Far from developing rapidly, economies with large-scale government intervention, trade protection, and inward-looking development were looking very sick by the end of the 1980s. Recession in the world economy exposed their weakness: unsustainable balance of payments and domestic deficits, rapid inflation, international debt, and low growth or even economic decline reached the point where it was widely acknowledged that things had to change. The fact that socialist economies too were beginning to throw off the rigidities of the command economy and move into varying degrees of reliance on markets was influential.

There began to arise a worldwide consensus that greater reliance on market forces was essential for speeding up development where it was lagging, though how far governments should be involved in the development process remained, and remains, controversial. In the 1980s and early 1990s, more and more economies as different as China and India, Brazil and Tanzania, were undergoing market-oriented reforms. The East and South East Asian experience for some was a triumph of the marketplace; but for others, it demonstrated the power of combining market forces with skilful government intervention—more skilful perhaps than could be easily copied by others.

Since the mid-1990s, it appears that much of Asia and Latin America has been set on a more effective development path than before. But the failure of development in much of sub-Saharan Africa gives cause for concern. Much has been learned about how development happens; but without effective government and good policies, and people in good health and equipped with education and skills, this knowledge is hard to put into practice. The main lesson for development economics may be that it has given insufficient attention to the human factor, and to political development.

Contributed By:
Robert H. Cassen