Addis Abeba University

Collage of social science

Department: Political Science and International Relations

Course Title: Introduction to Politics of Development (PSIR2252)

Degree Program: BA in political Science and International

Relations

Module Name: Politics of Development

Prepared by: Mr. Tibebu Elias

Date: 09/03/2024 G.C

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Table of Contents
CHAPTER ONE .......................................................................................................................................... 3
1. Understanding Development ................................................................................................................ 3
1.1. Definition of Development............................................................................................................ 3
1.2. Economic Growth and Development ............................................................................................ 4
1.3. Indicators of Development ............................................................................................................ 5
1.4. Core Elements and Objectives of Development ........................................................................... 6
1.5. Under Development ...................................................................................................................... 9
CHAPTER TWO........................................................................................................................................ 10
2. Basic Features of Developing Countries ............................................................................................ 10
2.1. Definition and Characteristics of Poor Nations........................................................................... 10
2.2. Diverse Structures and Common Characteristics of Developing Nations .................................. 11
CHAPTER THREE .................................................................................................................................... 23
3. Theoretical Frame Work - Contending Theories of Development .................................................... 23
3.1 The Linear stages Theory ............................................................................................................. 23
3.2. Structural-Change: Two sectors model and patterns of Development ........................................ 39
3.3Underdevelopment and Marxism: from Marx to the theories of imperialism and dependency ... 45
3.4. The Liberal Theory of Development ........................................................................................... 60
3.5 Neo–Liberal Perspective of Development ................................................................................... 65
3.6. The Neoclassical counter-revolution ........................................................................................... 75
3.7 Alternative Development ............................................................................................................. 79
3.8. Developmental state .................................................................................................................... 83
CHAPTER FOUR ...................................................................................................................................... 85
2.1 Fundamental Development Issues .................................................................................................... 85
Indicative Resources .............................................................................................................................. 94

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 CHAPTER ONE
1. Understanding Development

1.1. Definition of Development

Because the term development mean different things to different people, it is important at the outset
that we have some working definition or core perspective on its meaning. And there are two different
conceptions of development: the traditional economic measures and the new economic view of
development.
A. Traditional Economic Measures
In strictly economic terms, development has traditionally meant the capacity of a national economy,
whose initial economic condition has been more or less static for a long time, to generate and sustain
an annual increase in its gross national product (GNP) at rates of perhaps 5% to 7% or more. A
common alternative economic index of development has been the use of growth of income per capita
or per capita GNP to take into account the ability of a nation to expand its output at a rate faster than
the growth rate of its population. Levels and rates of growth of ‗real‘ per capita GNP (monthly growth
of GNP per capita minus the rate of inflation) are normally used to measure the overall economic
well-being of a population – how much of real goods and services is available to the average citizen
for consumption and investment.
Economic development in the past has also been typically seen in terms of the planned alteration of the
structure of production and employment so that agricultures shares of both declines and that of the
manufacturing and service industries increases. Development strategies have therefore usually
focused on rapid industrialization, often at the expense of agriculture and rural development. Finally,
these principal economic measures of development have often been supplemented by casual reference
to non-economic social indicators: gains in literacy, schooling, health conditions and services, and
services, and provision of housing, for instance.
On the whole, there fore, prior to the 1970s, development was nearly always seen as an economic
phenomenon in which rapid gains in overall and per capita GNP growth would either ―trickle down‖
to the masses in the form of jobs and other economic opportunities or create the necessary condition
for the wider distribution of the economic and social benefits of growth. Problems of poverty,
unemployment, and income distribution were of secondary importance to ―getting the growth job
done‖.

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B. The New Economic View of Development
The experience of the 1950s and 1960s, when many third world nations did realize their economic
growth-targets but the level of living of the masses of people remained for the most part unchanged,
signaled that something was very wrong with this narrow definition of development. An increasing
number of economists and policy makers now clamored for the ―dethronement of GNP‖ and the
elevation of direct attacks on wide spread absolute poverty, increasingly inequitable income
distributions, and rising unemployment. In short, during the 1970s, economic development came to be
redefined in terms of the reduction or elimination of poverty, inequality, and unemployment with in
the context of a growing economy. ―Redistribution from growth‖ became a common slogan.

This assertion was neither idle speculation nor the description of a hypothetical situation. A number of
developing countries experienced relatively high rates of growth of per capita income during the
1960s and 1070s but showed little or no improvement or even an actual decline in employment,
equality, and the real incomes of the bottom 40% of their populations. By the earlier growth definition,
these countries were developing: by the newer poverty, equality, and employment criteria, they were
not. The situation in the 1980s and early 1990s worsened further as GNP growth rate turned negative
for many LDCs and governments, facing mounting foreign-debt problems, were forced to cut back on
their already limited social and economic programs.

But the phenomenon of development or the existence of a chronic state of underdevelopment is not
merely a question of a economic or even one of quantitative measurement of incomes, employment,
and inequality. Underdevelopment is a real fact of life for more than 3 billion people in the world- a
state of mind as much as a state of national poverty.

Development must therefore be conceived as a multidimensional process involving major changes in

social structures, popular attitudes, and national institutions, as well as the acceleration of economic
growth, the reduction of inequality, and the eradication of poverty. Development, in its essence, must
represent the whole gamut of change by which an entire social groups with in that system, moves away
from a condition of life widely perceived as unsatisfactory toward a situation or condition of life
regarded as materially and spiritually better.

1.2. Economic Growth and Development

Economic growth has been defined by Arthur Lewis as “the growth of output per head of population”.
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In other words, economic growth refers to an increase in per capita national income. It may be noted
that the subject matter is growth and not distribution. For example, during the Industrial Revolution in
the U.K., there was economic growth. But there was no improvement in the standard of living of the
working classes because they were exploited and made to work for long hours at low wages.

According to Arthur Lewis, economic growth is conditioned by (1) economic activity, (2) increasing
knowledge and (3) increasing capital. In other words, these three factors are labour, technical
improvements and capital. We may add land or resources to the list.

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Economic growth and economic development have received a lot of attention in the 20 century. In an
economy there must be balanced economic growth of all sectors – agriculture, manufacturing industry
and the service sector. Only then, economic growth will benefit all sectors of the population. Not only
that, economic welfare depends not only on the growth of output but on the way it is distributed among
different factors of production in the form of rent, wages, interest and profits.

In the past, economic growth and economic development were used more or less with the same
meaning. For example, they used rate of growth of income per capita or per capita GNP as index of
economic development. And they wanted to see whether the rate of growth of per capita income was
greater than the rate of growth of population. We have to note one more thing. The wellbeing of
population depends on the rate of growth of ‗real‘ per capita GNP. Real per capita GNP refers to the
monetary growth of GNP per capita minus the rate of inflation.

In general terms, we may say if there is decline in poverty, unemployment, and inequality, there is
economic development in the country. Otherwise, even if per capita income doubled, we cannot say
there is economic development. So when we say there is development, there must be improvement in
the quality of life. That means, people must have higher incomes, better education, better health care
and nutrition, less poverty and more equality of opportunity. So according to Michael P. Todaro and
Stephen C. Smith, ―development must be conceived of as a multidimensional process involving major
changes in social structures, popular attitudes and national institutions, as well as the acceleration of
economic growth, the reduction of inequality, and the eradication of poverty‖.

1.3. Indicators of Development

There are five major indicators as listed below:

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  Literacy, education, and skills (literacy, education, training and skills, and opportunities for all
members of society to increase their capacities) — The availability and level of education is an
indicator in its own right; it also contributes to increased individual and social choice, and is a
prerequisite for better democracy and governance.

 Health (life expectancy, maternal and infant mortality, quality of life, and the levels of health care
available in situations of morbidity) — Physical health and well-being are basic requirements of
stable population growth and the ability to function more effectively on a regular basis.

 Income and economic welfare (high levels of employment, high incomes per capita, and
increased gross national product, with appropriate corrections for environmental protection and
for income equity) — Personal savings and investment to support structural change are important.

 Choice, democracy, and participation (participation in social and economic affairs, with fair
economic rewards, the availability of reasonable choice, and participation in the democratic
process) — The political process can enable or inhibit development. The importance of good
government and appropriate democratic institutions to articulate social goals cannot be
over-emphasized. Participants were not greatly concerned with the formality of these
organizations, but were much more interested in their effectiveness in serving social goals.

 Technology (the capacity to develop technological innovations and to make technological choices)
— Few countries are capable of radical innovation as R&D becomes more expensive and
complicated. For these countries, a more appropriate indicator is the capacity, in terms of
know-how and wealth, to make the appropriate choice between competing technologies and to
develop or adapt technology to fit their own needs.

 Cultural indicators are also obviously important, but can be problematic. They are difficult to
quantify, and there is little consensus about which cultural values actually support development.
OECD countries exhibit varying attitudes and approaches to support learning, innovation, wealth
creation, and social development. There are similar differences found in developing countries.

1.4. Core Elements and Objectives of Development

Having an understanding of the nature and essence of the concept development, now we will move to
see to what elements and objectives development should be geared towards. One might enumerate
several elements and objectives, but in this lesson, we will discuss those points which are more

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 conclusive and agreed upon.

1.4.1 Core Values of Development

The appropriate answer for developing nations in the first decade of the twenty first century is not
necessarily the same as it would have been in previous decades. But we agree that at least three basic
components or core values should serve as a conceptual basis and practical guidelines for
understanding the inner meaning of development. These core values – sustenance, self – esteem, and
freedom – represent common goals sought by all individuals and societies. They relate to
fundamental human needs that find their expression on in almost all societies and cultures at all times.
Let us therefore examine each in turn.

Sustenance: The ability to meet basic needs

All people have certain basic needs without which life would be impossible. These live – sustaining
basic human needs include food, shelter, health, and protection. When any of these is absent or in
critically short supply, a condition of ―absolute underdevelopment‖ exists. A basic function of all
economic activity, therefore, is to provide as many people as possible with the means of overcoming
the helplessness and misery arising from a lack of food, shelter, heath and protection. To this extent,
we may claim that economic development is a necessary condition for the improvement in and
continuous economic progress at the individual as well as societal level, without which the realization
of the human potential would not be possible. One clearly has to ―have enough in order to be more.‖
Rising per capita incomes, the elimination of absolute poverty, greater employment opportunities, and
lessening income inequalities therefore constitute the necessary but not sufficient conditions for
development.

Self Esteem: To be a person

The second universal component of the good life is self – esteem – a sense of worth and self – respect,
of not being used as a tool by others for their own needs. All peoples and societies seek some basic
form of self – esteem, although they may call it authenticity, identity, dignity, respect, honor, or
recognition. The nature and form of this self – esteem may vary from society to society and from
culture to culture. However, with the proliferation of the ―modernizing values‖ of developed nations,
many societies in developing countries that have had a pronoun sense of their own worth suffer from

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serious cultural confusion when they come in contact with economically and technological advanced
societies. This is because national prosperity has become an almost universal measure of worth. Due
to the significance attached to material values in developed nations, worthiness and esteem are
nowadays increasingly conferred only on countries that possess economic wealth and technological
power, those that have ―developed‖.

Freedom from servitude: To be able to choose

The third and final universal value that should constitute the meaning of development is the concept
of human freedom. Freedom here is to be understood in the sense of emancipation from alienating
material condition of life, from social servitude to nature, ignorance, other people, misery, institutions,
and dogmatic beliefs, especially that one‘s poverty is one‘s predestination.

Freedom involves an expanded range of choice for societies and their members together with a
minimization of external constraints in the pursuit of some social goal we call development. W.
Arthur Lewis stressed the relationship between economic growth and freedom for servitude while he
concluded that ―the advantage of economic growth is not that wealth increases happiness, but that it
increases the range of human choice, wealth can enable people to gain greater control over nature and
the physical environment (e.g. the production of food, clothing, and shelter) than they would have if
they remained poor. It also gives them the freedom to choose to live a life of spiritual contemplation.
The concept of human freedom should also encompass various components of political freedom of
expression, political participation, and equality of opportunity. Some of the most notable economic
success stories of the 1970s and 1980s (Saudi Arabia, Chile, South Korea, Singapore, Malaysia,
Thailand, Indonesia, Turkey, and China, among others) did not score high on the 1991 human
Freedom index compiled by the United Nations Development Program (UNDP).

1.4.2 The Three Objectives of Development

We may conclude that development is both a physical reality and a state of mind in which society has,
through some combination of social, economic, and institutional process the specific components of
this better life, development in all societies must have at least the following three objectives.

1. To increase the availability and widen the distribution of basic life, sustaining goods such
as food, shelter, Health, and protection.
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 2. To raise levels of living, including, in addition to higher incomes, the provision of more jobs,
better education, and greater attention to cultural and humanistic values, all of which will serve
not only to enhance material well-being but also to generate great individual and national self
-esteem.
3. To expand the range of economic and social choices available to individuals and nations by
freeing them from servitude and dependence not only in relation to other people and
nation–states but also to the forces of ignorance and human misery.

1.5. Under Development

Underdevelopment is the state of an organism or of an organization (e.g. a country) that has not
reached its maturity. Underdevelopment takes place when resources are not used to their full
socio-economic potential, with the result that local or regional development is slower in most cases
than it should be. Furthermore, it results from the complex interplay of internal and external factors
that allow less developed countries only a lop-sided development progression. Underdeveloped
nations are characterized by a wide disparity between their rich and poor populations and an unhealthy
balance of trade.
The economic and social development of many developing countries has not been even. They have an
unequal trade balance which results from their dependence upon primary products (usually only a handful) for
their export receipts. These commodities are often (a) in limited demand in the industrialized countries (for
example: tea, coffee, sugar, cocoa, bananas); (b) vulnerable to replacement by synthetic substitutes (jute,
cotton, etc); or (c) are experiencing shrinking demand with the evolution of new technologies that require
smaller quantities of raw materials (as is the case with many metals). Prices cannot be raised as this simply
hastens the use of replacement synthetics or alloys, nor can production be expanded as this rapidly depresses
prices. Consequently, the primary commodities upon which most of the developing countries depend are
subject to considerable short-term price fluctuation, rendering the foreign exchange receipts of the developing
nations unstable and vulnerable. Development thus remains elusive. The world consists of a group of rich
nations and a large number of poor nations. It is usually held that economic development takes place in a
series of capitalist stages and that today‘s underdeveloped countries are still in a stage of history through
which the now developed countries passed long ago. The countries that are now fully developed have never
been underdeveloped in the first place though they might have been undeveloped.

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 CHAPTER TWO
2. Basic Features of Developing Countries
2.1. Definition and Characteristics of Poor Nations
The most common way to define the developing world is by per-capital income. Several international
agencies including the Organization for Economic Cooperation and Development (OECD) and the
United Nations offer classifications of countries by their economic status, but the best Known system is
that of the International Bank of Reconstruction and Development (IBRD), more commonly known as the
World Bank.

In the World Bank‘s classification system, 208 economies with a population of at least 30,000 are ranked
by their levels of Gross National Income (GNI) per capital. These economies are then classified as Low
Income Countries (LIC), Lower–Middle Income Countries (LMC), Upper- Middle Income
Countries (UMC), High-Income, and Other High-Income Countries.

Generally speaking the developing countries are those with low, lower – middle, or upper- middle
incomes. These countries are grouped by their geographic region in table 2.1, making them easier to
identify. In 2000, Low income countries are defined as having a per–capita gross national income (GNI)
of $755 or less; upper- middle income countries between $2,996 and $9,265 and high income
countries have incomes of $9,265 or more.

Note, however, that a few of the countries grouped as other high income economies in table 2.1 are
sometimes classified by the UN as developing countries, for example, high–income countries that have
one or two highly developed export sectors but in which significant parts of the country‘s income level,
may be viewed as still developing. Examples may include oil exporters such as Kuwait, Qatar, and the
United Arab Emirates. Indeed, some classifications such as that of the OECD and some of the UN
schemes offer a separate category for members of the Organization of Petroleum Exporting Countries
(OPEC). However, OPEC includes low – income countries such as Nigeria and Indonesia, and middle
income countries (MICs) such as Ecuador and Gabon, with much more profound development problems.

Upper – income economies also include some tourism – dependent islands with lingering development
problems. Even a few of the high income OECD member countries, notably Portugal and Greece have

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been viewed as developing countries at least until very recently.
Nevertheless, the characterization of the developing world as developing world as Sub-Saharan Africa,
North Africa, the Middle East and Asia except for Japan, Latin America and the Caribbean, and the
transition countries of East Europe and Central Asia including the former Soviet Union, remains a useful
generation. In contrast, the developed world constituting the OECD is comprised of the countries of
Western Europe, North America, Japan, Australia and New Zealand. Sometimes a special distinction is
made among upper– middle income economies, designating some that have achieved relatively advanced
manufacturing sectors as “newly industrializing countries”, or NICs.

Yet another way to classify the developing world is through their degree of international indebtedness,
the World Bank classifies countries as severely indebted, moderately indebted, and less indebted. Finally,
the United Nations development program (UNDP) classified countries according to their level of human
development, including health and education attainments.

The simple division of the world into developed and developing countries is often very useful for
analytical and policy purposes. However, the wide income level of the latter serves as an early warning
for us not to over-generalize.

Nevertheless, despite the obvious diversity of these countries most developing nations share a set of
common and well-defined goals. These include the reduction of poverty, inequality, unemployment, the
provision of minimum levels of education, health housing, and food to every citizen, the broadening of
economic and social opportunities, and the forging of a cohesive nation – state.

2.2. Diverse Structures and Common Characteristics of Developing Nations

It is hazardous to try to generalize too much about the 160 member countries of the United Nations (UN)
that constitute the developing world. While almost all are poor in money terms, they are diverse in culture,
economic conditions, and social and political structures, thus, for example, low income countries include
India, with about one billion people and 26 states, as well as Grenada, with less than 100,000 people,
fewer than most cities in the United States.

Large size entails complex problems of national cohesion and administration while offering the benefits
of relatively large markets, a wide range of resources, and the potential for self sufficiency and economic

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diversity. In contrast, for many small countries the situation is reversed, with problems include: limited
markets, shortage of skills, scarce physical resources, weak bargaining power, and little prospect for
significant economic self-reliance, but strong incentives for exports of manufactured goods.

In this Lesson, we provide an overview of the great diversity of developing countries. Despite their
variations, however, developing nations share a common set of problems, both domestic and international
problems that in fact define their state of underdevelopment.

2.2.1. The Structural Diversity of Developing Economies

Any portrayal of the structural diversity of developing nations requires an examination of eight critical
components:-

1 The size of the country (Geographic, population, and income size),

2 Its historical and colonial background,
3 Its endowments of physical and human resources,
4 Its ethnic and religious composition,
5 The relative importance of its public and private sectors,
6 The nature of its industrial structure,
7 Its degree of dependence on external economic and political forces and,
8 The distribution of power and the institutional and political structure with in the nation.

Size and Income Level

Obviously, the sheer physical size of a country, the size of its population, and its level of national income
per capital are important determinants of its economic potential and major factors differentiating one
developing nation from another. Of the 160 developing countries that were full member of the United
Nations in 2000, 87 had fewer than 5 million people, 58 had fewer than 2.5 million, and 38 had fewer than
500,000. Large and populated nations like Brazil, India, Egypt, and Nigeria, exist side-by-side with small
countries like Paraguay, Nepal, Jordan, and Chad. Large size usually presents advantages of diverse
resource endowment, large potential markets, and lesser dependence on foreign sources of materials and
products. But, it also creates problems of administrative control, national cohesion, and regional
imbalances.

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Historical Backgrounds

Most Africans nations were at one time or another colony of western European countries, primarily
Britain, and France but also Belgium, the Netherlands, Italy, Germany, Portugal and Spain. The economic
structures of these nations, as well as their educational and social institutions, have typically been
modeled on those of their former colonial rulers. Countries like those in Africa that only recently gained
their independence are therefore likely to be more concerned with consolidating and evolving their own
national economic and political structures than with simply promoting rapid economic development.

Perhaps more important, the European colonial powers had a dramatic and long lasting impact on the
economies, political and institutional structures of their African and Asian colonies by their introduction
of three powerful and tradition–starting ideas: private property, personal taxation, and the
requirement that taxes be paid in money rather than in kind. These ideas combined expose their
people to many new forms of potential exploitation. The worst impact of colonization was probably felt in
Africa especially if one also considers the earlier slave trade. While in other colonies such as India local
people played a role in colonial governance, in Africa most governance was administered by expatriates.

