DEVELOPMENT THEORIES:

AN OVERVIEW
DEVELOPMENT ECONOMICS: A POST-WAR
DEVELOPMENT
CONCERN WITH ECONOMIC DEVELOPMENT OF POOR/LESS
DEVELOPED COUNTRIES.
DISILLUSIONMENT WITH EFFICIENT ALLOCATION OF
RESOURCES BASED ON THE NEO-CLASSICAL ECONOMIC
THEORY.
STRONG INFLUENCE OF KEYNES (1936).
ACTIVIST VIEW OF THE STATE
1940s, 1950s and 1960s: PERIOD WHEN THE STATE ROLE
WAS STRONGLY EMPHASISED IN LDCs.
CAPITAL FORMATION, IN THIS VIEW, WAS THE ENGINE OF
DEVELOPMENT.
FREE MARKET IN LDCs WOULD GENERATE LESS
INVESTMENT THAN WAS SOCIALLY DESIRABLE AND
ALLOCATE IT IN LESS THAN SOCIALLY DESIRABLE WAYS.
DEVELOPMENT ECONOMICS COMBINED CAPITAL
FORMATION WITH AN ACTIVIST VIEW OF THE STATE THAT
CLASSICAL ECONOMICS HAD NOT.
SOME MAJOR CONTRIBUTORS
AN EARLY MAJOR ATTEMPT BY ROSENSTEIN-RODAN
(Problems of Industrialisation in Eastern and South-Eastern
Europe, Economic Journal, 1943) -

RR argues for government intervention in the form of a Big

Push approach. He is the first major advocate for a

course of nationally balanced growth.

OTHER MAJOR CONTRIBUTORS INCLUDE THE FOLLOWING.
1950s: NURKSE (1953,1959), PREBISCH (1950), SINGER (1950),
SCITOVSKY (1954), LEWIS (1954, 1955), MYRDAL (1957),
LEIBENSTEIN (1957) and HIRSCHMAN (1958)
1960s: ROSTOW (1960), CHENERY (1960, 1962) and DOBB
(1963)

Among the above, Ragnur NURKSE (Problems of

Capital Formation in Underdeveloped Countries, Basil
Blackwell, Oxford,1953) is perhaps the foremost and
most influential advocate of the balanced growth
hypothesis.
AN APPEALING PROPOSITION FOR LATECOMERS:
ENABLING GROWTH TO START BY INDUCING
INVESTMENT IN INDUSTRY.
Why did investment have to be induced at all, as
opposed to arising naturally and optimally as the
result of profit-seeking private investment?
TWO MAIN ARGUMENTS:
a)

RULING MARKET PRICES DO NOT CONVEY

ALL RELEVANT INFORMATION TO PRIVATE
INVESTORS. (Not only are market structures
imperfect, they are also incomplete.)

b)

FIRMS PERCEIVE THEIR DEMAND

SCHEDULES TO BE RATHER INELASTIC
WHERE AN EXPANSION OF OUTPUT WAS
CONCERNED. (The assumption of 'elasticity
pessimism' was perhaps a natural legacy from the
inter-war period. Nurkse, certainly, was
pessimistic about the prospect for international
trade.)

MAJOR THEORETICAL DEVELOPMENTS

(a)

THE VICIOUS CIRCLE HYPOTHESIS

THE NEED TO RAISE SAVINGS FOR CAPITAL
FORMATION (as a deliberate move on the part of the State)
Ragnar Nurkse (1953), Problems of Capital Formation

in Underdeveloped Countries, Basil Blackwell,

Oxford,1953; and
Harvey Leibenstein (1957), Economic Backwardness and
Economic Growth, Wiley, New York.
Nurkse provides a very account of vicious circles of poverty.
According to Nurkse (1953), a circular constellation of forces tending
to act and react upon one another in such a way as to keep a poor
country in a state of poverty. The following proposition puts it nicely:
a country is poor because it is poor.
The vicious circle typically starts with low productivity, which leads to
low output per person. Low output (income) leads to low savings,
and because of low savings there is low net investment. And
because of low investment (or the low building up of the capital stock)
producers are unable to increase productivity or output per person.
Leibensteins (1957) notion of low level equilibrium trap provided an
equally influential theory of self-perpetuating poverty. He went
beyond the subtle approach of the vicious circle trap as provided by
Nurkse. By introducing the influence of expectations of future rates of

growth on investment decisions, Leibenstein helped to bring dynamic

explanations.
(b)

THE COMPLEMENTARY NATURE OF INVESTMENT

DECISIONS
RIGOROUSLY PUT FORWARD BY SCITOVSKY (Two
Concepts of External Economies, Journal of Political
Economy, 1954)
ALMOST ALL THE MAJOR WRITERS OF THE 1950s AND
1960s EMBRACED IT IN ONE FORM OR ANOTHER.

