Transcript Capitalist Theories of Development

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During the past three centuries, three economists stand out as archetypes,
symbols of three distinct approaches to economic philosophy, guiding
development throughout the world.
Adam Smith, a student of the Scottish Enlightenment, expounded a “system
of natural liberty”, a liberal democratic order consisting of an unfettered
market and limited government, and elucidated how a nation flourishes and
advances the standard of living of its citizens.
In the nineteenth century, the German philosopher Karl Marx attracted and
inspired workers and intellectuals who felt disenfranchised by industrial
capitalism and sought radical solutions to inequality, alienation, and
exploitation of the underprivileged.
Finally, in the twentieth century, the British economist John Maynard Keynes
sought to stabilize a crisis-prone market system through activist fiscal and
monetary government policies.
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What is development?
To understand Development, first we have to
understand what development thinking . Hettene in
his review of Development Theory and the Three
Worlds (1995) suggested that Development
involves three things.
Development Theory, Development Strategies and
Development Strategies.
◦ Development Theory may be regarded as sets of ostensibly logical
propositions, which aim to explain how development has occurred
in the past, and/or how it should occur in the future.
◦ Development Theories can either be normative or positive.
Normative that they can generalize about what should happen or
be the case in an ideal world. Positive, in the sense of dealing
with what has generally been the case in the past.
◦ According to Hettene, a study of Development is explicitly
normative. Teachers, students, researchers and practitioners in
the field want to change the world, not only analyse it.
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Development Strategies can be defined as the practical path
to Development which may be pursued by international
agencies, states in both the developing and developed
worlds, NOGs, Community based organisations or individuals,
in an attempt to stimulate change with particular nations,
regions and continents.
Hettene provides a definition of development
strategies as effort to change existing economic
and social structures and institutions in order to
find enduring solutions to the problems facing
decision makers (state and other actors)
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Development Ideologies: Different development
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Development Ideology refers to set of political and
agendas reflect different goals and objectives.
These goals reflect social, economic, political,
cultural, ethical, moral and even religious
influences.
economic, cultural and religious beliefs that finally
shape up development strategies.
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Development economic first appeared as distinct area
of research in 1940’s & 50’s, concurrently with
decolonisation of Asia, Middle East and Africa.
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The main object of the research was to uncover the
causes of the underdevelopment.
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As a result of this pursuit, 3 major approaches
appeared:
 Capitalist theories of development.
 Neo-Marxist/Dependency theories
 Theories of Human Development
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Neo classical free Market:
Neoliberal policies of the capitalism draws inspiration from the
classical political economy of 18th and 19th century represented
by Adam Smith (1723-1790), Thomas Robert Malthus (17661834), David Ricardo (1772-1832)
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Adam Smith (1723-1790):
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Adam smith’s Laissez-faire was based on three principles
◦ Freedom: Individuals have the right to produce and exchange production,
labour, and capital as they see it.
◦ Competition: individual have the right to compete in the production and
exchange of goods and services.
◦ Justice: the actions of individuals must be just and honest , according to
the rules of the society.
◦ He underlined the critical role of the market
mechanism.
◦ The major thrust of his argument was that there
may be producers who will try to sell inferior goods
at high prices, but if the producers are competing
they will all eventually be forced to deliver proper
goods at reasonable prices.
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Further, he says when market is free then
demand would increase and production
would grow as a result of that.
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At the same time specialisation would also increase as a result of
the competition.
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Specialisation, for number of reasons, would lead to higher
productivity per working hour.
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The major condition for this was an increased accumulation of
wealth which had to come form rich, especially industrialist and
their profits for productive investment in new industries.
As a result, the newly emerging industrial sector would serve as
a base of aggregate growth.
To Smith, accumulation and investment of profits were the most
important determinant of economic growth and has played
important role in the debated ever since.
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David Ricardo: he was the first one to elaborate on the
Adam Smith’s political economy, especially on Land-rent,
distribution and the theory of comparative advantage.
In addition to capital, Ricardo found two other sources of
growth - technical innovation and international trade.
Ricardo further argued that continued population growth
and the corresponding increase in the demand for food
would result in the conversion of all land for agricultural
production.
Hence, the utilization of land would cause the land
value/rent to go up, mainly due to the farmers competition
for the better and more profitable land.
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According to David Ricardo, this process would result in a
redistribution of national income to the benefit of landed
aristocracy and to the detriment of industrialists.
Simultaneously marginal cost of agriculture production
would then rise with increase in the cultivation of marginal
land.
Food prices would then rise, leading to stronger pressure
on wages which would in return, eat into the profits of
industrialists from outside.
Final result would be the squeezing of the industrial
profits to zero whereby the whole foundation of growth
would disappear.