In Latin America, a large history of political independence plus a more shared colonial heritage (Spanish
and Portuguese) has meant that in spite of geographic and demographic diversity, the countries posses
relatively similar economic, social and cultural institutions and face similar problems. In Asia different
colonial heritages and the diverse cultural traditions of the indigenous peoples have combined to create
different institutional and social patterns in countries such as India (British), the Philippines (Spanish and
American), Vietnam (French), Indonesia (Dutch), and Korea (Japanese).

Physical and Human Resources

A country‘s potential for economic growth is greatly influenced by its endowments of physical resources
(land, minerals, and other raw materials) and human resources (numbers of people, and their levels of
education and skills). The other extreme case of favorable Physical resource endowment is the Persian
Gulf oil states. At the other extreme are countries like Chad, Yemen, Haiti and Bangladesh, where
endowments of raw materials and minerals and even fertile land are relatively minimal.

Geography and climate can also play an important role in the success or failure of development efforts.

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Island economies like Taiwan seem to do better than landlocked economies, and temperate zone countries
do better than tropical zone nations, all other things being equal.

In the realm of human resource endowments, not only are sheer numbers of people and their skill level
important, but so also are their cultural outlooks, attitudes towards work, access to information,
willingness to innovate, and desire for self improvement. Moreover, the level of administrative skills will
often determine the ability of the public sector to alter the structure of production and the time it takes for
such structural alteration to occur. This involves the whole complex of interrelationships between culture,
tradition, religion and ethnic and tribal fragmentation or cohesion. Thus, the nature and character of a
country‘s human resources are important determinants of its economic structure and these clearly differ
from one region to the next.

Ethnic and Religious Composition

One of the direct benefits of the end of the 45 year Cold War between the United States and the former
Soviet Union has been a substantial decline in foreign military and political presence in the developing
world. An indirect cost of this withdrawal, however, has been the acceleration of ethnic, tribal, and
religious conflict, such as in the violent disintegration of Yugoslavia. Although Ethnic and Religious
tensions and occasional violence have always existed in LDCS, the waning of superpower influence
triggered a revival of these internal conflicts and may even have accelerated the incidence of political and
economic discrimination.

Ethnicity and religion often play a major role in the success or failure of development efforts. Clearly, the
greater the ethnic and religious diversity of a country, the more likely it is that there will be internal strife
and political instability. It is not surprising, there, that some of the most successful recent development
experience – South Korea, Taiwan, Singapore, and Hong Kong- have occurred in culturally homogenous
societies.

Today more than 40% of the world‘s nations have more than five significant ethnic populations. In most
cases, one or more of these groups face serious problems of discrimination. Over half of the world‘s
LDCS have recently experienced some form of inter-ethnic conflict. Just in the 1990s, ethnic and
religious conflicts leading to widespread death and destruction took place in Afghanistan, Rwanda,
Mozambique, Sri Lanka, Iraq, India, Somalia, Ethiopia, Liberia, Angola, Myna mat, Sudan, Yugoslavia,
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Haiti, Indonesia, and Zaire(now renamed the Democratic Republic of Congo). Moreover, descendants of
African slaves brought forcefully to the Western hemisphere continue to suffer pernicious discrimination
in countries such as Brazil.

But neither over physical conflict nor widespread violence is necessary to disrupt an economy or cause
political instability. If development is about improving human lives and providing a widening range of
choice to all peoples, racial, ethnic, caste, or religious discrimination can be equally pernicious. For
example, throughout Latin America, indigenous populations have significantly lagged behind other
groups on almost every measure of economic and social progress. Whether in Bolivia, Brazil, Peru,
Mexico, Guatemala, or Venezuela indigenous groups have benefited little from overall economic growth.

Ethnic and religions diversity need not, however, necessarily lead to inequality, turmoil, or instability.
There have been numerous instances of successful economic and social integration of minority or
indigenous ethnic populations in countries as diverse as Malaysia, Mauritius, and Zimbabwe. And in the
United States, diversity is often limited (is not such a problem) as a source of creativity and innovation.
The point is that the ethnic and religious composition of a developing nation and whether or not that
diversity leads to conflict or cooperation can be an important determinant of the success or failure of
development efforts. Too often, economists neglect to recognize this fundamental fact.

Relative Importance of the Public and Private Sectors

Most developing countries have mixed economic systems, featuring both public and private ownership
and use of resources. The division between the two and their relative importance are mostly a function of
historical and political circumstances. Thus, in general, Latin America and Southeast Asia nations have
larger private sectors than south Asian and African nations. The degree of ownership in the private sectors
is another important variable to consider when differentiating among LDCS.

A large foreign – owned private sector usually creates economic and political opportunities as well as
problems not found in countries where foreign investors are less prevalent. Often countries like those in
Africa with severe shortage of skilled human resources have tended to put greater emphasis on public –
sector activities and state run enterprise on the assumption that limited man power can be best used by
coordinating rather than fragmenting administrative and entrepreneurial activities. The widespread
economic failures and financial difficulties of many of these public concerns in countries such as Ghana,
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Senegal, Kenya, and Tanzania raise question, however, about the validity of this assumption as a result,
these and other African nations have moved in recent years towards less public and more private
enterprise the most dramatic examples of which are found in the 15 countries of the former Soviet Union,
and other once centrally planned economies, which have privatized a majority of their once mostly
state-owned economies.

Economic policies, such as those designed to promote more employment, will naturally be different for
countries with large public sectors and ones with sizable private sectors. In economies dominated by the
public sector, direct government investment projects and, large rural work programs will take precedence,
whereas in private–oriented economies, special tax allowance designed to induce private business to
employ more workers might be more common.

Finally, note that the degree of corruption differs widely across developing countries and may influence
both the size of the public sector and the design of privatization progress.

Industrial Structure

Though rapidly urbanizing, the majority of developing countries are agrarian in economic, social, and
cultural outlook. Agriculture, both subsistence and commercial, is a principal economic activity in terms
of the occupational distribution of the labor force, if not in terms of proportionate contributions to the
gross national product. Farming is not merely an occupation but a way of life for a majority of people in
Asia, Africa, and Latin America.

It is in the relative importance of the agricultural, manufacturing, and service sectors that we find the
widest variation among developing nations. Most Latin American countries, having a long history of
independence and generally higher levels of national income than African or south Asian nations, possess
more advanced industrial sectors, but in the 1970s and 1980s, economies like those of Taiwan, South
Korea, and Singapore greatly accelerated the growth of their manufacturing output, and these countries
are rapidly becoming industrialized states. In terms of sheer size, India has one of the largest
manufacturing sectors in the developing world, but this sector is nevertheless small in relation to the
nation‘s enormous rural population.

In spite of common problems, therefore, development strategies may very from one country to the next,
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depending on the current nature, structure, and degree of inter-dependence among its primary, secondary,
and tertiary industrial sector. The primary sector consists of agriculture, forestry, and fishing, the
secondary, mostly of manufacturing and the tertiary, of commerce, finance, transport, and services.

External dependence: Economic, Political, and Cultural

External dependence refers to the degree to which a country is dependent on foreign size, resources
endowment, and political history. For most developing countries, this dependence is substantial. In some
cases, it touches almost every facet of life. Most small nations are highly dependent on foreign investment
and trade with the developed world. Almost all small nations are dependent on importation of foreign and
often excessively capital intensive technologies of production. This fact alone exerts an extraordinary
influence on the character of the growth process in these dependent nations.

But even beyond the strictly economic manifestations of dependence in the form of the international
transfer of goods and technologies is the international transmission of institutions (most notably systems
of education and governance), values, patterns of consumption, and attitudes towards life, work, and self.
A country‘s ability to chart its own economic and social destiny is significantly affected by its degree of
dependence on these and other external forces.

Power Structure, Power, and Interest Groups

In the final analysis, it is often not the correctness of economic policies alone that determines the outcome
of national approaches to critical development problems. The political structure and the vested interests
and allegiances of ruling elites (e.g. Units of a foreign country‘s currency required to purchase the
identical quantity of goods and services in the local (LDC) market as $1 would buy in the United States.
Generally, price of non traded services are much lower in developing countries because wages are so
much lower. Clearly, if LDC domestic price are lower, purchasing power parity (PPP) measures of GNP
per capital will be higher than estimates using foreign – exchange rates as the conversion factor. For
example, China‘s 1997 GNP per capital was only 2.7% of that of United States using the exchange rate
conversion but raises to 12.5% when estimated by the PPP method of conversion income gaps between
rich and poor nations thus tend to be less when PPPs are used.

17
In 1997 GNP the per capital calculations measured in PPP international dollars were as follows, United
States, 28,740, Switzerland, 26,320, Japan 23,400, Canada, 21,860, United kingdom, 20,520, Mexico,
8,120, Colombia, 1,650, Pakistan, 1,590, Bangladesh, 1,050, Nigeria, 880, and Ethiopia,510,(table 2.4
provides a comparison of exchange – rate and PPP GNP per capital for 20 developing countries measured
in PPP dollars, the gap between the highest income country (the United States) and the lowest-income
country (Ethiopia) would be 56 to 1 instead of the 403 to 1 gap using official foreign exchange rates. An
interesting illustration of how volatile exchange – rate fluctuations can break havoc with currency crisis.

2.2.2. Common Characteristics of Developing Nations

We can classify those common characteristics in to seven broad categories:-

1. Low levels of living, characterized by low incomes, inequality, poor health and in adequate
education,
2. Low level of productivity,
3. High rates of population growth and dependency burdens,
4. Substantial dependence on agricultural production and primary – product exports,
5. Prevalence of imperfect markets and,
6. Dependence on Primary Exports
7. Dominance, dependence, and vulnerability in international relations.

Low Levels of Living

In developing nations, general levels of living tend to be very low for the vast majority of people. This is
true not only in relation to their counterparts in rich nations but often also in relation to small elite groups
within their own societies. These low levels of living are manifested quantitatively and qualitatively in
the form of low incomes(poverty), inadequate housing, poor health, limited education, high infant
mortality, low life expectancies, and in many cases a general sense of malaise and hopelessness.

Low Level of Productivity

In addition to the above point, developing countries are characterized by relatively low levels of labor
productivity. The concept of a production function systematically relating outputs to different
18
combinations of factor inputs for a given technology often used to describe the way in which societies go
about providing for their material needs. But the technical engineering concept of a production function
must be supplemented by a broader conceptualization that includes among its other inputs like managerial
competence, access to information, worker motivation, and institutional flexibility. Throughout the
developing world, levels of labor productivity (output per worker) are extremely low compared with
those in developed World.

High Rates of Population Growth and Dependency Burdens

th
Of the world‘s population of just over 6 billion people in 2000, more than 5/6 live in the less developed
th
countries and less than 1/6 in the developed nations. Both birth and death rates are strikingly different
between the two groups of countries, birthrates in less developed countries are generally very high on the
order of 30 to40 per 1000 people, where as those in developed countries are less half that figure. There are
few less developed countries with below 20 per 1000 and no developed nation with a birth rate above it.

Death rates (the yearly number of deaths per 1000 population) in developing countries are also high
relative to the developed nations, but thanks to improved health conditions and control of major
infectious diseases, the differences are substantially smaller than the corresponding in birth rates. As a
result, the average rate of population growth is now about 1.6 per year in developing countries compared
to population growth of 0.7 per year in the high income countries.

A major implication of high LDC birth rates is that children under age 15 make up almost 40% of the total
population in these countries, as opposed to less than 20% of the total population in the developed
countries. Thus, in most developing countries, the active labor force has to support proportionally almost
twice as many children as it does in richer countries. By contrast, the proportion of people over the age of
65 is much greater in the developed nations.

Both older people and children are often referred to as an economic dependency burden in the sense that
they are non-productive members of society and there fore must be supported financially by a county‘s
labor force (usually defined as citizens between the ages of 15 and 64). The overall dependency burden
(i.e. both young and old) represents only about one –third of the populations of the developed countries
but almost 45% of the populations of the less developed nations. Moreover, in the latter countries,
almost90% of the dependents is children, whereas only 66% are children in the richer nations.
19
Substantial Dependence on Agricultural Production and Primary Product Exports

The vast majority of people in LDCs lives and work in rural areas. Over 65% are rurally based, compared
to less than 27% in economically developed countries. Similarly, 58% of the labor force is engaged in
agriculture, compared to only5% in developed nations. Agriculture contributes about 14% of the GDP of
the developing nations but only 3% of the GDP of developed nations.

The following table provides a breakdown of population, labor force, and agricultural production by
regions of developed and less developed world. Note in particular the striking difference between the
proportionate size of the agricultural population in Africa (68%) and south Asia (64%) versus North
America (3%). In terms of actual members, there were almost 685 million agricultural labor force
members in Asia and Africa producing an annual volume of output valued at U.S dollars 195 million. By
contrast, in North America, less than 1% of this total number of these agricultural workers (4.5 million)
produced almost one third as much total out put (60 million dollars). This means that the average
productivity of agricultural labor expressed in U.S dollars is almost 35 times greater in North America
than in Asia and Africa combined.

The basic reason for the concentration of people and production in agricultural and other primary
production activities in developing countries is the simple fact that at low income levels, the first
priorities of any person are food, clothing, and shelter. Agricultural productivity is low not only because
of the large numbers of people is relation to available land but also because LDC agriculture is often
characterized by primitive technologies, poor organization, and limited physical and human capital in
puts.
Table: population, labor force, and production in developed and less developed nations 1995-1997

Region Population Urban (%) Rural (%) Labor force in Agricultural

(millions) Agriculture share of GNP
(%) (%)

World 5,840 43 57 49 _
Developed
countries 1,175 74 26 5 3

Europe 729 72 28 7 5
North
America 298 75 25 3 2

20
Japan 126 78 22 7 2
Less
developed 4,666 36 64 58 14
countries

Africa 747 31 69 68 20
South Asia 1,417 27 73 64 30
East Asia 1,958 35 65 70 18
Latin America 490 72 28 25 10
Source: World Bank, World development report, 1997 (New York: Oxford University Press,
1997).

Dependence on Primary Exports

Most economies of less developed countries are oriented toward the production of primary products
(agriculture, fuel, forestry, and raw materials) as opposed to secondary (manufacturing) and tertiary
(service) activities. Except in countries blessed with abundant supplies of petroleum and other valuable
mineral resources and a few leading Asian exporters of manufactured goods, most LDCs exports consist
of basic food stuffs, non-food cash crops, and raw materials. In sub-Saharan Africa, for example,
primary products account for over 80% of total export earnings. In addition, most poor countries need to
obtain foreign exchange in addition to domestic savings in order to finance priority development projects.

Prevalence of Imperfect Markets and Incomplete Information

In the 1980s and 1990s, almost every developing country was moving, at its own pace, toward the
establishment of a market economy. Many countries did so at the behest of the World Bank, which kept
advocating ―market friendly‖ economic policies as preconditions for loans. There seemed to be a growing
consensus that there had been too much government intervention in the workings of developing
economies and that free markets and unfettered competition held the key to rapid economic growth.
But, the presumed benefits of market economies and market friendly policies depend heavily on the
persistence of institutional, cultural and legal prerequisites.

In many LDCs these legal and institutional foundations are either absent or extremely weak. In addition,
the existence of economies of scale in major sectors of the economy, thin markets for many of products
due to limited demand and few sellers, widespread externalities (costs or benefits that accrue to
21
companies or individuals not doing the producing or consuming) in production and consumption, and the
prevalence of common property resources (e.g. fisheries, grazing lands, waterholes) mean that markets
are often highly imperfect. Moreover, information is limited and costly to obtain, thereby often causing
goods, finances, and resources to be misallocated.

Dominance, Dependence, and Vulnerability in International Relations

For many less developed countries, a final significant factor contributing to the persistence of low levels
of living, rising unemployment, and rising income inequality is the highly unequal distribution of
economic and political power between rich and poor nations. These unequal strengths are manifested not
only in the dominant power of rich nations to control the pattern of international trade but also in their
ability often to dictate the terms whereby technology, foreign aid, and private capital are transferred to
developing countries.

Conclusion

The phenomenon of underdevelopment must be viewed in both national and international vulnerability
has both domestic and global origins and potential solutions. Economic and social forces both internal
and external and external, are therefore responsible for the poverty, inequality, and low productivity that
characterize most developing nations. The successful pursuit of economic and social development will
require not only the formulation of appropriate policies and strategies with in the developing world but
also a modification of the present international economic order to make it more responsive to the
development needs of poor nations.

Although the picture of life in much of the developing world painted throughout our lessons may seem
bleak, it should be remembered that many countries have succeeded in raising incomes, lowering infant
mortality, improving educational access, narrowing gender disparity, and increasing life expectancy.

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 CHAPTER THREE

3. Theoretical Frame Work - Contending Theories of Development

Introduction

In this chapter the recent historical and intellectual evolution in scholarly thinking about how and why
development does or does not take place will be explored. Thus you will be acquainted with several
contending theories of development. Some among them include: modernization theory, the
Harrod-Domar and Rostow‘s model of growth, the Neo-Classical model of development, the liberal and
Neo-liberal perspectives of development, the Marxian and Neo-Marxian approach to development,
dependency theory among others.

3.1 The Linear stages Theory

3.1.1 Modernization Theory

Modernization refers to a total transformation of a traditional or pre-modern society into the types of
technology and associated social organization that characterize the advanced economically prosperous
and relatively political stable nations of western world.

Modernization theory is a socio-economic theory which highlights the positive role played by the
developed world in modernizing and facilitating sustainable development in less developed nations,
often contrasted with dependency theory. Several branches of the theory exist to day, and it is generally
viewed as a model where by the Third and Second worlds are seen to benefit (with aids, and guidance
from the first world) economically, politically culturally, and demographically through the acculturation
of the modern policies and values of the western world.
Theories of modernization have been developed and popularized in 1950s and 1960s. It combines the
previous theories of socio-cultural evolution with practical experiences and empirical research, especially
those from the era of decolonization. The basic assumptions of this theory are:

a. Western world countries are the most developed, and the rest of the world (mostly former
colonies) are on the earlier stages of development, and will eventually reach the same level as the western
world.
b. Development stages go from the traditional societies to developed ones.
c. Third world countries have fallen behind with their social progress and need to be

23
directed on their way to becoming more advanced.

Developing from classical evolutionism theories, theory of modernization stresses the modernization
factor: many societies are simply trying (or need to) emulate the most successful societies and cultures. It
also states that it is possible to do so, thus supporting the concepts of social engineering and that the
developed countries can and should help those less developed, directly or indirectly.

The widespread interest in socioeconomic change among European scholars in the nineteenth century
th
was in part a direct reflection of the circumstances of their time among other process; the period (19 c)
saw rapid expansion of industrial manufacturing, a growth in population and urban centers, and the
increasing national importance of the political and bureaucratic activity of the state. These process were
not, of course, initiated during the nineteenth century but much earlier, in the British case for example as
early as the 1600s moreover, all European countries did not experience such development to the same
extent. Indeed many, for example, Spain, Portugal and the Scandinavian countries, remained relatively
untouched by the dynamics of industrialization. But within certain countries, particularly Britain, France,
and German the pace and extent of change were comparatively massive. It is evident that interpretation of
the nineteenth century economy would most essentially be an interpretation of its changes and
movements. And indeed there were many in the universities, academies, philosophical societies, and
political clubs who regarded an analysis of such changes as their most important task.

Despite their considerable differences, Karl Marx, Emile Durkheim and Max Weber shared the
intellectual concern of these times in trying to identify the basic features of societies that promote or
inhibit their development. They all, more or less, shared in the spirit of Darwinian thought that come to
dominate the philosophical, scientific, economic and political spheres of debate Darwin‘s theory of the
evolution of nature challenged the established notion of an unchanging predetermined God-Given order
to the world

Darwin‟s ideas raised the possibility that social change could be charted according to some principles of
social evolution: do societies develop through certain stages, what have these been in the past and what
will they be? Could such gestations be answered by comparing aspects of different societies, such as their
economic patterns, kinship systems, religion, and so on in order to find out how far they had developed?
These were the issues in which the classical sociologists, especially Marx and Durkheim, immersed
themselves. Weber was not so obviously tied to the evolutionist approach though he too has elements of it
24
within his work.

The twentieth century has seen the critique, refinement and even attempted synthesis of the ideas of these
men. Two main schools of thought now dominated the literature on development and change. The first
which come to prominence in the 1950s and 1960s is called modernization theory.