TWO MAJOR ASPECTS:

(c)

(i)

ECONOMIES OF SCALE OR INDIVISIBILITIES IN

INVESTMENT MAY INDUCE A PRODUCER TO
CHOOSE MORE OR LESS THAN PROFITMAXIMISING INVESTMENT.

(ii)

THE MARGINALIST APPROACH GENERALLY

OVERLOOKS THE DYNAMIC CHARACTER OF AN
INVESTMENT DECISION RAISING THE RATE OF
RETURN TO CAPITAL FOR OTHER FUTURE
INVESTORS.

SECULAR DETERIORATION OF THE TERMS OF TRADE OF

PRIMARY PRODUCE
STRONGLY INFLUENCED BY PREBISCH (1950)
A NUMBER OF OTHER CONTRIBUTORS
INCLUDING SINGER (1950) AND MYRDAL (1956)
ALSO EMPHASISED THIS.

GENERAL ACCEPTANCE OF A NUMBER OF PROPOSITIONS:

1.

Economic development is a discontinuous process of

structural transformation.

2.

Above a certain critical minimum level of per capita

income, growth tends to become self-sustaining.

3.

To break out of the poverty trap and achieve selfsustaining growth, a critical minimum effort or
big push is required.

4.

While this push requires many inputs, its single most

important component is massive increase in the ratio of
investment to national income.

5.

Development entails industrialisation which, by choice

or from necessity, will concentrate on satisfying the home
market for manufactures.

DISSIDENT VOICES
(a)

RIGHT-WING CRITICS
P T BAUER (1972), A LEADING CRITIC OF THE
MAINSTREAM DEVELOPMENT ECONOMICS, DOES
NOT APPROVE ACTIVIST STATE.
Jacob VINER (1952) and Hla MYINT (1954) WERE
AMONG MORE MODERATE AND EARLY CRITICS.
Deepak LAL (1985) IS A RECENT VOCAL CRITIC.
THE WORLD BANK AND THE IMF ARE ALSO VERY
CRITICAL OF THE INEFFICIENCIES OF RESOURCE
USE, FOLLOWING AN ACTIVE GOVERNMENT ROLE
IN DEVELOPMENT.

(b)

MARXIST CRITICS
ALTHOUGH AGREE WITH THE CRITICISMS RAISED
BY THE MAINSTREAM DEVELOPMENT ECONOMICS,
THEY DO NOT BELIEVE THAT THE CAPITALIST MODE
OF DEVELOPMENT WILL HELP THE DEVELOPING
COUNTRIES ACHIEVE ECONOMIC DEVELOPMENT.
EMPHASIS ON COLONIAL AND NEO-COLONIAL
EXPLOITATION.
MAJOR CONTRIBUTORS INCLUDE Paul BARAN
(1957), Andre GUNDAR FRANK (1966) and Samir AMIN
(1974).

1970s and 1980s: DOWNGRADING OF THE ROLE OF

THE STATE IN BOTH DEVELOPED AND DEVELOPING
COUNTRIES
IN THE LDC CONTEXT, THREE MAIN KINDS OF EVIDENCE
WERE PRESENTED.
1. The use of the state to promote Import Substituting
Industrialisation (ISI) during the 1950s and 1960s had
resulted in inefficient industries requiring permanent
subsidisation, with little prospect of achieving international
competitiveness.
2. Extensive government intervention tended to generate
rent-seeking on a significant scale, i.e., to divert the
energies of economic agents away from production and
into lobbying for increased allocation of government
subsidies and protection.
3. Some of the most successful LDCs - including Taiwan,
South Korea, Hong Kong and Singapore had achieved
extraordinary industrial growth by using an outwardoriented model driven by market incentives and a strong
private sector.

IN THE NEOCLASSICAL VIEW, THE ENGINE OF DEVELOPMENT

IS NOT SO MUCH CAPITAL FORMATION AS EFFICIENT
ALLOCATION OF RESOURCES.
Once institutional arrangements are in place to generate an
efficient allocation of resources investment can be left to take care
of itself.
GOVERNMENT SHOULD LIMIT ITS ACTIVITIES
TO IMPROVE THE FUNCTIONING OF MARKETS AND
TO PROVIDING ONLY THOSE GOODS WHERE THE
GOVERNMENT HAS A CLEAR COMPARATIVE ADVANTAGE
RELATIVE TO PRIVATE GOODS.
IF PRICES REFLECT SOCIAL OPPORTUNITY COSTS, THE
UNDERLYING ARGUMENT GOES, PROFIT INCENTIVES WILL
DRIVE THE ECONOMY TO ITS MAXIMUM PRODUCTION
POTENTIAL.
NEOCLASSICAL PRESUMPTIONS:
THE THEORY
BELIEF IN COMPARATIVE ADVANTAGE.
THAT ANY NATION WILL BE BETTER OFF IF IT
CONCENTRATES ON THOSE ACTIVITIES ON WHICH ITS
COSTS ARE RELATIVELY CHEAPER.
CRITICISMS:
THE CLASSICAL CASE FOR FREE TRADE AS A MEANS OF
HIGHER GROWTH IS SHAKY.