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According to Ricardo, only technical
innovation and international trade could
prevent this sad outcome.
The theory of comparative advantage.
 According to which each country should
concentrate its production in areas where it had
comparative advantage in relation to other country
keeping in view the productivity of its workers.
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In accordance with this basic thesis, Ricardo suggested
that non-industrialised countries such as Portugal should
refrain form trying to build up industries and instead
concentrate on production of, for instance, wine.
Industrialised countries like England on the other hand
should produce and exchange products such as textile and
clothing for Portuguese products.
Malthus:
◦ According to his theories, population increase faster than
resources. So countries should concentrate their efforts on
population control in order to achieve the target of growth.
◦ In case no attempt is made on the part of the countries, then
nature would intervene in the form of natural calamities in order
to maintain balance between population and resources.
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John Maynard Keynes: in his book on the General Theory
of Employment, Interest and Money did not focus on
growth and conditions in the colonies but rather discussed
relationship between state and market.
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To Keynes employment was key to growth. Therefore, he
strongly focused in the dual role of state and market.
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According to him, market imperfection could be overcome
by state intervention.
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Further to support state, he envisioned the institutional
control of international trade and finance.
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It was in this context that the IMF and World Bank were
formed in 1944 with the objective to help the development
process in Europe and bring financial stability by controlling
exchange control and providing liquidity to the members
states facing problem of balance of payment.
By the time there was clear difference in stand of three main
schools of thought
Neoclassical economist saw the economic development in
terms of the utility maximisation on the part of the consumer,
profit maximisation on the part of the producer and the
central role of the market as determining factor.
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Developmental Economist : saw the economic development in
terms of the redistribution of the growth and more so in
terms of the social development of the society.
Modernisation theorist : saw the economic development as a
process of the transformation of the society from
traditionalism to modernism.
They are mainly concerned with how traditional values,
attitudes, practices and traditional structures break down and
replaced with more modern one.
What condition promotes and impedes such transformation
was the main focus of the modernisation theorist.
Capital Accumulation and Balanced Growth
Rosenstein Rodan and Nurkse.
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He was polish born economics. According his theory of the
development that only massive industrialisation way forward to
growth and progress for back ward areas for Eastern Europe and rest
of the world.
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He further expanded his argument into the theory of ‘Big
Push’, according to which the backward areas were
characterised by low income and little buying power.
Further they were characterised by high employment and
under employment in agriculture.
To break out of this mould, it is necessary to industrialize.
However, private companies can not do this alone, partly due
to the lack of the incentives to invest as long as market for
their products remained small.
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To him , for example, one of the major impediment to the
growth is the cost being incurred on the training of workers.
According to him barriers to growth could be overcome with
the:
1. state intervention
2. investment in education of the workforce
3. planning and organising of large scale investment in industrial sector.
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Rosenstein Rodan compared big push with aeroplane which needs critical
ground speed before becoming airborne.
A similar condition applied to the growth process. Launching country into the
self-sustaining growth requires critical mass of simultaneous investment and
other initiatives.
Nurkse
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He further developed many of Rodan’s points.
He asserted that the economically backward countries were caught
in vicious circle of poverty.
The reason for this situation is that the demand in backward society
is low as a consequence of the very low income.
When demand is low and market limited then there will not be much
incentive to make private investment.
Therefore, capital formation and accumulation remain at very low.
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As a result, no productivity improvement occurs and income
therefore remain low.
On the supply side, the low incomes result in a small capacity to
save which, in turn, is reflected in lack of capital and low
productivity. The final outcome is reproduction of mass poverty.
Nurkse added to this that whole problem with attaining the
necessary savings and capital investment was compounded by rich
people’s tendency to copy, in their own consumption, the
consumption standards and patterns of industrially advanced
countries. This propensity on the part of the rich finally leads to
reduction in the saving rate.
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To break out of this these poverty circles, according to
Nurkse, the creation of strong incentives to invest along with
increased mobilisation of investible funds.
This requires significant expansion of the market through
simultaneous massive and balanced capital investments in a
number of industrial sectors.
This further depends on the active involvement of state.
Demand side
low level of
capital formation
Little incentive to
invest
low productivity level
limited market
Supply side
Low income
Small capacity
to save
low
Productivity
Lack of capital
Unbalance growth and income distribution.
Hirschman and Kuznets
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Unlike Rosenstein Rodan and Nurkse, Hirschman rejected the notion
that growth process could be initiated with balanced capital
investment in several sectors.
He claimed that there was a need to maintain and accelerate
imbalances and disequilibria in backward economies.
According to them there were other barriers to growth than limited
market and the lack of capital investment. The major impediment to
growth is lack of entrepreneur class and management.
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According to them if the country were ready to apply the doctrine of
balanced growth then it would be underdeveloped.