The second which came to occupy a central place in the development debate in the 1970s is called
―underdevelopment‖ theory and draws its ideas from the analysis of the economic system of capitalism
developed by Marx we shall look at this second school of thought in other section of this chapter. In this
section thus, we shall examine the origins and development of modernization theory.

The main pointes that are discussed under this lesson include features of modern and traditional society,
implication of modernization theory for the development policy in the third world etc.

3.1.1.1 The Theoretical Origins of Modernization Theory

Modernization means different things to different people on different occasion. Most contribution
whether economic, political, sociological, psychological were rooted in a basic paradigm, now most
commonly referred to as ‗Modernization paradigm‘.

Since the main contributions to modernization theory come from sociology, it has its own roots in the
ideas of Durkheim and Weber which will now be examined more thoroughly.

Emile Durkheim

In his book, ―the Division of labor in society‖, published in 1893, he proposed that there are two basic

25
types of society, the ‗traditional‘ and the ‗modern‘ which have very different forms of social cohesion
between their members. The people of a traditional society perform the limited tasks of a simple agrarian
community based on groups of families or clans in village settlement. In such society, social cohesion is
based on the simple common life system and beliefs that prevail within and between settlements.
Durkheim calls this form of cohesion ‗mechanical solidarity‘, ‗mechanical‘ in the sense that the separate
groups are very similar to one another, conforming to a rigid pattern of traditional norms and beliefs.

The similarity of groups with traditional society does not mean that they are heavily dependent on each
other: quite the contrary. In other words, the ‗division of labor‘ is restricted and with in the capabilities of
all in the group. Each group is then a sort of ‗segment‘ a discrete unite–in a large society: hence,
Durkheim also called this a segment society.

The traditional or segmental society is contrasted with the modern society. The basic mechanism that
undermines the traditional way of life is the ever increasing number and density of the population. This
leads to more people competing for relatively scares resources. Such competition, according to Durkheim,
was resolved by a gradual increase in the social divisions of labor. This division of labor became more
complex and created an increasing interdependency among people. Just as the cells in a growing body
differentiate to form specialized organs for particular function, so social differentiation occurred as
specialized institutions were formed by people to deal with particular needs of society (religious,
economic, political, educational and so on). And so, in this way modern society was created.

This modern society is more complex and integrated and has a cohesion which Durkheim called it,
‗organic solidarity‘ – each part, like a natural organism, is specialized in function and reliant on others.
The modern system creates a new pattern of morality and a system of norms; these social rules are much
less rigid than those of a traditional society since the have to act as guides for much more complex and
diverse social activities. This enabled them to be economically, politically and socially modern society.

At a more theoretical level two comments are worth making. Primarily, it is clear that Durkheim gives us
little explanation for the passage to modernity other than population growth and density. His arguments
about increasing social differentiation are not explanations but descriptions of the modernizing process.
Secondly, we ought to be cautious about his claims for the good reason that they are speculative with little
regard for historical evidence.

26
The other major sociologist whose work has had at last as great an impact was Weber whose theory of the
development of capitalism we can now consider.

Max Weber

Like Durkheim, Weber sought to explain the emergency of industrialization, though he focused his
attention on answering why capitalist manufacturing became dominant only in the economy of Western
Europe.

In his work, he argued that the basic explanation for this occurrence was the existence of a cultural
process peculiar to western society, namely, ‗rationalizations.‘ Weber proposed that a crucial element in
the expansion of capitalist manufacturing was the rational organization of business enterprise to establish
steady profitability and the accumulation of capital. This involved a number of task, including an
assessment of the most efficient use of capital, expansion through cost reduction and diligent invest, a
continual effort to better one‘s competitors, and an attempt to meet consumers‘ demands, which Weber
argued, is the outcome of the diligent hard working ethos of modern capitalism.

One of the important factors that promoted this work ethic was, according to Weber, not economic but
religious. In his famous text, ―the protestant Ethic and the sprite of capitalism”, Weber argued that the
distinctive care, calculation and hard work of western business were encouraged by the development of
the protestant ethic which came to preeminence in the sixteenth century. Thus, according to Weber, the
religious beliefs shared by Protestants throughout Western Europe helped fashion a work ethic which was
in tune with the spirit of capitalism, a combination that led to the development of modern capitalist
society through out the Western World.

The central theme in Weber‘s entire body of work is his belief that as western society has developed,
more and more of its members act in ways that are guided by the principle of rationality and less by the
customs of tradition.

The work of Durkheim and Weber were not identical, but both see the coming of the ‗modern‘ era as the
social birth of the individual; as relatively free agent not bound by rigid and unquestioning conformity of
the past tradition. This enables today‘s social scientists to combine Durkheim, and Weber‘s notions in to
a grand theory of development that incorporates an analysis of changing normative systems,

27
differentiation, rationalization, business motivation and individual ambition.

To conclude, the main contribution to modernization theory came from sociology whose center of
analysis was Western Europe. Its main idea concentrates on the divisions of society as traditional and
modern society taking different factors in to consideration thus; there are attributes of the modern and the
traditional society that causes development and under development that we shall discuss them in detail
below. Development, therefore, implied the bridging of these gaps by means of an imitative process, in
which the less developed countries gradually assumed the qualities of the industrialized nation.

3.1.1.2 Modernization Theory: Traditional Versus Modernity Category

In the 1950s and early 1960s moderation theory was developed by a number of social scientists,
particularly a group of American scholars the modest prominent of whom was Talcott Parsons. Much of
his interest in modernization was promoted by the decline of the old colonial empires.

The Third World became a focus of attention by politicians who were keen to show countries pushing
for independence that sustained development was possible under western wing (rather than that of the
Soviet Union) Academics reflected this interest by examining the socio economic conditions conducive
to modernization.

In constructing their accounts of development, theorists drew on the traditional and modernity distinction
of classical sociologists. Like Durkheim and Weber, these theorists (of the 1950s and 1960s) placed most
emphasis on the values and norms that operate in these two types of society and their economic systems.

Like Durkheim, most theorists of the 1950s and 1960s argued that the transition from the limited
economic relationship of traditional society to the innovative, complex economic associations of
modernity depended on a prior change in the values, attitudes and norms of people. Thus, economic
achievement and progress depend largely on human aptitudes and attitudes, on social and political
institutions and arrangements which drive from these on historical experiences and to a lesser extent on
external contacts, market opportunity and on natural resources.

The classical framework of modernization appears in its modern form in Talcott parson‘s (1951) pattern
variables (that shows some antagonistic values of modern and traditional society): particularism versus

28
universalism, ascription versus achievement and diffuseness versus specificity. The problem of under
development could, therefore, be solved as particularism, ascription and diffuseness were replaced by
universalism, achievement and specificity. In practice, modernization was very much the same as
westernization i.e. the under developed country should imitate those institutions that were characteristic
of the western countries. Development then depends on ‗traditional‘ ‗primitive‘ values being displaced
by modern ones.

In ‗traditional‘ society three crucial features are noted:

i) The value of traditionalism itself is dominant: that is, people are oriented to the past and they lack the
cultural ability to adjust to new circumstances; ii) The kinship system is the decisive reference point for
all social practices, being the primary means through which economic, political and legal relationship are
controlled. One‘s position in the kinship system and hence in the society is ascribed, not achieved. Status
is then, not earned or achieved, but conferred by virtue of kin relationships. Thus, jobs are not allocated
and rewarded on the basis of achieved skills and hard work, but on the basis of whom one is.
iii) Members of the traditional society have an emotional, superstitious and fatalistic approach to the
world. In contrast ‗modern‟ society is made up of completely opposite characteristics: 1) People may
still have traditions but they are not slaves to them and will challenge any that seem unnecessary or
get in the way off continued cultural progress (that is they do not suffer from traditionalism). 2)
Kinship has a very much less important role in all areas of society. Moreover, one‘s position in the
economy and state etc, is earned through hard work and high achievement motivation and not
determined by kinship; 3) Members of the modern society are not fatalistic but forward looking and
innovative, ready to overcome the obstacles they find in their way, particularly in business affairs,
reflecting a strong entrepreneurial spirit and rational, scientific approaches to the world.

Theorists of modernization of the 1950s and early 1960s viewed the process of development as a series of
successive stages of economic growth through which all countries must pass.

A more elaborate ‗stage‘ model has been provided by the development economist W.W Rostow. He
argued that it is possible to identify all societies, in their economic dimensions, as lying within one of five
stages (categories); the traditional society, the pre–condition for take–off, take – off, the drive to maturity
and the age of high mass consumption. The details of each ‗stage‘ will be discussed in the next
section–Rostow‘s model of economic growth. But, let us first summaries some of the basic themes of

29
modernization theory and draw out their implications particularly for development policy in the Third
World.

3.1.1.3 Summary of Modernization Theory and Its Implication, Particularly, for

Development Policy in the Third World

According to modernization theory, the history of the development of industrialization in the west is no
longer regarded as some thing unique, but as the blueprint for development through out the world.
Historically, modernization is the process of change towards those types of social, economic and political
systems that have developed in Western Europe and North America from the seventeenth to the
nineteenth centuries.

The evolution of societies occurs as traditional behaviors patterns give way under the pressure of
modernization. While these pressures built up gradually within western societies, the ‗developing‘
countries of the third world can be exposed to them from outside. That is they can be helped along the
road to modernity with the assistance of the developed countries whose ideas and technologies can be
introduced and diffused though out these poorer countries.

This process of ‗modernization by diffusion‘ should encourage the development of a number of features
in the third world, including urbanization based on nuclear family house holds, educational growth for
literacy and training, the development of mass media to disseminate ideas and encourage increased
awareness about society, heightened political awareness and participation in a democratic system,
increased business opportunities through providing capital or investment, the replacement of patterns of
authority based on traditional loyalties (for example monarchies, local chiefdoms) coupled with a rational
system of law with representative national government. These, then are the major tenets of
modernization.

What theoretical implication do they have for an understanding of development, particularly to the Third
World? 1). Lack of development is seen as condition prior to development: that is, that present day
Third World societies are underdeveloped countries gradually moving to wards modernity. This may
seem self – evident: However, as we shall see this lack of development may not reflect obstacles apparent
from the internal history of these countries but instead a result of the relationship they have had over the
past few centuries with out side countries. 2). Lack of development is the „fault‟ of Third World
30
countries socio –economic systems that create obstacles to modernization and encourage little ambition
or incentives among individuals, particularly in their work: they tend to have little interest in commercial
production and rationally planned long –term enterprise being content to work only as long as they need
to satisfy their immediate demands. 3). Development occurs not only along western lines for Third World
Societies but also for those countries which were then socialist states (for example Soviet Union, China)
whose future paths will, because of the forces of industrialization, converge with the road beaten out by
the pioneering west. 4). The western economies will continue to grow and develop so that, in Rostow‘s
(1960) terms, they enjoy the prosperity of the period of high mass consumption. There is no sign given of
the possible collapse or steady decline in the fortunes of these economies.

A whole range of policies, therefore, were fostered by modernization theory. They have included the
injection of capital to aid both ‗take off‘ and the commercialization of agriculture, the training of an entire
entrepreneurial elite in the values and motivations most likely to promote free enterprise, the expansion of
educational programs, and assisting ‗democratic‘ countries in the Third World.

Modernization theory remained intact for almost twenty years, but by the late 1960s and early 1970s a
number of criticisms began to appear that developed into an out attack on its central assumptions and
propositions. The main and devastating attack comes from those working within radical, Marxian
sociology. These radical groups have their specific criticisms; however, here we only examine a range of
criticisms made by sociologists, anthropologists and economists that initiated the attack on the
foundations of modernization theory.

3.1.1.4 The Critique of Modernization Theory

Modernization theory claims to identify those factors crucial for economic development such as
achievement, motivation and a decline in the significance of extended family relation. While it may be the
case that substantial economic growth can not occur with out changes in, say, technology, the level of
capital investment and market demand, it need not be the case that such growth requires major alterations
to value systems and social institutions as modernization theory claims. Indeed there is a good deal of
evidence to the contrary. The following section illustrates this through presenting a number of important
empirical and theoretical criticisms that have appeared in the literature since the late 1960s.

First, many critics have pointed out that the principal terms of the theory –the ‗traditional‘ and the
31
‗modern‘ –are much too vague to be of much use as classifications of distinct societies. The two terms do
not give any indication of the great variety of societies that have and do exist; instead, the ‗traditional‘
label is offered as a blanket term to cover a range of pre-industrial societies that have exceedingly
different socio – economic and political strictures such as feudal, tribal and bureaucratic empires.

Secondly, for some theorists of modernization, social change such as splitting off or ‗differentiation; of
kinship from the economy has been seen as the crucial or determinant factors of development. However,
we have no idea which a mechanism it is that brings about the process of social differentiation of which so
much is made.

Thirdly, even if, for the sake of the discussion, one is to accept the use of the terms ‗traditional‘ and
‗modern‘ societies, is it the case that they are as mutually exclusive as the theory states?

Remember, the claim is that, as societies develop, the ‗traditional‘ world gets squeezed out by the force of
modern values and attitudes. Yet, there is a wealth of evidence to indicate that economic growth and the
advent of modernity does not necessarily mean the abandonment of so-called – ‗traditional patterns of
action. There is also an evidence to show that in ‗modern‘ industrial society „traditional‟ values not only
persist but actually play an important role in keeping it going. Frank (1969) shows how the norm of
ascription (judging people according to their family background, age or sex for example, plays an
important role in a locating reward in Japanese industry, a paragon (of ‗modernity‘) if ever there was one.
Frank in fact offers considerable evidence of the persistence of so called ‗traditional‘ values in many
modern states, including Japan, Britain and the United States. Thus, even in the countries which are
economically and politically developed, the traditional values, norms and practices still persist. Indeed,
this fundamentally disproves the basic base of modernization.

Fourthly, one should question the proposition that as industrialization and its attendant urbanization
develop the wider kinship system is weakened as people become primarily concerned with their own
nuclear family. Several studies have concluded that certain extended family systems not only survive in a
modern economic context but that they often function positively to enable individuals to mobilize capital
and other resources essential for modern capitalist enterprises. Moreover, for urban poor as well as the
middle class, and for those who move to towns in search of work, extended family kins are an important
source of support as many writers have shown. Yet again, the essential weakness of the traditional

32
–modernity thesis is revealed here, namely, its persistent recourse to generalizations that such and such
will happen with out inspection of the historical or current evidence.

The final and in many ways most forceful criticism of modernization is that it entirely ignores the impact
of colonialism and imperialism on the third world countries. This is a staggering omission. In general,
therefore, most writers of modernization theory had little to offer by way of an analysis of power in
general and nothing about the specific impact of the imperialism in the third world.

It seems also ethno-centric in the sense that modernization theory believes that there will be no other path
of development except the one followed by the west.

3.1.2 The Growth Model

In times of depression and high unemployment in the industrialized countries, the problem was to employ
existing, but poorly utilized, factors of production. The growth model that was particularly popular with
economic planners just after world–war II came to be known as the Harrod –Domar model. The two
authors independently produced identical models was not surprising. This is because, their models were
simple extension of john Maynard Keynes well known macro economic model, which dominated
economic thinking in the 1940s of the post– World War II.

Keynes argued that the aggregate demand and its various components (consumption and investment)
were of strategic importance. Increases in expenditure will, in turn, increased aggregate demand would
eventually lead to an increase in the level of economic activity and a decrease in unemployment. Thus,
Keynes was primarily interested in short term problems of stabilization in Western Europe.

Since the problem of underdevelopment is radically different from those of the depression, he did not
directly contribute to the theory of development. That is, Keynesian theory and policies were recognized
as being inadequate for the types of unemployment to be found in LDCs, but the post–Keynesian analysis
of growth, capital accumulation and distribution were relevant to both back ward and developed
economies. Thus, the Harrod–Domar Growth model and the Rostow‘s stage of growth are discussed
below.
3.1.2.1 The Harrod–Domar Growth Model

33
The long –term problem, which Keynes intentionally disregarded, were developed by two other
economists– Ersey Domar and Roy Harrod. Independently of each other, and with some what different
premises they managed to show the intimate relationship between an economy‘s rates of growth on the
one hand, and its level of saving and investment on the other. Their growth model, named after them, later
formed the basis for modern growth theory, in which saving and investment is considered to be the central
force behind economic growth.

The Harrod –Domar Model greatly influenced development theories during the 1950s. Development and
growth were considered to be synonymous in theoretical discussions during this period i.e. development
was more or less considered to be synonymous with capital formulation.

W.A. Lewis has provided a classical passage in this context: The central problem in theory of economic
development, according Lewis, is to understand the process by which was previously saving and
investing 4 or 5 percent of its national income or less, converts itself in to an economy where voluntary
saving is running at about 12 to 15 percent of national income or more. This is the central problem
because the central fact of economic development is rapid accumulation (including knowledge and skill
with capital).

The great majority of economists thus saw no difference between ‗underdeveloped‘ and ‗undeveloped‘
countries during the 1950s.

The underlying assumption of the model is that the output of any economic unit, whether a firm, an
industry, or whole economy, depends up on the amount of capital invested in that unit.

The Harrod-Domar model also emphasizes the importance of investment and in this case the rate of
savings in the economy becomes the critical variable determining the rate of economic growth.

W.Arthur Lewis‘s model emphasizes the ―dual sector‖ nature of LDC economies. The traditional sector
has low levels of productivity, particularly at the margin, and employees labor intensive techniques but
has unlimited supplies of labor. Overtime the traditional sector declines in importance but the modern
sector which employee‘s capital intensive techniques is dynamic and as it grows it absorbs increasing
amounts of labor.

34
The economic logic of Harrod–Domar is very simple. In order to grow, economies must save and invest a
certain proportion of their GNP. The more they can save and invest the faster the can grow. The tricks of
economic growth and development, therefore, are simply a matter of increasing national saving and
investment.

The main obstacle or constraints of development, according to this model/ theory, was the relatively low
level of new capital formation in the most poor countries of the Third –World. Thus, states of the Third
world could fill this lack of capital through either foreign aid or private foreign investment just to fill the
saving gap. Hence, the ‗capital constraint‘ stages approach to growth and development become a
rational and (in terms of cold war politics an opportunistic tool for justifying massive transfer of capital
and technical assistance from the developed to the less developed nations. It was to be the marshal plan all
over again, but this time for the underdeveloped nations of the Third World.

3.1.2.1.1 Relevance of the Model to Developing Countries

In most developing countries capital is scarce, which in turn results, in less investment and
unemployment. Therefore, policy makers in developing countries can try to induce manufactures and
farmers to employ more labor– intensive technologies. Then, for a given amount of savings and
investments, both growth and employment can be higher. As the level of the whole economy, policy will
encourage labor–intensive technologies as well as encourage investment in the more labor-intensive
industries.

In other words, poor countries, with low saving rates and surplus (unemployed and underemployed)
labor, can achieve higher growth rates by economizing on capital and utilizing as much labor as possible.
As economies grow and per–capita income rises, saving rates and investment tends to increase and the
labor –surplus diminishes.

3.1.2.1.2 Some Criticisms of the Harrod–Domar Growth Model

Unfortunately, the tricks of development embodied in the growth model did not always work. And the
basic reason they did not work was not because more saving and investment is not a necessary condition
for accepted rates of economic growth –it –is –but rather because it is not a sufficient condition.

This Growth model inappropriately used some of the implicit assumptions of western economic theory
35
for the actual conditions in developing nations. The Marshall plan worked for Europe because the
European countries receiving aid possessed the necessary structural, institutional, and attitudinal
conditions (e.g. well integrated commodity and money markets highly developed transport facilities, a
well-trained and educated work force, the motivation to succeed, and efficient government bureaucracy)
to convert new capital effectively into higher level of out put.

The Harrod–Domar Growth Model implicitly assumes the existence of these same attitudes and
arrangements in underdeveloped nations. Yet, in many cases they are lacking, as are complementary
factors such as managerial competence, skilled labor, and the ability to plan and administer a wide
assortment of development plans.

But at an even more fundamental level, the Harrod –Domar Growth Model failed to take in to account the
crucial fact that contemporary developing nations are part of a highly integrated and complex
international system in which even the best and most intelligent development strategies can be nullified
by external force beyond the countries control. One simply can not claim, as many economists did in the
1950s and 1960s, that development is merely a matter of removing obstacles and supplying various
missing components like capital, technology, foreign exchange, skills and management tasks with which
the developed nations could theoretically play a role.