THE THEORY OF COMPARATIVE ADVANTAGE COVERS ONLY

THE EFFECTS OF ONCE-AND-FOR-ALL CHANGES IN TRADE
RESTRICTION. IT FAILS TO SPECIFY A CAUSAL
MECHANISM LINKING REALISATION OF COMPARATIVE
ADVANTAGE TO HIGHER GROWTH.
PAUL KRUGMANS CONCLUSION:
The idealised theoretical model on which the classical case for
free trade is based will not serve us any more. The world is
more complex than that, and there is no question that the
complexities do open, in principle, the possibility of successful
activist trade or industrial policy. (1986, p.15)
IN CONDITIONS OF INCREASING RETURNS TO SCALE AND
IMPERFECT WORLD MARKETS, A COUNTRYS GROWTH CAN
BE FASTER IF IT RESTRICTS TRADE TO SOME DEGREE.
LATE 1980s and 1990s:
ATTEMPTS TO REVIVE DEVELOPMENT THEORY
TWO INFLUENTIAL PUBLICATIONS - AMSDEN (1989) AND
WADE (1990) - SERIOUSLY CHALLENGED THE
NEOCLASSICAL ATTACK ON DEVELOPMENT THEORY.
BOTH AMSDEN AND WADE HEAVILY CRITICIZED THE
NEOCLASSICAL STANDPOINT AND, IN PARTICULAR, THEIR
INTERPRETATION OF THE SUCCESS OF THE LATE
INDUSTRIALISERS ON THE FREE MARKET APPROACH.
WADE (1990) ARGUED A CASE FOR GOVERNING THE
MARKET. IN EAST ASIA, MARKET GUIDANCE WAS
EFFECTED BY
AUGMENTING THE SUPPLY OF INVESTIBLE
RESOURCES (through spreading or socialising the risks
attached to long-term investment), and

STEERING THE ALLOCATION OF INVESTMENT (by

methods which combine government and entrepreneurial
preferences).
IN PARTICULAR, THE GOVERNMENT GUIDED THE
MARKET BY VARIOUS WAYS (pp.27-28) including
Controlling the financial system and making private
financial capital subordinate to industrial capital;
Maintaining stability in some of the main economic
parameters that affect the viability of long term
investment, especially the exchange rate, the interest
rate, and the general price level;
Modulating the impact of foreign competition in the
domestic economy and prioritizing the use of scarce
foreign exchange;
Promoting exports;
Promoting technology acquisition from MNCs and
building national technology system; and
Assisting particular industries.
KRUGMAN (1992) PROVIDED STRONG INTELLECTUAL BACKUP
FOR DEVELOPMENT ECONOMICS, THOUGH CAUTIONED
AGAINST DOGMATIC GOVERNMENT INTERVENTION.

No clarion call for interventionist trade and industrial

policies, while cautioning against carrying a free-market
orthodoxy too far.

There is an intellectually solid case for some government

promotion of industry.

Krugman adopts a cautious approach while advocating the case for

high development theory:

It is probably time once again to focus on market as well as

government failures. (p.32)

J STIGLITZ (2002): HIGHLY CRITICAL OF THE CURRENT

LIBERALIZATION STRATEGY
JOSEPH STIGLITZ, who won the Nobel Prize in Economics in
2001, HAS BEEN ANOTHER STRONG CRITIC OF THE
MARKET STRATEGY PUSHED FORWARD BY THE IMF AND
THE WORLD BANK, AS HE BELIEVES THAT THE STRATEGY IS
BASED ON THE OUTWORN PRESUMPTION THAT MARKETS,
BY THEMSELVES, LEAD TO EFFICIENT OUTCOMES.
(J Stiglitz, 2002)
While arguing for a supportive role of the state in developing
countries, which Stiglitz believes has played an important
role in the economic development of the industrialized world,
he exposes the hypocrisy of the Western countries, in
particular of the United States which, while remaining highly
interventionist, has been pushing developing countries to
remove their interventions including trade barriers.
As Stiglitz observes, Adam Smith was far more aware of the
limitations of the market, including the threats posed by
imperfections of competition, than those who claim to be his
latterday followers. (Stiglitz, 2002, p.219)
However, Stiglitz also is critical of weak governments and
too-intrusive governments which have both hurt stability and
growth. (p.220)

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Mozammel Huq
28 January, 2005

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