Theories of Development and Underdevelopment DEVELOPMENTALIST THEORIES Ch. 5 in Cypher & Dietz

DEVELOPMENTALIST THEORIES of ECONOMIC DEVELOPMENT BASIC CHARACTERISTICS: Post-WWII Pioneers of Development Economics Loose school of thought; less theoretical; more historical and practical approach to the question of how to develop Optimistic, believe in the inevitability of development as a linear process that all nations go through Emphasize large-scale industrialization as the key to the development process Profound respect for market forces yet support large-scale government intervention to force economic growth Similar to Keynesians in regard to advocacy for government intervention and also that poor economic performance reflects a lack of aggregate demand LEADING THEORETICIANS: Theory of the Big Push: Rosenstein-Rodan Theory of balanced growth: Ragnar Nurkse Unbalanced Growth: Hirschman Growth with Unlimited Supply of Labor: Lewis Stages of Growth Theory: Rostow

Theory of the Big Push Paul Rosenstein-Rodan hidden potential in developing economies large-scale industrialization and infrastructural development is key more investment is needed in many places at one time but this cannot be left to the market due to information and appropriation failures (“externalities”) the big push needs to come from the state to escape the low-level equilibrium trap

Theory of balanced growth Ragnar Nurkse export pessimism: exports cannot be depended upon as the source of growth massive injection of new technology, machines, production processes is the key to development hence need for domestic industrialization large scale industrial investments (i.e. expanded supply) would also generate large scale demand, hence leading to: BALANCED GROWTH

Industrial Linkages & Unbalanced Growth Alfred Hirschman Resource constraints in developing countries necessitate prioritization as to where to invest first; the big push should be only for a limited no of industries, hence initially unbalanced growth; this will initially result in unbalanced growth such that inducing development in key sectors first will create overcapacity here; cheapening their output due to economies of scale; this will stimulate upstream investments: eg. oversupply electric power; as electricity becomes cheaper this will stimulate investments in those sectors that use electric power in big amounts. The key sectors for initial investment should be determined on the basis of industrial backward and forward linkages.

Growth with unlimited supply of labor Arthur Lewis main difference between North and South: the relative weight of agricultural versus industrial production and employment. Hidden potential of developing countries for growth lies in unlimited supplies of rural labor inherent in their large agricultural sector ready to be pulled into the modern urban sector. in the South, coexistence of the two sectors is dualistic such that: agricultural sector provides labor to industry; and industry buys food from them; but there is little connection between them productivity in agricultural sector is so low that there is disguised unemployment; i.e. surplus labor transformation dynamic lies in the attraction of this rural surplus labor into the industry such that while industrial production increases, there is no change in agricultural production.

The Labor Surplus Model

The Labor Surplus Model

The Labor Surplus Model

Growth with unlimited supply of labor Arthur Lewis Distribution of Income: Higher level of savings and investment in the industrial sector is key to development; but only capitalist class is capable of savings and investment. A limit will be imposed on this growth process as L surplus is depleted and wages increase → undesirable from Lewis’ perspective. Hence Lewis advocates income distribution in favor of the capitalist class and against labor.

Critics of the Lewis Model Advocacy for pro-capital; anti-labor income distribution; hence increasing inequality for the sake of growth No consideration of Institutional Factors influential in wage determination such as minimum wage policies, labor unions and collective bargaining practices Assumption about Capitalist Strata as a source of investment and growth can be ill founded

Stages of Growth Theory Walt Whitman Rostow The Rostowian take-off model claims to be a universal historical model of economic growth which was developed on the basis of the economic history of Britain. The model claims that economic modernization occurs in five basic stages, in changeable time period. Traditional society Preconditions for take-off Take-off Drive to maturity Age of high mass consumption Rostow argues this is a universal historical categorization of stages of growth that all societies necessarily go through with similar experiences.

Traditional Society output consumed by producers rather than traded trade carried out by barter; goods exchanged for other goods agriculture → dominating sector; labor-intensive resource allocation determined by traditional methods of production than scientific knowledge “pre-Newtonian” or “pre-scientific” society dominated with a perspective of long-term fatalism landholders plays a dominant and important role in the determination of political and economic power

Pre-conditions for Take-off destruction of traditional society through outside forces such as colonialism emergence of entrepreneurial and managerial class development of a financial sector and increase in investment infrastructural development modern business using new and sophisticated methods of production emergence of “reactive nationalism”

Take-off into sustained growth increasing industrialization, production and employment switches from agriculture to manufacturing growth concentrated in a few regions of the country and in one or two manufacturing industries investment reaches over 10% of GNP evolution of new political and social institutions supporting the industrialization growth becomes self-sustaining as investment leads to increasing incomes in turn generating more savings to finance further investment.

Drive to Maturity the economy starts spreading into new areas technological innovation provides expanded range of investment opportunities. the economy starts producing a wide range of goods and services and there is less reliance on imports this diversity leads to greatly reduced rates of poverty and rising standards of living, as the society no longer needs to sacrifice its comfort in order to make certain sectors more productive.

Age of High Mass Consumption the economy is oriented towards mass consumption service sector becomes increasingly dominant society is now devoted to the pleasures of consumer choice, the pursuit of security, and the enjoyments of the arts and leisure

Critics of the Stages of Growth Theory by Rostow attempts to universalize the experience of a particular country (Britain) in a specific period of time (16th to 20th century) External factors such as colonization / imperialism can hinder the process of development in the colonized nations descriptive; no analysis of how the pre-conditions for take-off are to emerge empirically not validated

DEVELOPMENTALIST THEORIES of ECONOMIC DEVELOPMENT BASIC CHARACTERISTICS: Post-WWII Pioneers of Development Economics Loose school of thought; less theoretical; more historical and practical approach to the question of how to develop Optimistic, believe in the inevitability of development as a linear process that all nations go through Emphasize large-scale industrialization as the key to the development process Profound respect for market forces yet support large-scale government intervention to force economic growth Similar to Keynesians in regard to advocacy for government intervention and also that poor economic performance reflects a lack of aggregate demand LEADING THEORETICIANS: Theory of the Big Push: Rosenstein-Rodan Theory of balanced growth: Ragnar Nurkse Unbalanced Growth: Hirschman Growth with Unlimited Supply of Labor: Lewis Stages of Growth Theory: Rostow