It was because of numerous failures and growing disenchantment with this strictly economic theory of
development that a radically different approach was championed primarily by Third world intellectuals,
one that attempted to combine economic and institutional factors into a social systems model of
international development and underdevelopment. This is the international dependence paradigm, which
we will review shortly. But, first we examine two prominent examples of what emergent as main stream
western theories of development –Rostow‘s stages of growth and the Lewis Structural change model.

3.1.2.2. Rostow‟s Stages of Growth

A number of writers have employed a ―historical stages‖ approach to development. One of the most
influential variants of this approach is found in Rostow (1969). Rostow attempts to map the history of all
Societies, past and present, on a linear path through a uniform development process.

Walter Rostow‘s doctrine, which played an important role during the late 1950s and 1960s, was a typical

36
expression of the stages of growth model of development. According to the Rostow doctrine, the
transition from underdevelopment to development can be described in terms of a series of steps or stages
through which all countries must proceed. According to him there were five stages through which all
societies had to pass in order to reach a self –sustaining economic growth:
1 The Traditional society,
2 The pre-take off stage,
3 The take off,
4 The road to maturity, and
5 The society of mass consumption.

1. The Traditional Society

In this stage, the level of technological knowledge was so low that imposed an upper limit on per capital
income (production). There was a hierarchal social structure and long–run fatalism. Through time
however, this traditional society transformed into another stage of growth the precondition for take off.

2. The Precondition for take off

The economic prerequisites for a take off were created during this stage, and many of the characteristics
of the traditional society were then removed and some modern changes, but limited were developed:
a) The rise of new entrepreneurs,
b) The expansion of markets,
c) The development of new industries,
d) Building of an effective centralized state,
e) Rapid increase, in agricultural productivity and
f) A more effective infrastructure was created.

There was a decrease in death rate and expansion of population size. The society, at this stage, also
developed a new mentality, as well as a new class- the entrepreneurs.

3. The Take off stage

The third stage, the take off, was the most crucial for further development. It was during this period,

37
covering only a few decades, that the last obstacles to economic development were removed. The most
features/signs of having reached the take off stage was that the share of net investment and saving in
national income rose from 5 percent to 10 percent or more, resulting in a process of industrialization,
where a certain sectors assumed a leading role. Modern technology was disseminated from the leading
sectors while the economy moved towards.

4. The Stage of maturity: The economic structure changed continuously; certain industries stagnated
while new once were created.

5. The Stage of Maturity: This stage was gradually reached as was the ultimate goal, the mass
consumptions society. The citizens could now satisfy more than their basic needs, and consumption was
shifted towards durable goods and services.

Thus, Rostow‘s thinking, like other linear stage therein, was the process of capital for nation which is
crucial to the development of developing nations. According to him, international relations had little to do
with under development.

Some Criticisms of Rostow‟s Stage of Growth

Rostow‘s stages of Growth are incorrect primarily because they do not correspond at all to the past or
present reality of the underdeveloped countries whose development they are supposed to guide. It is
explicit in Rostow that underdevelopment is the original stage of what are supposedly traditional societies
that there were stages prior to the present stage of underdevelopment. It is also explicit in Rostow that the
now developed societies were once underdeveloped. But all this is contrary to fact as there are evidences
against Rostow‘s thinking.

According to Andre Gunder Frank, for example, underdevelopment was not an original stage, but
rather a created; to exemplify, he points to the British “deindustrialization” of India, the destructive
effects of slave trade on African societies and the obliteration of the Indian civilization in Central and
South America. Rostow, like Harrod – Domar model of growth, also failed to take into account the crucial
fact that contemporary developing nations are part of a highly integrated and complex international
system in which the best and most intelligent development strategies can be nullified by external force
beyond the countries control.

38
 3.2. Structural-Change: Two sectors model and patterns of Development
Structural change theory focuses on the mechanisms by which underdeveloped economies transform their
domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more
modern, more urbanized, and more industrially diverse manufactured and service economy. The well
known representative examples of this approach are: the two sector-surplus labor theoretical model of
W.A. Lewis that emphasizes the domestic constraints of development but ignores international constrains
on development. The second, the neoclassical model which contradicts with the existence of surplus
labor in the traditional sector. But like the Lewis model it tends to ignore the international constraints on
development. Patterns of development which focused on both domestic and international constraint on
development (unlike Lewis and neoclassical model) are all discussed bellow.

3.2.1 The Two Sector Models

Depending on the kind of problems being studied, the two sector model analysis can be done at the sector,
regional or international level.

Starting at the sector level, economists recognized the fundamental importance of the relation ship
between industry and agriculture. Thus, they began to design simple models to explain the key
connections between the two sectors. The best known of the earlier models appeared in David Ricardo
(1817). In this model, Ricardo included two basic assumptions that have played an important role in two
sector models ever since. First, he assumed that the agricultural sector was subject to diminishing return
given increases in inputs lead to continually smaller increases in output. The reason is that crops require
land and land is limited. Second, Ricardo put forward the concept that today is called labor Surplus.

The concept of Labor surplus is closely related to concepts such as rural unemployment and
underemployment or disguised unemployment. (Underemployment occurs when work force could be
removed entirely without a fall in production). Rural unemployment is formally much the same as urban
unemployment. When there are people who desire work, are actively looking for work, and can not find
work, they are said to be unemployed. In this sense, unemployment is not the same with
underemployment. In many cases there is not enough work to employ the entire rural work force full time.
Instead members of farm families all work part time, sharing what work there is. Economists call this
underemployment or disguised unemployment, because some members of the rural work force could

39
be removed entirely with out a fall in production. Some remaining workers would simply change from
part – time to full–time effort. The modern version of the two-sector labor surplus model was first
developed by W. Arthur Lewis (in the mid 1950s).

3.2.2. The Lewis Model

The Lewis two –sector model that focused on the structural transformation of a primarily subsistence
economy became the general theory of the development process in surplus –labor third world nations
during most of the 1960s and early 1970s.
In the Lewis model, the underdeveloped economy consists of two sectors: a traditional, over populated
rural subsistence sector characterized by zero marginal labor productivity –a situation that permits Lewis
to classify this a surplus labor in the sense that it can be withdrawn from the agricultural sector with out
any loss of out put (productivity) and a high productivity modern urban industrial sector in to which
labor from the subsistence sector is gradually transferred. The primary focus of the model is on both the
process of labor transfer and the growth of output and in the modern sector.

Both the labor transfer and modern –sector employment growth are brought about by out put expansion in
the modern sector. The speed with which this expansion occurs is determined by the rate of industrial
investment and capital accumulation in the modern sector. Such investment is made possible by the
excess of modern sector profits over wages on the assumption that capitalists reinvest all their profits.
Finally, the level of wages in the urban industrial sector is assumed to be constant and determined as a
given premium over a fixed average subsistence level of wages in the traditional agricultural sector.
Lewis assumed that urban wages would have to be at least 30% higher than average rural income areas.
At the constant urban wage, the supply curve of rural labor to the modern sector is considered to be
perfectly elastic. The usual assumption is that modern sector would pay farmers (surplus labor) a bit more
than they are receiving in agriculture to get them to more. For Lewis, therefore, the modern (industrial)
sector which is assumed to have unlimited supplies labor drawn from the traditional sector, is the main
driving force in the thrust for development.

To conclude, according to Lewis, this process of modern –sector self – sustaining growth and
employment expansion is assumed to continue until all surplus rural labor is observed in the new
industrial sector.
There after, the structural transformation of the economy will have taken place, with the balance of
40
economic activity shifting from traditional rural agriculture to modern industry.

Criticisms of the Lewis two-sector model

According to M.P. Todaro, although the Lewis two sector development model is simple and roughly
reflects the historical experience of economic growth in the west, its key assumptions, do not fit the
institution and economic realities of most contemporary developing countries.

First, the model implicitly assumes that the rate of labor transfer and employment creation in the modern
sector is proportional to the rate of modern sector capital accumulation. This means that the faster the rate
of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of new job
creation. In other words, capitalists in the modern sector reinvest their profit and a new job is created there
by increase employment and development. But, what if capitalists profit are reinvested in more
sophisticated labor saving capital equipment rather than labor intensive investment as is implicitly
assumed in the Lewis model.

If the investment is capital intensive, total output (product) could increase with out change in total wage
and employment. If this is the case, all the extra income and out put growth are distributed to the few
owners of capital, while income and employment levels for the mass of workers remain largely
unchanged. Thus, the idea that labor surplus from the rural sector would be withdrawn to the modern
sector remains questionable.

The second questionable assumption of the Lewis model is the notion that surplus labor exists in rural
areas while there is full employment in the urban areas. However, most contemporary research indicates
that the reverse is more likely true in many developing countries there is substantial unemployment in
urban areas but little general surplus in rural locations. By and large, development economists to day
agree that the assumption of urban surplus labor is empirically more valid than Lewis assumption of rural
surplus labor.

Because of the above and other weaknesses, the Lewis two sector model though extremely valuable as an
early concept of the development process of sectoral interaction and structural change rebuilds
considerable modification in summations and analyses to fit the reality of contemporary developing
nations. The Lewis model ignores international constraints on development. The structural change and
41
patterns of development analysis that emphasizes both domestic and international constraints on
development modifies the assumptions and analysis of Lewis model. And, this will be discussed in detail
below under this lesson.

Before we discuss the patterns of development, however, let us observe another two sectors model which
contradicts the assumptions and analysis of Lewis model, the neoclassical model. Many economists
simply do not agree that a surplus of labor exists in today‘s developing nations, even in India or china.
These economists have developed an alternative two sector model that is some times referred to as
neoclassical model.

3.2.3. The neoclassical model

The implications of population or labor force growth in the neoclassical model are quite different form
what they were in the labor surplus model. An increase in labor in agriculture with raise farm out put and
removal of labor from agriculture will cause farm out-put to fall. Thus, there is no surplus of labor that can
be transferred with out a consequent reduction in agricultural output.

According to the neoclassical model, if industry is to develop successfully, simultaneous efforts must be
made to ensure that agriculture grows fast enough to feed workers in both the rural and urban sectors at
ever higher level of consumption and to prevent the terms of trade from turning against industry. A
stagnant agricultural sector, that is one with little new investment or technological progress, will cause
wage of urban workers to rise rapidly, as labors must pay high prices for food, there by cutting into profits
and the funds available for industrial development.

Where in the labor surplus model planners can ignore agriculture until the surplus of labor is exhausted,
in the neoclassical model, however, there must be a balance between industry and agriculture from the
beginning. The neoclassical model like the Lewis model tends to ignore the international constraints on
developments. The pattern of development that focuses both the domestic and international constraints on
development is discussed here below.

3.2.4. Structural Change and Patterns of Development

Like the earlier Lewis model, the patterns of development analysis of structural change focuses on the

42
sequential process through which the economic, industrial, and institutional structure of an
underdeveloped economy is transformed over time to permit new industries to replace traditional
agriculture as the engine of economic growth. However, inconstant to the Lewis model and the original
stages view of development (i.e. the modernization theory, the Harrod –Domar Growth model, and
Rostow‘s stage of development), increased savings and investment are perceived by patterns of
development analysts as necessary but not sufficient conditions for economic growth. In addition to the
accumulation of capital, both physical and human, a set of interrelated changes in the economic structure
of a country are required for the transition from a traditional economic system to a modern system.
Patterns of development analysis emphasize both domestic and international constraints on
development. The domestic ones include economic constraints such as a country‘s resource endowment
and its physical and population size as well as institutional constraints such as government policies and
objectives. International constraints on development include: access to external capital, technology and
international trade.

Differences in development level among developing countries are there fore, largely ascribed to these
domestic and interracial and transits. However, it is the international constraints that make the transition
of currently developing countries different from that of now industrialized countries. To the extent that
developing countries have access to the opportunities presented by the industrial countries as sources of
capital technology, and manufactured imports as well as markets for exports, they can make the transition
at an even faster rate than that achieved by the industrial countries during the early periods of the
economic development. Unlike the earlier stages model, the structural model recognizes the fact that
developing countries are part of a highly integrated international system that can promote (as well as
hinder) their development.

The best known model of structural change patterns; of development analysis is the one based largely on
the empirical work of chancery who examined patterns of development for numerous third world
countries during the post-war period.

His empirical studies, both cross-sectional (among countries at given point in time) and time-series
(over long period of time) of countries at different level of pre capita income led to the identification of
several features of development process. These include the shift from agricultural to industrial
production, the steady accumulation of physical and human capital, the change in consumer demands

43
from emphasis on food and basic necessities to desire for diverse manufactured goods and services, the
growth of cities and urban industries as people migrate from farms and small towns, and the decline in
family size and over all population growth as children lose their economic value and parents substitute
child quality (education) for quantity.

Conclusions and Implications

The major hypothesis of the structural change model is that development is an identifiable process of
growth and change whose main features are simpler in all countries. However, as mentioned earlier, the
model does not recognize that differences can arise among countries in pace and pattern of development,
depending on their particular set of circumstances. Factors influencing the development process
include: a country‘s resource endowment and size, its government‘s policies and objectives, the
availability of external capital and technology, and the international trade environment, etc.

In short, structural transformation according to patterns of development is not simple process as the
assumptions and analysis of two sector surplus labor Lewis model. Rather, the empirical studies on the
process of structural change lead to the conclusion that the pace and pattern of development can vary
according to both domestic and international factors many of which are beyond the control of an
individual developing nation. Yet, one can identify certain patterns occurring in almost all countries
during the development process. And these patterns may be affected by the choice of development
policies pursued by LDC governments as well as the international trade and foreign assistance policies of
developed nations.
Hence, structural change patterns of development analysis are basically optimistic that the ―correct‖
mix of economic policies (both at domestic and international level) will generate beneficial patterns of
self sustaining growth to the third world countries.

The international dependence school in contrast, is in many cases down right pessimistic. This school
questions the validity of Lewis type two sector models of modernization and industrialization in right of
their questionable assumptions and recent Third World history. The International dependency school
further rejects the claims made by chenery and others that there exists well defined empirical patterns of
development that should be pursued by most poor countries on the periphery of the third world. Instead,
the dependence school places more emphasis on international power imbalances and on needed
fundamental economic, political, and institutional reforms, both domestic and world wide. One should
44
accept that dependency as a theory of underdevelopment is a Marxist inspired or an indirect out growth of
Marxist thinking.

3.3 Underdevelopment and Marxism: from Marx to the theories of imperialism and
dependency
When embarking on a study of the Marxist contribution to the analysis of underdevelopment, the question
immediately precedents itself that is may one talk of a single Marxist theory of underdevelopment? The
answer is no because, it is under theism theory that we find the widest divergences between the writings
of Marx and Engels and those of many contemporary Marxists.
However, it is possible to distinguish three principal phases in the development of Marxist thought
concerning the problem of capitalist development in backward countries and areas of the world.

The first, essentially that Karl Marx and Frederick Engels, analyse capitalism as historically progressive
system, which will be transmitted from the advanced countries (though colonialism, free trade) and which
will spread through the backward nations by a continual process of destruction and replacement of
pre-capitalist structures. As a result of this process the services of new capitalist societies would arise,
whose development would be similar, in the post–colonial period, to that of the advanced countries
themselves. Colonialism was therefore, according to Marx, a necessary evil.

Here Marx underestimated the importance of political independence and thus overestimated the
possibility of introducing capitalism (development) through colonialism.

Here comes the second phase, the so–called ‗classics of imperialism‘ which stresses that once the
colonial bonds are broken modern industrialization could eventually takes place. According to Lenin,
who wrote about imperialism, the obstacle to capitalist development in the less developed nations should
be looked for in the colonial legacies to the mother country. If these ties could be broken, capitalist
development was indeed possible. He thus believed in the progressively of capitalism in the less
developed countries, once they had politically independent.

The third approach was first developed at the end of the fifties, and took off with the publication of the
work of Paul Baran. It is in this third phase that the analysis of the dependency school emerged. The
majority of the survey articles which have been written regarding these analyses tend to distinguish
45
between three major approaches with in them, which will be discussed in detail here below in this section.
Now the three phases- Marxism, Imperialism and dependency-will be discussed one by one.

3.3.1 Marx on Development of Capitalism in backward nations

Marx was one of the mainstream writers of classical approach to development .Marx based his studies of
various societies on materialist interpretation of history. According to this approach, the analysis of
development of a society must begin from the process of production, which in turn contains two crucial
aspects -the forces of production and the relations of production. The forces of production are
generally assumed to be the sum of the material condition of production raw materials, tools, machines,
etc as well as the human beings themselves, with their knowledge and experience.

The relation of production is the relations between human beings during the process of production,
exchange and distribution of the material utilities in a society. The forces of production and the
production relations together form the mode of production, which constitutes the societies economic
structure.

Marx mentioned several different modes of production, which successively, should replace each other
as the development of the forces of production progressed.

Thus, primitive communal system was the predecessor of slavery system and feudalism was the
predecessor of capitalism, and capitalism that of socialism and communism. According Marx, then in
order to reach a state of socialism, all societies including the less developed once, were required to pass
the various stages of capitalist development.
However, Marx doubted that the less developed countries were capable of accomplishing this (capitalism)
on their own. Marx often considered these countries to be ―primitive‖ and incapable of starting a process
of development by themselves. Colonialism was therefore according Marx, a necessary evil. This means
that despite the fact colonialism was both cruel and ruthless, it was necessary for the elimination of the
pre– capitalist modes of production and the introduction of capitalism in development in the colonies
(Third World).

According to Marx, there was no difference between the kind of capitalism developed in the colonies and
that developed in Europe. In this regard, Marx stated that, ―The industrially more developed country

46
shows the less developed one merely an image of its own future‖. Thus, Marx did not believe in a
continued expansion of European imperialism. Instead, the less developed countries would develop a
more autonomous kind of capitalism similar to that which later developed in the USA. From this one
th
might conclude that Marx shared the common 19 century view that development (capitalism) was
universal and inevitable. Thus, the feasibility of capitalism (development) in back-ward nations was
taken completely for granted.

As it is stated in the introduction, therefore, there is no question that the attitude of some Marxist writers
to day that capitalist industrialization in the periphery (less developed nations) is no longer feasible goes
against the sprit of Marx‘s writing.

Within the Marxist tradition it is in Vladimir Illyich Lenin‘s work that we find the first systematic attempt
to provide a concrete analysis of the development of capitalism in developing nations and is in much view
the pioneering classic of dependency studies.
The early Marxist theoreticians who dealt with imperialism did not question Marx‘s idea of the
progressive role playact by capitalism in the less developed countries. What they did question was his
analysis of the interaction between the developed and the less developed countries.

Lenin, who may be considered the most important of the early theorists of imperialism, did not find that
exporting capital to the less developed countries would automatically lead to capitalist development.
According to Lenin, the progressive effects of capitalism, on the contrary are not to be seen in the
colonies (less developed countries), despite the infiltration of foreign capital. This is because, when the
dominant imperialist power needs social support in the colonies, it joins force, first and foremost, with the
ruling class of the old pre-capitalist system the feudal type land lords, the commercial and money lending
bourgeoisie against the masses. Capitalist development in less developed nations is therefore more
complex than suggested by Marx‘s analysis.

Taking Russia as one of the backward nations, Lenin suggested three inter -related themes for the
slowness of capitalist development in Russia:
i) The weakness of the Russian (backward nations) bourgeoisie as an
agent for the furthering of capitalist development.
ii) The great and unexpected capacity for survival of the traditional

47
 structure of Russian (backward nations) society.
iii) The effect of competition from Western Europe in slowing the
growth of modern industry in Russia. Although Lenin did not study the concrete development of
capitalism in other backward nations of the world, it is possible to drive from his analysis of imperialism.

Imperialism, the highest stage of capitalism, is defined as the policy of conquest which financial capital
pursues in the struggle for markets for manufactured products, for the sources of raw material, and for
places in which capital can in theory be invested. The result of this would be a tendency towards a greater
integration of the world economy, a considerable degree of capital movement, and an international
division of labor which would restrict the growth of backward economies to the production of mineral
and agricultural primary products as are suit of the effects of the expansion of the advanced economies as
they enter the monopoly phase of their development. The economies of the backward countries will tend
to be characterized by increasing indebtedness and by a productive structure which leads them to
consume what they do not produce, and to produce what they do not consume. If these relation ships were
shaped within a colonial context, they would clearly be unequal, and therefore the colonial nations‘
possibility of development would be very restricted. Imperialism, therefore, would tend to hinder
industrial development, but once the colonial bond had been broken, the backward nations would be able
to develop their economies in a different way, and eventually to industrialize.

