1 Development economics core course Lecture 6 Structuralism, dependency theory and other radical approaches 1

2 Important factors for growth & development (overview) 1.Capital 2.Population growth 3.Technical progress 4.Human capital, externalities Today: Balance of payments, regional specialisation, increasing returns, dependency, exploitation Coming up  next lecture: complementarities, increasing returns (in a modern formulation)  Dualism  Agriculture  Inequality and poverty  Trade  Aid  Role of the state

3 Paradigms (schools of thought) in development economics (brief) 1.Neoclassical paradigm 2.Structuralism 3.Radical approaches  Marxism  Neo-marxism  Dependency theory

Strukturalism Characteristics of the center High manufacturing production and low population growth Ability to develop technology Productivity improvements, good export prices Elasticity of imports less than one Institutions geared towards production and growth. Characteristics of the periphery Dualism: small modern sector & large subsistence sector High population growth Small open modern sector Not able to develop own technology; use of in-appropriate technology Elasticity of imports greater than one Raoul Prebisch Celso Furtado, Hans Singer Dudley Seers 4

5 Gunnar Myrdal and cumulative causation Look at regional differences (within a country) Theory about instability, dynamic change, cumulative and circular causation. Difefrs from equilibrium theory.  Regions with high growth attract resources (labour, capital, entrepreneurs etc) from slowly growing regions  These are made worse off : backwash effect  Compare to neoclassical theory, where factor mobility leads to equal factor prices between regions (discuss)  Myrdal: growing differences due to multiplicator / accelerator effects and increasing returns

6 Take a closer look Benefits of being a leader:  Accelerator and multiplikator effects (jvf Keynes)  Industry grows faster than agriculture  Increasing returns to scale, learning by doing  Growth  productivity gains (Verdoorn’s lov)  capital  productivity gains (cf Ray ch 4) 2 inter-regional effects 1.Polarisation (Increasing returns) 2.Trickle-down(demand efefcts, remittances etc) ?Hvad gør regeringerne? ?Hvad gør donorer?

Prebisch on the terms of trade Source: Prebisch, 1962 (from Hunt, 1989). 7

Structuralists on international trade Reject comparative advantage as basis for specialisation Terms of trade pessimism (Prebisch and others) Poor countries have flexible wages, rich countries tend to have rigid wages and prices Rich countries therefore can absorb their productivity gains, poor cannot, and terms of tarde evolve to the benefit of rich countries Low import coefficient in the US Income elasticities of demand (Singer) Synthetical substitutes (Nurkse) Growing protectionims in European (and US) agriculture (Prebisch) 8 Discussion: EU, WTO and development today?

Income elasticity of demand C = Center - produces industrial goods P = Periphery – produces primary goods Income elasticity for industrial goods, e i = 1.3 Income elasticity for primary goods, e p = 0.8 Begin with equal growth in both countries, g C = g P = 3 % Import growth in center, m C = g C x e p = 3,0 x 0,8 = 2,4% Export growth in center, x C = g P x e i = 3,0 x 1,3 = 3,9% Import growth in periphery, m P = g P x e i = 3,0 x 1,3 = 3,9% Export growth in periphery, x P = g C x e p = 3,0 x 0,8 = 2,4% (all in value). Assume constant prices Balance of payment neutral growth: m P = x P or g P x e i = x P so g P = x P /e i = 1,85 9

10 Conclusions on this little illustration Policy options  Reduced growth  Protectionism, eg quantitative trade restrictions  Borrowing abroad  Stimulation of exports Developing countries have done all of this to a varying extent How?

General structuralist policy-conclusions Foreign demand as a source of growth? Possibility of generating growth in the domestic economy? Industrialisation through government directed import substitution only road ahead 11

Strukturalism: summing up Eclectic Loose ends (but has later been reborn in ”modern” guise): see Krugman link on course homepage Development is not just growth Focus on the structure of the economy, and on industry Bottlenecks and disequilibrium Inequality, tensions and conflict Need for institutional analyses Planning and state intervention How did it go in practice??? 12

Radical approaches - intro Baclground: Marxist ideas and vocabolary Many Third world contributions Political involvement and normative theory Is capitalistic development in the periphery possible? Marxism Neo-marxism, Paul Baran, André Gunder Frank, Arghiri Emmanuel Dependency theories, André Gunder Frank, Samir Amin, Celso Furtado, Sunkel 13

A true ’radical’ One must denounce the existence of economic, financial, and social mechanisms which, although they are manipulated by people, often function almost automatically, thus accentuating the situation of wealth for some and poverty for the rest. These mechanisms, which are maneuvered directly or indirectly by the more developed countries, by their very functioning, favor the interests of the people manipulating them. But in the end they suffocate or condition the economies of the less developed countries. 14 The rich in the periphery countries are allied with the center in exploiting the poor and the natural resources of the periphery, which is therefore maintained in under-development.

15 Unequal exchange Unequal exchange = (unfair) differences in terms of trade Wage differences cause the unequal exchange (Emmanuel) Why wage differences? Institutional reasons Produktivity differences?

Is capitalistic development possible 1.Marxism Poor countries become rich but remain exploited until global revolution 2.Neo-marxism Poor countries cannot grow rich 3.Dependency theory Development difficult but possible with the right policy 16

17 Summing up What were the issues? Constant or growing regional inequality due to increasing returns etc Strukturalists and balance of payment constrained growth Unequal exchange and exploitation ?Globalisation critique, ATTAC, WTO protests– a modern version of this?