Nevertheless, the political independence of the backward nations has not been followed by development,
contrary to the expectations of Lenin we have been discussing. The reason is that the historical
progressiveness of capitalism in the backward regions of world in the colonial and post colonial periods
was limited by the previously mentioned alliance between imperialism and traditional elites, the so-called
feudal imperialist alliance.

The third phase in the Marxist tradition is the Dependency school of thought. Not all dependency theorists,
however, are Marxist and one should clearly distinguish between dependency and a theory of imperialism:
Marxist theory of imperialism explains the reasons why imperialism occurs, while dependency theories
explain the consequences of imperialism.

3.3.2. Dependency Theory: Neo-Colonial Model, the False Paradigm Model and the Dualistic

Development Thesis

48
Dependency Theory developed in the late 1950s under the guidance of the Director of the United
Nations Economic Commission for Latin America, Raul Prebisch. Prebisch and his colleagues were
troubled by the fact that economic growth in the advanced industrialized countries did not necessarily
lead to growth in the poorer countries. Indeed, their studies suggested that economic activity in the richer
countries often led to serious economic problems in the poorer countries. Such a possibility was not
predicted by neoclassical theory, which had assumed that economic growth was beneficial to all (Pareto
optimal) even if the benefits were not always equally shared.

Prebisch's initial explanation for the phenomenon was very straightforward: poor countries exported
primary commodities to the rich countries that then manufactured products out of those commodities are
sold back to the poorer countries. The "Value Added" by manufacturing usable product always cost more
than the primary products used to create those products. Therefore, poorer countries would never be
earning enough from their export earnings to pay for their imports. This is because, demand and price of
primary goods decreases when income increases.

Prebisch's solution was similarly straightforward: poorer countries should embark on programs of import
substitution so that they need not purchase the manufactured products from the richer countries. The
poorer countries would still sell their primary products on the world market, but their foreign exchange
reserves would not be used to purchase their manufactures from abroad.

Three issues made this policy difficult to follow. The first is that the internal markets of the poorer
countries were not large enough to support the economies of scale used by the richer countries to keep
their prices low. The second issue concerned the political will of the poorer countries as to whether a
transformation from being primary products producers was possible or desirable. The final issue
revolved around the extent to which the poorer countries actually had control of their primary products,
particularly in the area of selling those products abroad. These obstacles to the import substitution policy
led others to think a little more creatively and historically at the relationship between rich and poor
countries.

At this point dependency theory was viewed as a possible way of explaining the persistent poverty of the
poorer countries. The traditional neoclassical approach said virtually nothing on this question except to
assert that the poorer countries were late in coming to solid economic practices and that as soon as they
learned the techniques of modern economics, then the poverty would begin to subside. However,
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Marxists theorists viewed the persistent poverty as a consequence of capitalist exploitation. They argued
that the poverty was a direct consequence of the evolution of the international political economy into a
fairly rigid division of labor which favored the rich and penalized the poor.

In this lesson we explore some of the major principal arguments of dependence approach –neocolonial
dependence model/neo-Marxist approach, the false paradigm model and the dualistic development
thesis. .

3.3.2.1.Background to dependency school

The 1950 was a witch period for stracturalist analysis which explained many of the economic problems
facing the LDCS in terms of the failure of the price system. In Latin America Raul Prebisch theorized the
long-run deterioration in the terms of trade for primary products as a function of technical economic
factors and/or the monopolization of factor and commodity markets in center or developed countries, and
used this to argue for inward-looking development based on state protected and directed import
substituting industrialization (ISI). In the 1940s and 1950s ISI was the only realistic way for LDCs to
industrialize. ISI can be seen as a necessary stage in creating an industrial base which later leads to export
of manufactures. This appears to confirm with the experience of the newly industrializing countries
(NICs) which pursued a flexible mix of ISI and export oriented industrialization (EOI) using a
combination of market forces and state intervention. For the future, the structuralislts believe not all
LDCs can become NICs and they will need to develop South-South trade if the growth of manual curing
exports is to be sustained.

More recently, with the rise in all prices in the late 1970s and the growth of international debt in the 1980s,
many structuralists have become concerned with short-Run adjustment problems in the context of
Long-run structural change.

The Marxist, Neo-Marxist and dependency schools analyze development and underdevelopment in the
context of the international capitalist system. Two of the writers of this school, Marx and Engels,
believed that all backward countries would eventually become autonomous to the capitalist states. As
Marx puts it ―the country that is more developed industrially only shows, to the less developed, the image
of its own future‖ Both Marx and Engels analyze capitalisms as a historically progressive system, which
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will be transmitted from the advanced countries (through colonialism, free trade, etc.), and which will
spread through the backward nations by a continual process of lest destruction and replacement of
pre-capitalist structures. As a result of this process a series of new capitalist societies would arise, whose
development would be similar, in the post-colonial period, to that of the advanced countries themselves.

Lenin followed Marx and Engels in arguing that backward nations would eventually become full
capitalist states but there is an implicit recognition that future development would be brought with
difficulties because of:
(i) The weakness of the peripheral (underdeveloped) Bourgeoisie,
(ii) The effect of competition from the center, and
(iii) The survival of traditional structures.

Paul Baron (1957) provided the first major analysis of the effect of imperialism from the point of view
of the less developed countries. Baron explains under development not as an original state of affairs but
as a result of particular historical process. In this process developed countries became so by exploiting
and colonizing the LDCS and independent industrialization is blocked by an alliance between local
(comprador) elites and the metropolitan (developed) states. The analysis of A.G. Frank (1907) led to the
impossibility thesis and thought that underdevelopment was part of the process of development itself.
Having an overview of different schools of development, let us now discuss about the major modern
theories/ models/ perspectives or approaches.

3.3.2.2 The Neo-colonial Dependency model

The first major stream, which we call the neocolonial dependency model, is an indirect out growth of
merit thinking. It attributes the existence and continuance of underdevelopment primarily to the historical
evaluation of a highly unequal international capitalist system of rich country–poor country relationships.
Whether because rich nations are intentionally exploitative or unintentionally neglectful, the existence
of rich and poor nations in an international system dominated by such unequal power relationships
between the center (the developed nations) and the periphery (the LDCs) renders attempts by poor
nations to be self –reliant and independent difficult and some times even impossible.

Certain groups in the developing countries (including land lords, entrepreneurs, military rulers,

51
merchants, salaried public officials and trade union leaders) who enjoy high incomes, social status and
political power constitute a small elite ruling class whose principal interest, menacingly or not, is in the
perpetuation of the international capitalist system of inequality and conformity by which they are
rewarded. Directly and indirectly, they serve (are dominated by) and are rewarded by (are dependent on)
international special–interest power groups including multinational corporations, national bi-lateral aid
agencies and multilateral assistance organizations like the World Bank and International Monetary Fund
(IMF) which are tied by allegiance or funding to the wealthy Capitalist countries.

In short the Neo–Marxist, Neo-colonial view of underdevelopment attributes a large part of the Third
World‘s continuing and worsening poverty to the existence and policies of the industrial capitalist
countries of the Northern hemisphere and their extension in the form of small but powerful elite or
comprador groups in the less developed countries.
Underdevelopment is thus seen as an externally induced phenomenon, in contrast to the liner stages and
structural change theories that stress on internal constraints such as insufficient savings and investment
or lack of education and skill. Revelatory struggles or at least major restructuring of the world capitalist
system are therefore required to free dependent third world nations from the direct and indirect economic
control of their First world and domestic oppressors.

According to the neocolonial dependence model, dominant countries are endowed with technological,
commercial, capital and sociopolitical predominance over dependent countries –the form of
predominance varying according to the particular historical movement –and can therefore exploit them,
and extract part of the locally produced surplus. Dependence, then, is based up on an international
division of labor which allows industrial development to take place in some countries while restricting it
in others whose growth is conditioned by and subjected to the power centers of the world.

Now the question is how the Neo–Marxists/Neo-colonial theorists define dependence theory? And how
they view the structural context of dependency? And, what are the central propositions of dependency
theory and policy implication of dependency analysis according the Neo-Marxist view?

3.3.2.3 How Can One Define Dependency Theory?

The debate among the liberal reformers (Prebisch), the Marxists (Andre Gunder Frank), and the world
systems theorists (Wallerstein) was vigorous and intellectually quite challenging. There are still points of

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serious disagreements among the various strains of dependency theorists and it is a mistake to think that
there is only one unified theory of dependency. Nonetheless, there are some core propositions which
seem to underlie the analyses of most dependency theorists.

Dependency can be defined as an explanation of the economic development of a state in terms of the
external influences-political, economic, and cultural-on national development policies. Theotonio Dos
Santos emphasizes the historical dimension of the dependency relationships in his definition:
[Dependency is]...an historical condition which shapes a certain structure of the world economy such that
it favors some countries to the detriment of others and limits the development possibilities of the
subordinate economics...a situation in which the economy of a certain group of countries is conditioned
by the development and expansion of another economy, to which their own is subjected.

There are three common features to these definitions which most dependency theorists share. First,
dependency characterizes the international system as comprised of two sets of states, variously described
as dominant/dependent, center/periphery or metropolitan/satellite. The dominant states are the
advanced industrial nations in the Organization of Economic Co-operation and Development (OECD).
The dependent states are those states of Latin America, Asia, and Africa which have low per capita
GNPs and which rely heavily on the export of a single commodity for foreign exchange earnings.

Second, both definitions have in common the assumption that external forces are of singular importance
to the economic activities within the dependent states. These external forces include multinational
corporations, international commodity markets, foreign assistance, communications, and any other
means by which the advanced industrialized countries can represent their economic interests abroad.
Third, the definitions of dependency all indicate that the relations between dominant and dependent
states are dynamic because the interactions between the two sets of states tend to not only reinforce but
also intensify the unequal patterns. Moreover, dependency is a very deep-seated historical process, rooted
in the internationalization of capitalism. Dependency is an ongoing process:

Latin America is today, and has been since the sixteenth century, part of an international system
dominated by the now-developed nations....Latin underdevelopment is the outcome of a particular series
of relationships to the international system.

In short, dependency theory attempts to explain the present underdeveloped state of many nations in the
53
world by examining the patterns of interactions among nations and by arguing that inequality among
nations is an intrinsic part of those interactions.

3.3.2.4 The Structural Context of Dependency: Is it Capitalism or is it Power?

Most dependency theorists regard international capitalism as the motive force behind dependency
relationships. Andre Gunder Frank, one of the earliest dependency theorists, is quite clear on this
point: ...historical research demonstrates that contemporary underdevelopment is in large part the
historical product of past and continuing economic and other relations between the satellite
underdeveloped and the now developed metropolitan countries. Furthermore, these relations are an
essential part of the capitalist system on a world scale as a whole.

According to this view, the capitalist system has enforced a rigid international division of labor which is
responsible for the underdevelopment of many areas of the world. The dependent states supply cheap
minerals, agricultural commodities, and cheap labor, and also serve as the repositories of surplus capital,
obsolescent technologies, and manufactured goods. These functions orient the economies of the
dependent states toward the outside: money, goods, and services do flow into dependent states, but the
allocation of these resources is determined by the economic interests of the dominant states, and not by
the economic interests of the dependent state. This division of labor is ultimately the explanation for
poverty and there is little question but that capitalism regards the division of labor as a necessary
condition for the efficient allocation of resources. The most explicit manifestation of this characteristic is
in the doctrine of comparative advantage.

Moreover, to a large extent the dependency models rest upon the assumption that economic and political
power are heavily concentrated and centralized in the industrialized countries, an assumption shared with
Marxist theories of imperialism. If this assumption is valid, then any distinction between economic and
political power is spurious: governments will take whatever steps are necessary to protect private
economic interests, such as those held by multinational corporations.

Not all dependency theorists, however, are Marxist and one should clearly distinguish between
dependency and a theory of imperialism. The Marxist theory of imperialism explains dominant state
expansion while the dependency theory explains underdevelopment. Stated another way, Marxist
theories explain the reasons why imperialism occurs, while dependency theories explain the
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consequences of imperialism. The difference is significant. In many respects, imperialism is, for a
Marxist, part of the process by which the world is transformed and is therefore a process which
accelerates the communist revolution. Marx spoke approvingly of British colonialism in India that
England has to fulfill a double mission in India: one destructive, the other regenerating-the
annihilation of old Asiatic society, and the laying of the material foundations of Western society in
Asia. For the dependency theorists, underdevelopment is a wholly negative condition which offers no
possibility of sustained and autonomous economic activity in a dependent state.

Additionally, the Marxist theory of imperialism is self-liquidating, while the dependent relationship is
self-perpetuating. The end of imperialism in the Leninist framework comes about as the dominant
powers go to war over a rapidly shrinking number of exploitable opportunities. World War I was, for
Lenin, the classic proof of this proposition. After the war was over, Britain and France took over the
former German colonies. A dependency theorist rejects this proposition. A dependent relationship exists
irrespective of the specific identity of the dominant state. That the dominant states may fight over the
disposition of dependent territories is not in and of itself a pertinent bit of information (except that a
period of fighting among dominant states affords opportunities for the dependent states to break their
dependent relationships). To a dependency theorist, the central characteristic of the global economy is the
persistence of poverty throughout the entire modern period in virtually the same areas of the world,
regardless of what state was in control.

3.3.2.5 The Central Propositions of Dependency Theory

There are a number of propositions, all of which are contestable, which form the core of dependency
theory. These propositions include:

 Underdevelopment is a condition fundamentally different from un-development. The latter

term simply refers to a condition in which resources are not being used. For example, the
European colonialists viewed the North American continent as an undeveloped area: the land was
not actively cultivated on a scale consistent with its potential. Underdevelopment refers to a
situation in which resources are being actively used, but used in a way which benefits dominant
states and not the poorer states in which the resources are found.

 The distinction between underdevelopment and un-development places the poorer countries of

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 the world in a profoundly different historical context. These countries are not "behind" or
"catching up" to the richer countries of the world. They are not poor because they lagged behind
the scientific transformations or the Enlightenment values of the European states. They are poor
because they were coercively integrated into the European economic system only as producers of
raw materials or to serve as repositories of cheap labor, and were denied the opportunity to market
their resources in any way that competed with dominant states.

 Dependency theory suggests that alternative uses of resources are preferable to the resource
usage patterns imposed by dominant states. There is no clear definition of what these preferred
patterns might be, but some criteria are invoked. For example, one of the dominant state practices
most often criticized by dependency theorists is export agriculture. The criticism is that many
poor economies experience rather high rates of malnutrition even though they produce great
amounts of food for export. Many dependency theorists would argue that those agricultural lands
should be used for domestic food production in order to reduce the rates of malnutrition.

 The diversion of resources over time (and one must remember that dependent relationships have
persisted since the European expansion beginning in the fifteenth century) is maintained not only
by the power of dominant states, but also through the power of elites in the dependent states.
Dependency theorists argue that these elites maintain a dependent relationship because their own
private interests coincide with the interests of the dominant states. These elites are typically
trained in the dominant states and share similar values and culture with the elites in dominant
states. Thus, in a very real sense, a dependency relationship is a "voluntary" relationship. One
need not argue that the elites in a dependent state are consciously betraying the interests of their
poor; the elites sincerely believe that the key to economic development lies in following the
prescriptions of liberal economic doctrine.

3.3.2.6 The Policy Implications of Dependency Analysis

If one accepts the analysis of dependency theory, then the questions of how poor economies develop
become quite different from the traditional questions concerning comparative advantage, capital
accumulation, and import/export strategies. Some of the most important new issues include:

1. The success of the advanced industrial economies does not serve as a model for the currently
developing economies. When economic development became a focused area of study, the analytical

56
 strategy (and ideological preference) was quite clear: all nations need to emulate the patterns used by
the rich countries. Indeed, in the 1950s and 1960s there was a paradigmatic consensus that growth
strategies were universally applicable, a consensus best articulated by Walter Rostow in his book,
The Stages of Economic Growth. Dependency theory suggests that the success of the richer
countries was a highly contingent and specific episode in global economic history, one dominated by
the highly exploitative colonial relationships of the European powers. A repeat of those relationships
is not now highly likely for the poor countries of the world.

2. Dependency theory repudiates the central distributive mechanism of the neoclassical model, what is
usually called "trickle-down" economics. The neoclassical model of economic growth pays
relatively little attention to the question of distribution of wealth. Its primary concern is on efficient
production and assumes that the market will allocate the rewards of efficient production in a rational
and unbiased manner. This assumption may be valid for a well-integrated, economically fluid
economy where people can quickly adjust to economic changes and where consumption patterns are
not distorted by non-economic forces such as racial, ethnic, or gender bias. These conditions are not
pervasive in the developing economies, and dependency theorists argue that economic activity is not
easily disseminated in poor economies. For these structural reasons, dependency theorists argue that
the market alone is not a sufficient distributive mechanism.

3. Since the market only rewards productivity, dependency theorists discount aggregate measures
of economic growth such as the GDP or trade indices. Dependency theorists do not deny that
economic activity occurs within a dependent state. They do make a very important distinction,
however, between economic growth and economic development. For example, there is a greater
concern within the dependency framework for whether the economic activity is actually benefiting
the nation as a whole. Therefore, far greater attention is paid to indices such as life expectancy,
literacy, infant mortality, education, and the like. Dependency theorists clearly emphasize social
indicators far more than economic indicators.

4. Dependent states, therefore, should attempt to pursue policies of self-reliance. Contrary to the
neo-classical models endorsed by the International Monetary Fund and the World Bank, greater
integration into the global economy is not necessarily a good choice for poor countries. Rather a
policy of self-reliance should be interpreted as endorsing a policy of controlled interactions with the

57
 world economy: poor countries should only endorse interactions on terms that promise to improve the
social and economic welfare of the larger citizenry.

3.3.2.7 The false Paradigm Model

A second and a less radical international dependence model approach to development, which we might
call. The false paradigm model, attributes under development to faulty and in appropriate advice provided
centric international ―expert‖ advisers from development country assistance agencies and multinational
donor organizations. These experts offer sophisticated concepts, elegant theoretical structures, and
complex econometric models of development that often led to inappropriate or incorrect policies.

In addition, according to this argument, leading university intellectuals, trade unionists, future high level
government economists, and other civil servants all get their training in developed country institutions
where they are unwittingly served unhealthy doses of alien concepts and elegant but inapplicable
theoretical models.

Having little or no really useful knowledge to enable them to come to grips in an effective way with real
development problems; they often tend to become unknowing or reluctant apologists from the existing
system of elitist policies and institutional structures. In university economics courses, for example,
typically entails the perpetuation of the teaching of many relevant western concepts and models while in
government policy discussions too much emphasis is placed on attempts to measure capital out put ratio,
to increasing savings and investment ratios or to maximize GNP growth rates. As a result, desirable
institutional and structural reforms are neglected or given only cursory attention.

3.3.2.8 The Dualistic–Development Thesis

Implicit in structural change theories and explicit in international dependence theories is the notion that of
a world of dual societies, of rich nations and poor nations, and, in the developing economies, pockets of
wealth with in broad areas of poverty. It has the following major assumptions:

1. Different sets of conditions, of which some are, “superior” and other “inferior” can coexist
in a given space. Examples of this element of dualism include Lewis‘s notion of the coexistence
of modern and traditional methods of production in urban and rural sectors; the coexistence of
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 wealthy, highly educated elites with masses of illiterate poor people; and the dependence nations
with weak, impoverished peasant societies in the international economy.

2. This coexistence is chronic and not merely transitional. It is not due to a temporary
phenomenon, in which case time could eliminate the discrepancy between superior and inferior
elements. In other words the international coexistence of wealth and poverty is not simply a
historical phenomenon that will be rectified in time. Although both the stages of growth theory
and the structural change models implicitly make such as assumption, the fact of growing
international inequalities seem to refute it.

3. Not only do the degrees of superiority or inferiority fail to show any signs of diminishing,
but they even have an inherent tendency to increase. For example, the productively gap
between workers in developed countries and their counterparts in most LDC, seems to widen with
each passing year.

4. Therefore, the interrelations between the superior and inferior elements are such that the existence
of the superior elements does little or nothing to pull up the inferior elements, let alone ―trickle
down‖ to it. In fact, it may actually serve to push it down to develop its underdevelopment.

Conclusions and Implication

What ever their ideological differences, the advocates of the neo –colonial /neo-Marxist–dependence,
False –paradigm, and Dualism models reject the exclusive emphasis on traditional western economic
theories (such as modernization theory, stage Growth model of Rostow, Harrod Dammar Model, classical
theory, etc) designed to accelerate the growth of GNP as the principal index of development. They
question the validity of Lewis type two sector models of modernization and industrialization in light of
their questionable assumptions and recent third world history. They further reject the claims made by
Chenery and Straut and others that there exist well-defined empirical patterns of development that should
be pursued by most poor countries on the periphery of the world economy.

Instead, dependence, false paradigm, and dualistic development theorists place more emphasis on
international power imbalances, and on needed fundamental economic, political, and institutional
reforms, both domestic and world wide. In extreme cases, they call for the outright expropriation of

59
privately owned as sets in the expectation that public asset ownership and control will be a more effective
means to help eradicate absolute poverty, and provide expanded employment opportunities, lessen
income inequalities, and raise the levels of living (including health, education, and cultural enrichment)
of the masses. Although a few radical neo-Marxists would even go so far as to say that economic growth
and structural change do not matter, the majority of thoughtful observers recognize the most effective
way to deal with these diverse social problems is to accelerate the pace of economic growth though
domestic and international reforms accompanied by a judicious mixture of both public and private
economic activity.

Dependence theories have two major weaknesses. First, although they offer an appealing explanation of
why many poor countries remain underdeveloped, they offer little formal or informal explanation of how
countries initiate and sustain development.

Second and perhaps important, the actual economic experience of LDCs that have pursued revolutionary
campaigns of industrial nationalization and state-run production has been mostly negative. As we shall
discover in the next chapters, governments can fail as well as markets; the key to successful development
performance is achieving a careful balance among what government can successfully accomplish, what
the private market system can do, and what both can best do together.

At the same time till the 1970s that the international dependence revolution in development theory was
capturing the imagination of many western and LDC scholars, a neo-classical/neo-liberal free-market
counterrevolution was beginning to emerge, ultimately to dominate western(and, to a lesser extent, LDC)
development writings during the 1980s and 1990s. Neo-liberalism is a direct outgrowth of Liberalism. If
so, in the next lesson we will first look on Liberalism and then will continue discussing Neo-liberalism.
3.4. The Liberal Theory of Development
The liberal theory of economics (also called classical liberalism) is a theory of economics developed in
the Enlightenment period, and believed to be first fully formulated by Adam Smith. It is associated
with the political ideology of classical liberalism. The concept of economic liberalism or market
th
liberalism underpinned the move towards a free market capitalist economic system in the late 18 century,
and the subsequent demise of the mercantilist system.

60
Economic liberalists (proponents of the free trade economy) believe that the international economy is a
non–zero sum game in which prosperity is available to all. However, this non–Zero sum game is possible
if states specialize their economy based on their resources.

Dear students, in this lesson you will be introduced to the classical theory of economic liberalism with
particular emphasis to Absolute Advantage model of Adam Smith and comparative advantage model of
David Ricardo.

3.4.1 Absolute Advantage Model of Adam Smith

Adam Smith (1723 -1790) provided the basic building blocks for the construction of the classical theory
of international trade. He enunciated the theory in terms of what is Called Absolute Advantage model.

Smith argued that the wealth of a nation would expand most rapidly if the government would abandon
mercantilist controls over foreign trade. Smith also exploded the mercantilist myth that in international
trade one country can gain only at the cost of other countries. He showed how all countries would gain
from interventional trade through international division of labor.

In smith‘s model of international trade, every one will be better of with out making any one worse off.
Smith‘s model of world trade is one of harmony of interest among countries, where free trade would
come out as the best policy for all. Let us now discuss smith‘s model with the help of an example.

Imagine for the sake of simplicity that we have a world of only two countries and two commodities.
Ethiopia and India are two such countries. Coffee and Textiles are the two commodities. Assume further
that the production possibilities are such that both countries can produce both the goods if they wish.
Finally assume that both the countries are endowed with ―X‖ amount of factors of production.
Such that (a) with ―X‖ factors of production Ethiopia, can produce either 100 units of coffee or 50 units of
61
textiles, or any other mix of coffee and textiles conditioned by the opportunity cost ratio of 2:1 (this
means that if Ethiopia wants to produce 1 more unit of textiles it will have to give up the opportunity of
producing 2 units of coffee; or alternatively, by giving up the opportunity of producing one unit of textile,
Ethiopia can produce 2 units of coffee (b) with X factors of production India can produce either 5o units
of coffee or 100 units of textiles or some other combination of coffee and textiles subject to the
opportunity cost ratio of 1:2 (this means that India has to give up producing 1 unit of coffee in order to
produce 2 units of textiles or alternatively, India has to give up the opportunity of producing 2 units of
textiles in order to produce 1 more unit of coffee.

From the above production possibility, it is quite clear that Ethiopia has an absolute advantage in the
production of coffee, and India has the absolute advantage in the production of textiles. This means that
there is symmetrical factor distribution between the two countries so that there is scope for specialization
in production and also a scope for establishing mutually beneficial trade between the two countries.

Unlike mercantilism and protectionism, smith argues that the two countries will have a non–zero sum
game if they conduct a free trade based on their absolute advantage and the specialization of production.

If both countries engage in complete specialization of production, both countries will become better off in
terms of production without making any country worse off.

Getting back to the classical trade theory, it is enough to note that Adam Smith showed convincingly how
countries could gain from trade. In his model, to recapitulate, one country has an absolute advantage over
the other country in one line of production, and the other country has an absolute advance over the first
country in the other line of production. In such away both the countries gain from trade in terms of
production as well as consumption. Adam Smith advocates that the state should not interfere in domestic
or international trade through protectionism and that price for goods, services, and labor should be set
through the mechanism of a free market.

He wants little or no government regulation of economy and the removal of legal barriers to trade and
cessation of government bestowed privileges such as subsidy and monopoly. The other advocator of
economic liberalism / classical liberalism who strongly support free trade was David Ricardo.

3.4.2 Comparative Advantage Model of David Ricardo

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Ricardo went even further, and he argued that even if the countries did not have absolute advantage in any
line of production over the others, international trade would be beneficial bringing gains from trade to all
the participating countries. Ricardo‘s model is termed as comparative advantage model. Ricardo‘s
model is a further refinement of smith‘s model. Let us now discuss Ricardo‘s model in detail.

Once again, let us assume a world of two countries and two commodities. Ethiopia and India are the two
countries: coffee and textiles are the two commodities. The production possibilities in the two countries
are such that both countries can produce both the commodities if they wanted; this means that dependence
on each other is not inevitable, because the two countries can produce and consume some combination of
the two goods, working in isolation (closed economy). There fore, Ricardian model is similar to smith‘s
model. But the differences arise from here on. In the Ricardian model we assume that one country has the
absolute advantage over the other country in both lines (coffee and textile) of production and the other
country has the absolute disadvantage in both the lines of production (contrast this with Smith‘s model,
where one country has absolute advantage in one line and the other in other line.)

In terms of comparative advantage, Ricardo assumes that the first country (which has absolute advantage
in either line of production) has a greater comparative advantage in one line compared with the other line,
in which its comparative advantage is smaller; and the other country‘s (the one which has absolute
disadvantage in either line of production) comparative disadvantage is smaller in the second line
compared with the first line of production, where its comparative disadvantage is greater.

International trade would bring production and consumption gains, when these two countries enter in to
trade with each other. Let us see, with the help of a numerical model, how that happens hypothetically.

Assume that with ―X‖ factors of production; Ethiopia can produce 120 units of textiles or 120 units of
coffee or any combination of textiles and coffee at the constant opportunity cost ratio of 1:1. Thus,
Ethiopia is equally efficient in the production of the two commodities.

India, on the other hand, is equally inefficient in either line of production compared with Ethiopia;
because with ―X‖ factors of production India can produce either 40 units of coffee or 80 units of textile or
any combination of textiles and coffee at the constant opportunity cost ratio 1:2.

Based on the above assumption, therefore, Ethiopia has absolute advantage over India in the production
63
of both the goods, and India had absolute disadvantage in respect of both goods. This is as far as absolute
advantage and disadvantage is concerned. In terms of comparative advantage and disadvantage, we have
the following things to say, (a) Ethiopia‘s comparative advantage over India is greater in the production
of coffee (3:1) as compared to textile (1.5:1). Therefore, Ethiopia should specialize in the production of
coffee rather than textiles although Ethiopia can produce both the goods equally and efficiently (at a cost
ratio of 1:1).

India‘s comparative disadvantage, in relation to Ethiopia, is lower in the production of textile (1:1.5) as
against coffee (1:3). In addition, India can produce textile at a far lower cost of production than coffee.
Hence, India should specialize in the production of textile, not because it has absolute advantage over
Ethiopia in this line but because its comparative disadvantage is less in this line of production than in the
other line of production (coffee).

The theory of comparative advantage suggests that a country should specialize in the production and
export of those goods in which either its comparative advantage is greater or its comparative disadvantage
is less and it should import those goods, in the production of which its comparative advantage is less or
comparative disadvantage is greater. Thereby, a country would be able to maximize its production (GNP)
and its consumption (economic welfare). In the classical comparative advantage theory, therefore, the
introduction of trade does not make any body worse off.

According to the classical economists, international trade is not only an engine of growth but an
instrument of reducing income inequalities between the rich and the poor countries of the world. Such as
international inter dependence, resulting from trade, would be consistent with equity or justice. The
classical economists, who were also great moral philosophers in those days, saw such situations emerging
out of international trade. They thought international trade would make the world a better place to live for
the entire mankind in a global perspective.

3.4.3 Some Comments on the classical Economic Liberalism

The world reality today does not, however, seem to conform to the hopes and aspirations entertained by
the classical economist. The facts of global inequalities Mercantilism are indeed startling. The period
from the end of World War II to date is marked by a large and growing disparity in income and living
standards. The very fact that income disparities between the rich and poor countries are growing dividing
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the already divided world all the more, suggests that there must be something fundamentally wrong with
the very mechanism which links the two worlds through international trade. The discussion of what must
have gone wrong with trade today could perhaps fill hundred pages of this module. However, what is
relevant at this point is that the classical hope that international trade would benefit all the countries,
particularly the smaller counties seems to have faded, especially for the Third world countries. It is in
these countries that a large part of man kind if it can be called as living at all. Critics from the left tend to
focus on the economic consequences, claiming that perfectly free markets or laissez fair capitalism,
undermines individual freedom for many people by creating social inequality, poverty and lack of
accountability for the most powerful. In other words, economic liberalism found itself under attack
favored redistribution of wealth, greater economic equality; government preprograms to help the poor
and, in some cases planned economies.

th th
The liberal theory of economics fell partially out of practice in the late 19 and early 20 century, when
many countries followed protectionism as a policy to achieve self sufficiency. The theory fell further out
th
of favor in the first half of the 20 century, following World War (I) and the great depression. It was also
largely superseded by modern economic theories, such as Keynesian economics, which take into account
macro–level phenomena and call for mixed economy involving significant state intervention. After
Keynesianism failed to explain stagflation in the 1970s, many concepts from the traditional liberal theory
were revived by neo-liberalism and are currently prompted by the World Bank and IMF as part of the
process of globalization, although both organizations were actually founded by Keynes. Since the 1970s,
the governments of many countries around the world have adopted economic liberalism to a greater or
less degree. The second phase of liberalism, which is the neo-liberal perspective of development, will be
discussed in detail in part.

3.5 Neo–Liberal Perspective of Development

Neo-liberalism is a label for economic liberalism which has become increasingly important in
international economic policy discussions from the 1970s onwards.

In its dominant international use, Neo-liberalism refers to a political-economic philosophy that

de-emphasizes or rejects government intervention in the domestic economy. It focuses on free-market
methods, fewer restrictions on business operations, and property rights. In foreign policy, Neo-liberalism

65
favors the opening of foreign markets by political means, using diplomacy, economic pressure and, for
some neo-liberals, military might. Opening of markets refers to free trade and an international division of
labor. Neo-liberalism generally favors multilateral political pressure through international organizations
or treaty devices such as the World Trade Organization (WTO), World Bank (WB) and African
Development Bank (ADB). It promotes reducing the role of national governments to a minimum.
Neo-liberalism favors privatization over direct government intervention and production (such as
Keynesianism), and measures success in overall economic gain. To improve efficiency and minimize
unemployment, it strives to reject or mitigate labor policies such as minimum wage, and collective
bargaining rights. It opposes socialism, protectionism, environmentalism, fair trade, and critics say it
impedes democratic rule. Likewise, these critics argue that labor rights and social justice should have a
priority in international relations and economics.

Neo-liberalism

The term "Neo-liberalism" is used to describe a variety of movements away from state control or
protection of the economy and toward corporate control of the market, particularly beginning in the
1970s.

In its most uncompromising form, Neo-liberalism is an economic ideology centered upon the values of
unregulated trade and markets, and the expanded business horizons provided by the end of the Cold War,
or globalization. It argues that free markets, free trade, and the unrestricted flow of capital will produce
the greatest social, political and economic good. This form advocates minimal government spending,
minimal taxation, minimal regulations, and minimal direct involvement in the economy. The argument is
that market forces will naturally fill many areas of jurisdiction for the highest overall gain. Detractors
state that market forces are inherently not equitable. In the West, Neo-liberalism argues that the Welfare
State should be dismantled and/or privatized. The thrust of this form of

Neo-liberalism as part of globalization is to utilize the world's resources: cheap labor, raw materials,
markets, in the most efficient way possible, and in doing so, to make more markets open to entrance by
developed nations.

However, Neo-liberalism is applied to a much broader range of developments, not all of which are closely

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associated with conservative parties. These include the shift from regulation to deregulation, the shift
from corporate benefits to privately managed benefits, the move from low trade volumes mandated by the
Britton Woods System to high-trade volumes in a floating currency environment utilizing comparative
advantage to increase GDP and median wages. It is argued in this broader sense that the problem with
under-developed countries is corruption related to the state interfering with adjustments in the market
mechanism by, for example, subsidizing prices, setting wages, or picking winners and losers in
economic development.

Central to the ideas of Neo-liberalism as opposed to the main competing foreign policy ideology,
Neo-realism is the belief that people and states are inherently good and cooperate as such. Neo-realism
on the other hand assumes that people and by extension states only act in self interest and sees possible
interstate cooperation only through the lens of national benefit. Neo-liberals are again more optimistic
than Neo-realists in their belief of absolute gain (as opposed to relative gain). Deals between nations
where both nations benefit but one benefits more are more likely to be approved of by Neo-liberals than
Neo-realists.

Some portray Neo-liberalism as the imposition of free markets from the top-down, arguing that it has
been promoted for the benefit of multinational corporations through the largest international financial
institutions of the world-economy, namely, the IMF, WTO, and World Bank and by powerful core
states, in particular, the European Union and the United States government. Because these
governmental institutions advocate Neo-liberalism, many identify the policies with exploitation by
corporations and the developed nations of less developed nations. The critics argue that these institutions
do not promote development, but instead ensure the advantages and positions of the developed countries
that dominate them. (See also Washington Consensus, Los Chicago Boys, Corporatism, Shock
therapy.) Critics also protest the fact that Neo-liberals policies give multinational corporations economic
power over democratically elected governments, as these corporations can use their abilities to withdraw
or infuse capital (and therefore affect jobs and the economy) as political leverage.

Supporters of Neo-liberalism will state that rights over the flow of capital are essential for necessary
market efficiency. They point to economic studies of the turbulence and shocks of the 1970s and argue
that free markets will be more resilient in the face of such shocks, produce higher growth, better returns
on capital and therefore more investment and development. They argue that binding other nations to the

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developed core will promote global stability, and eventually a turn to more democratic forms of
government.
Contrary to what the name seems to suggest, individuals identified as liberals often oppose neo
liberalism or do not support it entirely. Neoliberalism is not a version of the new liberalism of John
Dewey, Woodrow Wilson, John Maynard Keynes, Franklin D. Roosevelt, or the British Liberal
Democrats, which advocated limited intervention in the economy as a tool to benefit people.

"Neo-liberalism" is often used as a pejorative; in this context it usually means not the economic theory,
but the implementation of global capitalism and the power of multinational corporations, as well as the
effects of free trade on wages and social structures.

Brief history

Just as the drive towards liberalization of trade and laissez-faire economics justified and encouraged the
"first era of globalization", which came to an end with the shocks of the First World War, the collapse of
the Gold Standard, and the Great Depression, Neo-liberalism is associated with the contemporary
"second era of globalization," the seeds of which were planted after the Second World War. In between,
during the period from 1915 until the 1960s or so, different versions of more statist liberalism and
economic nationalism guided the economic and social policies of many nations. In mid-1950s, a book
about the theory and practice of Neo-liberalism, recent German liberalism and the Federal Republic of
Germany was published in the German Democratic Republic.

Neo-liberalism economic roots begin with the re-establishment of international monetary stability with
the Britton Woods system, which fixed currencies to the U.S. Dollar to gold. As an ideological
movement, it became increasingly prevalent based on the work of Robert Mundell and Arthur
Flemming. The Mont Pelerin Society, founded at about the same time by thinkers such as Friedrich
Hayek, Milton Friedman, and Michael Polanyi created free-market think tanks and advocacy groups in
the United Kingdom and the United States during the 1960s and 1970s. They drew upon the theories of
the Austrian School of economics and monetarism. Neo-liberalism argued that protectionism and
government programs produced economic inefficiencies, and that developing nations should open their
markets to the outside, and focus on exporting. Also emphasized was the liquidation of state-owned
corporations, and the reduction in rules designed to hinder business. Neo-liberals ideas found expression
in a series of trade talks to form the General Agreement on Tariffs and Trade (GATT) as well as
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regional free trade agreements such as the European Union (EU) and the North American Free Trade
Agreement (NAFTA).

The slow and quantitative development of Neo-liberalism after World War II became more rapid in the
1970s, and not always by peaceful means. One of the often-touted neo-liberals success stories is General
Augusto Pinochet's Chile – which began with the violent ousting of the democratically-elected
government of Salvador Allende. The Allende government had pursued radical left wing policies, and
has been labeled "socialist" or "Marxist." "Free market" policies, including privatization of state assets,
were imposed by "los Chicago Boys," Chicago school economists inspired by Milton Friedman. These
policies were later imitated by the Britton Woods institutions operating in many other poor countries,
particularly in Latin America.

The rise of this wave of Neo-liberalism culminated with the Reagan government in the United States and
that of Margaret Thatcher in Britain. The Reagan and Thatcher governments not only shifted their own
countries' policies toward laissez-faire but used their control of the major Britton Woods institutions to
impose their policies on the rest of the world. For this reason, some regard Neo-liberalism as synonymous
with the "Washington Consensus," the dominant policy view at the International Monetary Fund
(IMF), the World Bank, and the U.S. Treasury at the end of the twentieth century and the start of the
twenty first. A major axiom of the neo-liberals school is that (to quote Thatcher) "There Is No
Alternative" to globalized capitalism. This slogan is often abbreviated as "TINA."

In the late 1980s and early 1990s neo-liberals policies had been embraced by the conventionally-defined
center-left, as Bill Clinton of the United States backed the North American Free Trade Agreement. Free
trade was seen as essential to his economic program, which promoted the creation of technology and
intellectual property rights as the means by which America would be able to reduce or manage its
persistent balance of trade deficit. Some center-left neo-liberals economists argued that protectionism is
not a left or right issue, but an issue of asymmetry, and therefore a general cause for concern. Neoliberals
policies became adopted by several Third way parties, including New Labor in Britain, and the Social
Democratic Party (SPD) in Germany. These governments opted for a continuation of the policies of the
1980s, arguing that they could be implemented in a more equitable manner that would produce greater
social good, and bind the recently liberated communist states to the developed world economy.

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Critics of Neo-liberalism in both theory and practice are numerous. This is particularly true in developing
nations whose assets have been acquired by foreigners and whose underdeveloped domestic political and
economic institutions had been undermined by the effects of being exposed to trade and rapid flows of
capital. Even within the neo-liberals movement there is intense criticism of how many developed nations
have demanded that others liberalize their markets for manufactured goods, while protecting their own
domestic agricultural markets.

Anti-globalization advocates are the most vociferous opponents of Neoliberalism, particularly its
implementation as "free capital flows" but not free labor flows. They argue that neo-liberals policies
encourage a "race to the bottom" as capital flows to the lowest environmental and labor standards, and is
merely updated "beggar thy neighbor" imperialism, dating back 200 years. In this they are in fundamental
agreement with many of Neo-liberalism supporters who argue that Neo-liberalism represents an updated
version of classical liberalism.

The Theory of Neo-Liberalism

As described by University of California, Berkeley economic historian and defender of Neo-liberalism

Professor Brad DeLong, this "ism" has two main tenets: The first is that close economic contact between
the industrial core [of the capitalist world economy] and the developing periphery is the best way to
accelerate the transfer of technology which is the sine qua non/means for making poor economies rich
(hence, all barriers to international trade should be eliminated as fast as possible). The second is that
governments in general lack the capacity to run large industrial and commercial enterprises. Hence,
[except] for core missions of income distribution, public-good infrastructure, administration of justice,
and a few others, governments should shrink and privatize."

To critics of Neo-liberalism, these two principles represent parts of the "trickle-down theory," that is,
under free-market capitalism, economic growth and technological change benefits the poorest countries
and people, even if ownership remains predominantly with the wealthier countries. However, Critics also
claim that these claims are contradicted by the empirical record. To defenders, "Development is
Freedom" (i.e., free-market capitalism). More economic growth, specialization and opportunity create
chances for individuals to achieve more than rigid structures which provide only illusory protection.
The concept of Neo-liberalism became popular among economists not only as the balance of political
power changed (as discussed above), but as many decided that post-World War II national development
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strategies for poor countries were not having the intended effects. In particular, funding for mega-projects
left poor countries with high debts but little growth to show for it. It is also a reaction to the perceived
failures of populist and modern liberal economic policies, such as import-substituting
industrialization.

Alleged failures of the East-Asian (Taiwanese, South Korean) policies of state-guided export-led
economic growth and of the centrally-planned or "communist" economies also were interpreted as
requiring neo-liberals medicine. With the exception of the Chinese 'success', most centrally-planned
countries fell apart economically and politically in late 1980s and early 1990s. China's market socialism
has been criticized for developing towards crony capitalism, with closed markets, manipulated currency
and stock prices and restrictions on imports, that has plagued many export-led economies.

As noted, the neo-liberals doctrine is linked to the so-called "Washington consensus," a set of specific
policy goals designed for Latin American countries. In addition to the tenets of Neo-liberalism noted by
Professor DeLong, the Washington consensus stipulated that a country should have stable exchange
rates and a government budget in balance.

While some use the terms neo-liberals and libertarian or classical liberalism interchangeably there is a
difference between the two philosophies. While both share a belief in market economics and free trade,
neo-liberals‘ economics theory shares with neo-liberals‘ international relations theory (and liberal
internationalism) a belief in international regimes and a degree of global governance as a means of
negotiating and administering international agreements. Neo-liberals believe that greater economic and
political interdependence will lead to progress and a reduction of international tensions or at least divert
states from utilizing military means to resolve conflict. Libertarians reject the neo-liberals‘ belief that
global governance bodies or state negotiated treaty regimes that bind the individual are desirable.

Much of Neo-liberalism accepts macro-economic theory that assumes full employment and rational
expectations, that is, it is a modern neoclassical and free-market economic theory. Others rely on the
benevolence and technical expertise of the IMF and other International Financial Institutions to solve the
world's economic problems.

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Practice

The practice of neo-liberals ideas varies widely. Some proponents see transparency, development and
uniformity of regulations as the most important goals, while many others see the dismantling of state
regulations, as such, as the primary purpose. Many leading implementers of neo-liberals‘ policies
criticize the manner in which those policies are implemented. Some blame the institutions such as the
World Bank and IMF directly, while others argue that by the time the IMF and World Bank are involved,
the problems have already become endemic – they blame the "shock therapy" approach which was taken
in the 1980s for much of the economic damage, and argue that "big bang" marketization, such as was
pursued in Russia, leads to centralized corrupt economic oligarchy, the very opposite of what
Neo-liberalism proposes (though defenders point to the success of Estonia's and Poland's speedy reforms
and the economic problems faced by slower reformers such as Moldova and Russia).

There were also catastrophic failures. In particular, Nobel prize winner and former World Bank chief
economist Joseph Stiglitz argues that the IMF is guilty of forcing neo-liberals and Washington
consensus policy goals on countries at times when it was not appropriate (e.g., the Asian financial crisis),
with devastating results. The "cookie cutter" approach of applying the same policy no matter what the
specificities were can be seen in this crisis, as the IMF pushed for government budget cuts even though
government budget deficits had nothing to do with the crisis. Neo-liberalism has also been criticized by
populists, social democrats, and anti-capitalists, who argue that unbridled market forces inevitably
increase inequality in wealth and hence power.

Competing studies have been undertaken to analyze the economic effectiveness of neo-liberals policy.
These are the two most prominent ones:

(A) Professor Robert Pollin, in a recent book, showed the neo-liberals record on world economies
compares unfavorably to development under the preceding era. Excluding the People's Republic of
China, which did not follow the neo-liberals lead, the era of the "developmental state" (1961-80) saw a
per capita growth rate of real gross domestic product that averaged 3.2 percent per year. On the other
hand, during the neo-liberals‘ era (1981-99) this growth rate fell to 0.7 percent per year, slowing both
absolutely and relative to the wealthier countries of the OECD. China, which shifted from pure state
planning to state-guided export promotion, saw its per capita growth rate rise from 2.5 to 8.4 percent

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between these periods. Pollin also shows the rapid increase in income inequality between these periods
[question: Inter-country inequality? or intra-country inequality?], especially when China is excluded
from the sample.

Neo-liberals counter that Pollin's research lumped both neo-liberals and other anti-neoliberals countries
in the same group and time period; hence it does not show the effect of Neo-liberalism for any single case
(fallacy of composition).

(B) Professors Jeffrey Sachs and Andrew Warner offer a counter study that examined 111 countries
between 1970 and 1989 and separated the country's economic data into groups based on open and closed
economic policy. They observed that in those developing countries that pursued open economic policies
the income per person grew 4.5 % per year, whereas the number in closed economies was close to zero
and in the developed countries 2.3 %. These empirical results are in line with the theoretical ones, where
poorer countries are shown to have the follower's advantage, being able to import capital, technology
and managerial practices.

The opponents to Neo-liberalism, however, counter that the study did not provide an adequate definition
for open and closed economies when they divided the groups.

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3.6. The Neoclassical counter-revolution

Challenging the statist model: Free Markets, Public Choices, and Market-Friendly Approaches

In the 1980s, the political ascendancy of conservative governments in the United States, Canada, Britain,
and West Germany brought a neoclassical counter-revolution in economic theory and policy. In
developed nations, this counterrevolution favored supply-side macroeconomic policies, rational
expectations theories, and the privatization of public corporations. In developing countries it called for
free markets and the dismantling of public ownership, statist planning, and government regulation of
economic activities.

Neoclassicists obtained controlling votes on the boards of these world‘s two most powerful
international financial agencies-the World Bank and the International Monetary Fund. In conjunction
and with the simultaneous erosion of influence of organizations such as the International Labor
Organization (ILO), the United Nations Development Program (UNDP), and the United Nations
Conference on Trade and Development (UNCTAD), which more fully represent the views of LDC
delegates, it was inevitable that the neoconservative, free-market challenge to the interventionist
arguments of dependence theorists would gather momentum.

The central argument of the neoclassical counterrevolution is that underdevelopment results from poor
resource allocation due to incorrect pricing policies and too much state intervention by overly active
Third World governments. Rather the leading writers of the counterrevolution school argue that it is this
very state intervention in economic activity that slows the pace of economic growth.

The neo-liberals argue that:

(A) By permitting competitive free markets to flourish,
(B) Privatizing state-owned enterprises,
(C) Promoting free trade and export expansion,
(D) Welcoming investors from developed countries, and
(E) Eliminating the plethora of government regulations and price distortions in factor, product,
and financial markets, both economic efficiency and economic growth will be stimulated.

Contrary to the claims of the dependence theorists, the neoclassical counter-revolutionaries argue that
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the Third world is under developed not because of the predatory activities of the First World and the
international agencies that it controls but rather because of the heavy hand of the state and the
corruption, inefficiency, and lack of economic incentives that permeate the economies of developing
nations.

What is needed therefore is not:

(A) a reform of the international economic system,
(B) a restructuring of dualistic developing economies,
(C) an increase in foreign aid,
(D) attempts to control population growth, or
(E) a more effective central planning system.

Rather, it is simply a matter of promoting free markets and laissez-faire economics within the context of
permissive governments that allow the ―magic of the marketplace‖ and the ―invisible hand‖ of market
prices to guide resource allocation and stimulate economic development. They point both to the success
of countries like South Korea, Taiwan, and Singapore as ―free market‖ examples (these Asian Tigers are
far from the laissez-faire neoconservative prototype) and to the failures of the public-interventionist
economies of Africa and Latin America. The neoclassical challenge to the prevailing development
orthodoxy can be divided into three component approaches: The free-market approach, the public
choice (or “new political economy”) approach, and the “market-friendly” approach.

(A) Free-market analysis argues that markets alone are efficient-product markets provide the signals for
investments in new activities; labor markets respond to these new industries in appropriate ways;
producers know best what to produce and how to produce it efficiently; and product and factor prices
reflect accurate scarcity values of goods and resources now and in these future. Competition is effective,
it not perfect; technology is freely available and costless to absorb; information is also perfect and
costless to obtain. Under these circumstances, any government intervention in the economy is by
definition distortionary and counterproductive. Free-market development economists have tended to
assume that Third World markets are efficient and that whatever imperfections exist are of little
consequence.

(B) Public-choice theory, also known as the new political economy approach, goes even further to argue
that governments can do nothing right. This is because public-choice theory assumes that politicians,

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citizens, and states act solely from a self-interested perspective, using their power and the authority of
government for their own selfish ends. Citizens use political influence to obtain special benefits (called
―rents‖) from government policies (e.g., import licenses or rationed foreign exchange) that restrict access
to important resources.

Politicians use government resources to consolidate and maintain positions of power and authority.
Bureaucrats and public officials use their positions to extract bribes from rent-seeking citizens and to
operate protected businesses on the side. Finally, states use their power to confiscate private property
form individuals. The net result is not only a misallocation of resources but also a general reduction in
individual freedoms. The conclusion, therefore, is that minimal government is the best government.

(C) The market-friendly approach is the most recent variant on the neoclassical counterrevolution. It is
associated principally with the writings of the World Bank and its economists, many of whom were more
in the free-market and public choice camps during the 1990s. This approach recognizes that there are
many imperfections in LDC product and factor markets and those governments do have a key role to play
in facilitating the operation of markets through ―nonselective‖ (marketfriendly) interventions-for
example, by investing in physical and social infrastructure, health care facilities, and educational
institutions and by providing a suitable climate for private enterprise.

The market-friendly approach also differs from the free-market and public-choice schools of thought by
accepting the notion that market failures are more widespread in developing countries in areas such as
investment coordination and environmental outcomes. Moreover, phenomena such as missing and
incomplete information, externalities in skill creation and learning, and economies of scale in production
are also endemic to LDC markets.

Conclusions and implications

Like the dependence revolution of the 1970s, the neoclassical counterrevolution of the 1980s had its
origin in an economics-ideological view of the Third World and its problems. Whereas dependence
theorists (many, but certainly not all, of whom were LDC economists) saw underdevelopment as an
externally induced phenomenon, neoclassical revisionists (most, but certainly not all, of whom were
western economists) saw the problem as an internally induced LDC phenomenon, one of too much
government intervention and bad economic policies. Such finger-pointing on both sides is not uncommon

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in issues as contentious as those that divide rich and poor nations.

But what of the neoclassical counterrevolution‘s contention that free markets and less government
provide the basic ingredients for Third World development? On strictly efficiency (as opposed to equity)
criteria, there can be little doubt that market price allocation usually does a better job than state
intervention.

The problem is that many LDC economies are so different in structure and organization from their
Western counterparts that the behavioral assumptions and policy precepts of traditional neoclassical
theory are sometimes questionable and often incorrect. This is because:

(A) Competitive markets simply do not exist, not, given the institutional, cultural, and historical
context of many LDCs, would they necessarily be desirable from a long-term economic and social
perspective.
(B) Consumers as a whole are rarely sovereign about anything, let alone about what good and services
are to be produced, in what quantities, and for whom.
(C) Information is limited, markets are fragmented, and much of the economy is still non-monetized.
(D) There are widespread externalities of production and consumption as well as discontinuities in
production and indivisibilities (i.e., economies of scale) in technology.
(E) Producers, private or public, have great power in determining market prices and quantities sold.
(F) The ideal of competition is typically just that-an ideal with little relation to reality. Instead of the
equilibrium, automatic-adjustment framework of neoclassical theory, many LDC markets are better
analyzed through disequilibrium, structural-adjustment models in which responses to price and wage
movements can be ―perverse‖. Although monopolies of resource purchase and product sale are a
pervasive Third World phenomenon, the traditional neoclassical theory of monopoly also offers little
insight into the day-to-day activities of public and private corporations. Decision rule can vary widely
with the social setting, so that profit maximization may be a low-priority objective in comparison with,
say, the creation of jobs or the replacement of foreign managers with local personnel.
(G) Finally, the invisible hand often acts not to promote the general welfare but rather to lift up those
who are already well-off while pushing down the vast majority.

The reality of the institutional and political structure of many Third World economies-not to mention
their differing value systems and ideologies-often makes the attainment of appropriate economic policies

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based either on markets or enlightened public intervention an exceedingly difficult endeavor. In an
environment of widespread institutional rigidity and severe socioeconomic inequality, both markets and
governments will typically fail. It is not simply an either-or question based on ideological leaning; rather
it is a matter of assessing each individual country‘s situation on a case-by-case basis. Development
economists must therefore be able to distinguish between textbook neoclassical theory and the
institutional and political reality of contemporary LDCs. They can then choose the neoclassical concepts
and models that can best illuminate issues and dilemmas of development and discard those that cannot.

3.7 Alternative Development

It is another different sect of development studies. The perspective arose in reaction to mainstream
development/ orthodox development thinking/ neo-liberal thinking. They are different from this
perspective in that they suggest new strategies, new subjects, new agents, and new tactics/ methods.

The most important difference is in terms of their objective/ focus. Mainstreams assume that economic
growth equates development. On the other hand, alternative development says growth is not central.
Issues of poverty are central-Alleviation of poverty. They wanted subjects of development to focus on
the quality of life of the people. Development has to do with reducing the number of people that are in
absolute poverty. There are different perspectives under this stream. They are:-

1 Redistribution with growth.

2 Basic needs strategy.
3 Human development approach.
4 Sustainable development/ ecological/ environmental strands of development thinking.
5 Gender perspectives (women in development, gender and development).

1. Redistribution with growth

It is the first example of post development/ alternative development and has its origin in World Bank in
late 1960s. Here, the context is important. In 1968, Robert McNamara became the president of World
Bank who was formerly secretary of defense and national Security Council of U.S.A.

The funding of World Bank had been focusing on particular areas-prestige projects- financed large scale
industrial projects, huge hydroelectric projects, infrastructure projects. This period extends from 1948-
1960. When he came, emphasized a necessity to focus on poverty. Each country began to be studied. And
the conclusions of the studies were:-

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1. There was no necessary correlation between economic growth and reduction of poverty.
2. In terms of relative and absolute poverty, the most affected areas were rural areas. They were the
poorest of the poor.

Rural development became the focus. McNamara was involved in the war with Vietnam and Cambodia
and has experienced how rural inhabitants (communists) could successfully challenge USA. Rural
poverty created rural insurgency. So it has to be addressed. This implied a focus on rural development
projects. The state had an important role. Meaning:-
a) It should encourage productivity and over time, should expend
Health, education, and services,
b) There should be growth,
c) Agriculture should be encouraged,
d) The fruits of economic growth have to be distributed evenly. And State subsidizes cheap labor.
2. Basic needs strategy

The origin of this perspective is in the international labor organization and UNRISD. The time frame was
in mid 1970s. Development should involve the fulfillment of basic needs of the population. Basic needs
strategy had two components. They are:-
1 Fulfillment of basic necessities of life-food, cloth, shelter. And,
2 The achievement in terms of access to basic social services-health, education, transportation,
social amenities provided by the state.

Development can only be measured in terms of the achievement of these two categories. It also advocated
the enforcement and respect for human rights, the need of participation in economy and politics. ILO also
included the objective of full employment. To some extent accepted the need for growth. But, this should
be accompanied by other policy changes-change in asset ownership, need for land reform, and support to
the notion of new international economic order. Meaning, it called for new arrangement of trade relation
between developed and underdeveloped countries. Additionally, it assigned a proactive role to the state.
To reinforce this, successful examples of development were recognized-Peoples Republic of China (PRC)
and Cuba. Obviously, it was influenced by dependency/ Neo-Marxian thinking. Because of this fact, it
was not popular in subjects of development.

3. Human development

Its roots are in United Nations Development Program (UNDP) and the time frame was in late 1980s and

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early 1990s. It can not be said to be original because it has similar consensus as the basic needs argument
and focuses on poverty. But, it came with a new indicator to measure quality of life- human development
index (HDI).

Before its formulation, the only measure was GNP which has weaknesses (it‘s not a measure of quality of
life rather a quantitative measure, it‘s an average figure, doesn‘t tell about distribution of income). But, it
is still used today as a measure of economic growth. HDI is based on three separate criterions:-
a) Purchasing power,
b) Literacy rate (educational aspect),
c) Life expectancy. And also,
d) number of doctors, nurses per 1000 people. This is a better measurement of human welfare. It was
firstly made public in 1990 and has been further refined.

4. Sustainable development

When it came, the period saw emergence of ecological/ environmental movements. There were an
increasing number of social groups asking questions regarding the costs of economic development. Until
that time, developmental change was taken to be phenomenal and seen as positive. That means economic
development / growth/ industrialization has been seen as good, to be worked for. But, by 1970s and 1980s
people started to ask questions about environment/ ecology.

In 1972 the club of Rome issued a report discussing the limits of growth. The scientists began discussing
the possibility that patterns of economic growth had reached their absolute limits. And they agreed on the
pattern of depletion of national recourses-petroleum, coal, minerals, are running out and at some point
humans have to stop.

On another occasion, in 1983 the united nations set up a commission on environmental development
called Brunt land commission whose report came in 1987 stating pollution of seas, atmospheric air,
disappearance of species, deforestation, desertification, and depletion of non-renewable resources. And
as a solution, it proposed sustainable development as a compromise because; there was the emergence of
green critics on development suggesting uncontrolled industrialization and exploitation of national
resources to come to an end.

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This view advocated growth. The underdeveloped world is still lagging behind and can not be expected to
be satisfied with their position of underdevelopment. Development is necessary but industrialization
should be sustainable. It has to be aware of limits and guided by the technology, kind of society, and
resources you have. Development has to be the kind that satisfies present needs without threatening future
desires.

It also prescribed that governments of the underdeveloped world should not depend on development loans
and credits because it can satisfy in the present, later comers pay the price. This view has succeeded in
influencing development practices.

5. Gender Perspectives

This view emphasized that development and its practices have always marginalized women. The previous
view was arguing that poverty is disproportionately the characteristic of rural areas. But here they argue
that poverty not only affects the rural society, it also affects women disproportionately. Men are relatively
better off.

It goes on to say that mainstream development studies have always ignored the contribution of women in
terms of growth. House hold production was taken for granted. But with out it, economic development
would be impossible. So, it has to be given value. It was basically influenced by feminism.

Contributions of feminist influences:

A. The focus on women-has influenced development strategies and practices. In terms of poverty
alleviation, today the consensus is women are relatively more affected than men. So, the practice
of targeting women
B. Resource distribution-the consensus has been for policies and programs specifically to benefit
women. These feminist influences have been incorporated by mainstream economic thinkers.
Poverty itself became part of main stream economics.

6. Post Development

This view can not be taken as a paradigm or perspective in development studies. Rather it is a critique of

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development so far. Post development as a movement emerged in late 1980s and 1990s. It is related to the
situations in social sciences as post-structuralism, deconstruction and questioned some of the
assumptions that were taken for granted since enlightenment.

Post development criticized the whole development project for being unsuccessful. It questions the
justification for the whole development project and says it was mistaken. So, it criticized the previous
development projects by saying:-
a) It identified the developed capitalist societies/ socialists as a model to follow. Development was a
process of cultural homogenization. It imposed western culture, values and norms on those who
are not western. These societies were being viewed as abnormal and inferior. And this was racist.
It was also undemocratic. Development projects by defining this people as objects have made
them puppets.
b) It also criticized alternative development for becoming part of main stream economists, allied to
those who are governments of westerners and financial institutions. Post development didn‘t
suggest particular tactics to bring about development.

3.8. Developmental state

Developmental state, or hard state, is a term used by international political economy scholars to refer to
the phenomenon of state-led macroeconomic planning in East Asia in the late twentieth century. In this
model of capitalism (sometimes referred to as state development capitalism), the state has more
independent, or autonomous, political power, as well as more control over the economy. A development
state is characterized by having strong state intervention, as well as extensive regulation and planning.
The term has subsequently been used to describe countries outside East Asia which satisfy the criteria of
a developmental state. Botswana, for example, has warranted the label since the early 1970s.

One of the innovators in the discussion of the developmental state was Chalmers Johnson in his MITI and
the Japanese Miracle: In states that were late to industrialize, the state itself led the industrialization drive,
that is, it took on developmental functions. These two differing orientations toward private economic
activities, the regulatory orientation and the developmental orientation, produced two different kinds of
business-government relationships. The United States is a good example of a state in which the regulatory
orientation predominates, whereas Japan is a good example of a state in which the developmental
orientation predominates.

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A regulatory state governs the economy mainly through regulatory agencies that are empowered to
enforce a variety of standards of behavior to protect the public against market failures of various sorts,
including monopolistic pricing, predation, and other abuses of market power, and by providing collective
goods (such as national defense or public education) that otherwise would be undersupplied by the
market. In contrast, a developmental state intervenes more directly in the economy through a variety of
means to promote the growth of new industries and to reduce the dislocations caused by shifts in
investment and profits from old to new industries. In other words, developmental states can pursue
industrial policies, while regulatory states generally can not.

As in the case of Japan, there is little government ownership of industry, but the private sector is rigidly
guided and restricted by bureaucratic government elites. These bureaucratic government elites are not
elected officials and are thus less subject to influence by either the corporate-class or working-class
through the political process. The argument from this perspective is that a government ministry can have
the freedom to plan the economy and look to long-term national interests without having their economic
policies disrupted by either corporate-class or working-class short-term or narrow interests.

Characteristics of the Developmental state

 Emphasis on market share over profit
 Economic nationalism
 Protection of fledging domestic industries
 Focus on foreign technology transfer
 Large government bureaucracy
 Alliance between the state, labour and industry called corporatism
 Skepticism of neoliberalism and the Washington Consensus
 Prioritization of economic growth over political reform
 Legitimacy and Performance
Examples of Development States in East and Southeast Asia
Some of the best prospects for economic growth in the last few decades have been found in East and
Southeast Asia. China, South Korea, Japan, Thailand, Taiwan, Vietnam, Malaysia, and Indonesia are
developing at high to moderate levels. Thailand, for example, has grown at double-digit rates most years
since the early 1980‘s. China has been the world leader in economic growth since 2001. It is estimated
that it took England around 60 years to double its economy when the Industrial Revolution began. It took
the United States around 50 years to double its economy during the American economic take-off in the
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late nineteenth century. Several East and Southeast Asian countries today have been doubling their
economies every 10 years.

It is important to note that in most these Asian countries, it is not just that the rich are getting richer, but
the poor are becoming less poor. For example, poverty has dropped dramatically in Thailand. Research in
the 1960‘s showed that 60 percent of the people in Thailand lived below a poverty level estimated with
cost of basic necessities. By 2004, however, similar estimates showed that poverty there was around 13 to
15 percent. Thailand has been shown by some World Bank figures to have had the best record for
reducing poverty per increase in GNP of any nation in the world.

When viewed through the lens of dependency theory, developmentalism is about countries such as
Thailand, Taiwan, Malaysia, South Korea, and increasingly Vietnam, where the governments are able
and willing to protect their people from the negative consequences of foreign corporate exploitation.
They tend to have a strong government, also called a development state or hard state and have leaders
who can confront multinationals and demand that they operate to protect their people‘s interests. These
―development states‖ have the will and authority to create and maintain policies that lead to long-term
development that helps all their citizens, not just the wealthy. Multinational corporations are regulated so
that they may follow domestically-mandated standards for pay and labor conditions, pay reasonable
taxes, and by extension leave some profits within the country.

Specifically, what is meant by a development state, is a government with sufficient organization and
power to achieve its development goals. There must be a state with the ability to prove consistent
economic guidance and rational and efficient organization, and the power to back up its long-range
economic policies. All of this is important because the state must be able to resist external demands from
outside multinational corporations to do things for their short-term gain, overcome internal resistance
from strong groups trying to protect short-term narrow interests, , and control infighting within the nation
pertaining to who will most benefit from development projects.

CHAPTER FOUR
2.1 Fundamental Development Issues
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Introduction

Despite significant improvements over the half past century, extreme poverty remains widespread in the
developing world. More than 1.2 billion people live on less than $1 per day at purchasing power parity,
and more than 2.8 billion, almost half the world population live on less than $2 a day. These impoverished
people often suffer from under nutrition and poor health, have little or no literacy, live in environmentally
degraded areas, have little political voice, and attempt to earn a meager living on small and marginal
farms or in dilapidated urban slums.

That development requires a higher GNP and a faster growth rate is obvious. The basic issue, however, is
not only to make GNP grow but also who would make it grow, the few or the many. If it were the rich, it
would most likely be appropriate by them, and poverty and inequality would continue to worsen. But if it
were generated by the many, they would be its principal beneficiaries, and fruits of economic growth
would be shared more evenly. Thus many developing countries that had experienced relatively high rates
of economic growth by historical standards discovered that such growth brought little in the way of
significant benefits to their poor.

In September 1994, the program of action at the Cairo International Conference on population and
development asserted that ―despite decades of development efforts, both the gap between rich and poor
nations and inequalities within nations have widened…. Widespread poverty remains the major challenge
to development efforts. This view was echoed again and again at the United Nations world summit for
social development held in Copenhagen in March 1995 and attended by more than 134 heads of state.
Because the elimination of widespread poverty and highly ever growing income inequality are at the core
of all development problems and, in fact, define for many people the principal objective of development
policy, it is essential to focus on the nature of poverty and inequality problem in developing countries.
Although our main focus is on economic poverty and inequalities in the distribution of incomes and assets,
it is important to keep in mind that this is only a small part of the broader inequality problem in the
developing world of parallel or even greater importance are inequalities of power, prestige, status, gender,
job satisfaction, conditions of world, degree of participation, freedom of choice, and many other
dimensions of the problem. In most social relationships, we cannot really separate the economic from the
non-economic manifestations of inequality. Each reinforces the other in a complex and often interrelated
process of cause and effect.

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2.1.1 Poverty, Inequality, and Development

A. Measuring Inequality and Poverty

We can get answers to questions relating to the extent and character of inequality and poverty in
developing countries by pulling together some recent evidence from a variety of sources.

Measuring inequality
Economists usually like to distinguish between two principal measures of income distribution for both
analytic and qualitative purposes; the personal or size distributive factor share distribution of income.

Size distributions

The personal or size distribution of income is the measure most commonly used by economists. It simply
deals with individual persons or households and the total incomes they receive.
2.1.1.1 Population Growth and Development

As the twentieth century begun, the world‘s population was estimated to be almost 6.1 billion people.
Projections by the United Nations placed the figure at more than 9.1 billion by the year 2050 before
reaching a maximum of 11 billion by 2200.over 90% of that population will inhibit the developing world.
What will be the economic and social implications for the levels of living, national and personal esteem,
and freedom of choice-in short, for development-if such projections are realized? Are such projections
inevitable, or will they depend on the success or failure of development efforts? Finally, even more
significant, is rapid population growth per se as serious problem as many people believe, or is it a
manifestation of more fundamental problems of underdevelopment and unequal utilization of global
resources between rich and poor nations, as others argue?

2.1.1.2 The basic issue: population growth and the quality of life

Every year, approximately 83 million people are being added to the world‘s population. Almost all of this
net population increase is in developing countries. Increases of such magnitude are unprecedented. But
the problem of population growth is not simply a problem of numbers. It is a problem of human welfare
and development. Rapid population growth can have serious consequences for the well-being of all of
humanity. if development entails the improvement of peoples‘ levels of living-their incomes, health,
education, and general well being-and if it also encompasses their self-esteem, respect, dignity, and

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freedom to choose, then the really important question about population growth is this: How does the
contemporary population situation in developing countries contribute to or detract from their chances of
realizing the goals of development, not only for the current generation but also for future generations?
Conversely, how does development affect population growth?
2.1.1.3 Structure of the Worlds Population

The world‘s population is very unevenly distributed by geographic region, fertility and mortality levels,
and age structures.

a) Geographic region

More than three quarters of the world‘s people live in developing countries; fewer than one person in four
lives in an economically developed nation. Figure
7.2 shows the regional distribution of the world‘s population as it existed in 1998 as it is projected for
2050.

Given current population growth rates in different parts of the world (significantly higher in LDCs), the
regional distribution of the world‘s population will inevitably change by 2050. By that time, it is likely
that there will be almost
6.5 billion more people on earth than in 1950 and about 3 billion people more than in 2000. Africa will
experience the largest percentage increase (184%), and it‘s projected 10 times its 1950 population. Latin
America and Asia are projected to grow by 70% and 50%, respectively. Together these three continents
will probably hold over 88% of the world‘s population by 2050, as contrasted with 70% in 1950 and 82%
in 1998. Correspondingly, the former Soviet Union, and North America will have fallen from 17% to less
than 12% of the total.

b) Fertility and mortality rates

The rate of population increase is quantitatively measured as the percentage yearly net relative increase
(or increase, in which case it is negative) in population size due to natural increase and net international
migration. National increase simply measures the excess of births over deaths or, in more technical
terms, the difference between fertility and mortality. Net migration is of negligible, though growing,
importance today (although in the nineteenth and early twentieth centuries it was an extremely important
source of population increase in North America, Australia, and New Zealand and corresponding decrease

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in Western Europe). Population increase in developing countries there fore depends almost entirely on the
difference between their birth and death rates.

The difference between developing and developed nations in terms of rates of population growth can be
explained simply by the fact that birth rates (fertility) in developing countries are generally much higher
than in the rich nations. LDC death rates (mortality) are also higher. However, these death rate differences
are substantially smaller than the difference in birth rates. As a result, the average rate of population
growth in developing countries is now about 1.4% per year (1.6 excluding china), where as the
economically developed countries have an annual growth rate of only 0.1%. Figure 7.3 shows recent and
projected trends in population growth for both developed and less developed nations. Note that the
overall population growth rate in developing countries appears to have peaked at an annual rate of 2.32%
in the late 1960s and early 1970s and is now declining.

As just noted, the major source of difference in population growth rates between the less developed and
the more developed countries is the sizable difference in their birth rates.

While fertility has been declining in many LDCs, there has been a rapid narrowing of the gap in mortality
rates between developed and less developed countries. The primary reason is undoubtedly the
improvement in health conditions throughout the developing world. Modern vaccination campaigns
against malaria, small pox, yellow fever, and cholera as well as the proliferation of public health facilities,
clean water supplies, improved nutrition, and public education have all worked together over the past
three decades to lower

2.1.2 Population Explosion and Control

There are some distinct differences between developed and less developed countries‘ birth and death rates.
Birth rates in under developed countries are high while they are lower in developed ones. In addition,
population size has more or less stagnated in developed countries; which is not true for under developed
world.

In terms of population structure, the bulk of the population is in the working age group and the proportion
of elders and dependants is small in developed countries. While in under developed countries the bulk of
the population is dependant.

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75-80% of the world‘s population is found in under developed world. And the tendency is that population
size will keep on increasing because the bulk of the population is still in the reproductive age and also
because of early marriage. In contrast, minority of the population is in the reproductive age bracket and
age of marriage is high in developed countries.

Here, what you have to bear in mind is that population size, structure, and growth rates are related to
development. For mainstream economists, rapid population growth rate, and large population size are
never problems by them selves. In fact, large population size, high growth rate has always been seen as
positive in terms of encouraging economic growth. They say large population provides with quantity and
quality of labor and together with improvement in technology and capital, serves as an engine of growth.

This point was to change in a matter of decades. In development studies, there was an increasing focus on
population increase in the underdeveloped countries and how this can affect growth. Immediately, there
was emphasis on the negative aspects of the population structure in under developed countries. High birth
rates and rapid population growth rates contributed to the features of poverty.

Population structure and size caused underemployment and unemployment in urban areas. Also caused
pressure on basic socio-economic services; the educational system deteriorated because of this. Water,
sanitation, electricity suffered the same fate.

In rural areas, it led to further fragmentation of land that is utilized by peasants. Their land has become
less economical to farm and this complicated the problem of urban employment because it accelerated
rural-urban migration.

This condition also had social and political consequences. For instance, unemployment has a positive
relation ship with rising rates of urban crimes. The large proportion of youth in population creates volatile
political situation (political instability or unrest). So, as far as population growth was concerned, there
was a paradigm shift in development studies.

2.1.2.1 The Theory of Demographic Transition

This is a hypothesis which tries to explain the history of the decline of population growth rate and says
that population size has passed through three stages in the developed world. The stages were:-

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First Stage- Before Modernization

At this stage, population sizes in the developed world increased very slowly or in some cases were stable.
Because birth rates were high, and how ever, mortality rates were also high because the time was before
the emergence of modern health care. This was before economic development and the societies were
pre-modern.

Second Stage- The Stage of Modernization and Socio-Economic Development

Here we have the development of capitalist mode of production in Europe. There was a rapid rise in
population growth rate because the birth rate rose and also death rate decreased because we have
improvement of medical services, growing principles of hygiene, and increase in life expectancy, more of
the born children survived.

Third Stage- Stage of Demographic Transition

In societies that have already become industrialized birth rates decline, mortality rates were also low. And
this resulted in a situation where population size now became stable. The stage is where most developed
capitalist countries find themselves today.
This theory had important implications for development studies. Many policy makers saw that most
underdeveloped countries as being in the second stage. And in the future they will have a demographic
transition. This was an optimistic out look. But according to this view, there are no signs that any
underdeveloped country is moving to the third stage because there was no spread of education and
expansion of women‘s employment. And because of their population structure their population size will
keep on increasing.

2.1.2.2 Malthuse theory On Population

Malthuse developed a theory regarding population changes. His basic assumptions were: -A-Population
increases at geometric rate. i.e. 1, 2, 4, 8, 16 … (Doubling). B-Food production increases arithmetically.
i.e. 1, 2, 3, 4… So, in every country population doubles in every three or four decades. C-The marginal
productivity of labor is zero or close to zero. D-The only factor of production that can be exploited is land.
By bringing more land into production they can increase productivity.
He continues to add that land is a finite commodity and population growth rate is rapidly ousting food
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production. As a result they will have occurrences of famines and starvation. This was a natural increase
that was seen in history. Here, there will be a situation where human life is confined to subsistence type of
life because population always overtakes food production. There can be situations where population size
decreases because of famines, wars, and diseases. But this was a short gap. As soon as these effects go,
human population resumes its growth.

Finally, he concluded that paradoxically, it was the poor who tended to have more children and there was
a need for moral restraint if possible on voluntary basis, but if not, the state should force the people to
have small number of children.
He has been criticized for his assumption that, the marginal productivity of labor being zero or close to
zero in underdeveloped nations is wrong. This is because he underestimated the impact of technology.
Using the same plot of land, one can produce more with the help of different technological inputs.

2.1.2.3 The Household Theory of Population Change

This is a different theory/ model developed by economists. It is a more convincing theory. What it does is
similar to mainstream economics. It takes individual households as unit of production and consumption.
As consumers they have choice. The difference is that children are seen as commodity. How does it work?
The theorists argue that we could come up with several scenarios where changes in price and levels of
income would determine fertility.

When income rises there will be a tendency to have children; other things being constant. Falling prices
would also have the same effect. Opportunity cost is also important. For instance, if you have a child there
are the necessities of children (school, medical care, etc….). If the price of education and medical care
falls, then the household would be encouraged to have more children. Some factors are important when
applying this theory. For example, in the rural world, children shouldn‘t be seen as consumers because
they are also producers.

Cultural factors are also important. Some view them as not a cost. But there are values assigned to them.
This theory can be taken as more objective because it tries to relate the frequency in which household
decides to have children to economic situation. In the underdeveloped world, children of peasants are not
purely consumers, they are also potential producers. To increase labor power, households tend to have
more children. Having more children cannot be determined by economic criteria, there are religious and
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psychological values attached with it.
This theory could be criticized on one draw back. It disregards the fact that birth rates in underdeveloped
world do not show very high correlation with higher per capita income. In many of these societies, those
who are poorer happen to be having more children; but those who should have had more children have
lower children.

We have a paradigm shift on population structure and its implications for development. Population
structure was seen as positive in earlier times, but population growth and high birth rates are now
considered to be more negative. As far as agents are concerned, reducing birth rates and stabilizing
population has been an area of action beginning from 1960s. So, what were the mechanisms used?

1 Family planning techniques-which have as an objective a change in reproductive behavior of

men and women call for restraint, awareness rising, and operations not to have children.
2. In terms of targeting gender roles or expectations-this was by trying to change the structure
of those societies. It involves expanding educational opportunities for women, which would lead to
reduced fertility. The other technique was in terms of expanding opportunities for wage employment for
women. In most of these societies, women are engaged in household
Production. If they were engaged in wage employment, it will increase their chance of having
lesser number of children.
3. Land reforms-making sure that woman also have an equitable amount of land, and also
become owners of means of production. These mechanisms are
Voluntary in nature. But they face obstacles of patriarchal expectations, cultures, religion, and
etc…
2 Other mechanisms that are more coercive in nature- here, the state apparatus is supposed to
be used to reduce rate of population increase through forced sterilization (e.g. India). Similarly,
Governments in underdeveloped world tried to deal with the issue by legally setting limits on the number
of children that an individual can posses (e.g. China). As far as the subject of development is concerned,
their stand was to control the birth rate. It has to be noted that these mechanisms are more difficult and
that they require powerful state apparatus and have been causing the population to complain. These
mechanisms were not very popular among international financial institutions and international
intergovernmental institutions and are difficult to fund. There are perspectives that criticize the
hegemonic viewpoint of the relation between development and population growth.

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For dependency / Marxian theorists, rising population is not the source of problems; there are more
pressing problems which explain the nature of the under development. By analyzing Patterns of resource
consumption they argued that it is the societies of the developed nations (the North) who consume the
most energy and minerals (the minority). So, over population is not an issue. Rather how to bring about
equitable use of resources is.

For them, Population size is a completely false issue. In their view, these societies (of the underdeveloped
countries) do reflect a very high birth rate and rising population size. But according to this leftist, if we
look at population density, large parts of the underdeveloped world are under populated; especially Latin
America and Sub-Saharan Africa, with the territory they have, they can support much. So, the issue
should be how to distribute population over the territory more equitably, through resettlement programs,
bringing uncultivated lands under cultivation, land reforms. Often, population control mechanisms have
social and racial aspects in terms of their targets.

In terms of trying to decrease birth rates, western governments, international inter-governmental

organizations and, international financial institutions seem to follow a policy of reducing the number of
black, brown and yellow races (hidden agenda). Governments‘ policy formulators‘ stand on population
controls were especially targeted on specific social groups, often the poor. In India in 1970s the focus of
the forced sterilization has been on lower cast people. So, it was not purely determined by objectives and
economic rationales.

Indicative Resources
Frank A. (1969) Latin America: Underdevelopment or Revolution? New York. Monthly Review Press
Friedman, J. (1992) Empowerment: The Politics of Alternative Development. New York: Blackwell.
Nyilas, J. (1977) Theory and Practice of Development in the Third World
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Preston, P. (1996) Development Theory: An Introduction. Oxford. Blackwell.
Rostow, W. (1960) the Stages of Economic Growth: A Non-Communist Manifesto. Cambridge:
Cambridge University Press.
Todaro, M. (1992) Economics for a Developing World: An Introduction to Principles, Problems &
Policies for Development, London: Longman
Webster, A. (1990) Introduction to the Sociology of Development. London: MacMillan.

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