Instead of spending resources thinly over several sector and manage
badly, developing countries should invest in selected sectors which
had many forward and backward linkages.
Again they suggest redistribution in favour of rich as they have
tendency to save and invest and they could be major source of
growth. After which there will be trickle down to the poor in such
way that in the end everybody would be better off.
Simon Kuznets had the same views that growth would initially
produce inequality but later inequality would be flatten out.
Modernisation and stages of growth
Lewis and Rostow.
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They considered development as modernisation process.
Developing courtiers have abundant labour force but due to the low
income their saving rate is low.
They considered the existence of entrepreneur class necessary for
the transition to modernisation.
Lewis divided economy into the capitalist and subsistence sector.
The capitalist sector employs wage earners, used reproducible
capital and paid capitalists for the use of capital.
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Subsistence sector was characterised by being based primarily on family
labour.
It was in the subsistence sector that the abundant labour reserves were fond
not necessarily in the shape of many unemployed but rather in the shape of
many underemployed.
These underemployed could be transferred to the capitalist sector with out
bringing about a decline in the subsistence sector’s total production, and a
wage which was determined by the average in the subsistence sector.
The central problem in the in the theory of economic development was
therefore to investigate under which circumstances it would be possible to
increase the rate of saving and investment in a backward and stagnant
economy.
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Lewis’s answer to this central problem was that the poor in
the subsistence sector and workers in the capitalist sector
could not produce increased savings, because they were
simply too poor to save a significant proportion of their
income.
Same is for the rich in the subsistence sector, because they
were mostly landowners, who used their rents and other
income unproductively to existing assets rather than to create
new ones.
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Therefore capitalists have to produce the necessary increase
in the saving rate.
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Rostow like Lewis, differentiated between the traditional
sector and modern capitalist sector.
Further, he agreed with Lewis that a crucial precondition for
lifting an economy out of low income stagnation into
sustained growth is the significant increase in the share of
saving and investment in national income.
But Rostow was more interested in describing the whole
process through which society develops in different stages.
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Traditional Society: characterized by primitive technology,
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Precondition for take off: With improved technology and
hierarchical social structures, production and trade based on
custom and barter, as in pre- seventh century Britain.
transport and increased trade and investment, economically
based elite and more centralized national state. Economic
progress is assisted by education, entrepreneurship and
institutions capable of mobilizing capital. Always traditional
society exits side by side with modern economic activities as
in Seventh and eighteenth century Britain.
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Take off: It is characterized by rapid economic growth, more
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A period of self-sustaining growth, with increasing investment of 10
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Age of High mass consumption: The final stage characterized by the
sophisticated technology and considerable investment, particulary in
manufacturing industry. Share of net investment and saving in
national income rise from 5 percent to 10 per cent or more,
resulting in a process of industrialization. Agriculture becomes
increasingly commercialized and more productive with increasing
demand from growing urban centres.
and 20 per cent of national income. Technology becomes more
sophisticated. There is greater diversification in the industrial and
agricultural sectors .
increasing importance of consumer goods and services and the rise
of welfare state.
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From dualism to basic needs
Earlier theories presented by Lewis, Hirschman,
Myrdal, and Rostow failed to eliminate poverty and
the so called “trickle down’ effects of growth
generally failed to benefit the poor.
Dudley Seers ---- Poverty, inequality and
unemployment.
Basic need approach --- Food, Health Education.
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Basic approach gained momentum when ILO
conference in 1976 on World Employment adopted
a declaration of Principles and Programme of
Action for Basic Needs Strategy of Development.
Poverty alleviation was the key objective in the
period up to 2000.
It failed to achieve its goal due to top-down
approach.
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Neoliberalism.
Neoliberalism, in theory, is essentially about making trade
between nations easier. It is about freer movement of goods,
resources and enterprises in a bid to always find cheaper
resources, to maximize profits and efficiency.
To help accomplish this, neoliberalism requires the removal
of various controls deemed as barriers to free trade, such as:
◦ Tariffs
◦ Regulations
◦ Certain standards, laws, legislation and regulatory
measures
◦ Restrictions on capital flows and investment
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Central tents of Neoliberalism are:
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The rule of the market — freedom for capital, goods and
services, where the market is self-regulating allowing the
“trickle down” notion of wealth distribution. It also includes
the deunionizing of labor forces and removals of any
impediments to capital mobility, such as regulations. The
freedom is from the state, or government.
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Reducing public expenditure for social services, such as
health and education, by the government
Deregulation, to allow market forces to act as a selfregulating mechanism
Privatization of public enterprise (things from water to even
the internet)
Changing perceptions of public and community good to
individualism and individual responsibility.
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Effects
Some 3 billion people — or half of humanity — live on under
2 dollars a day
86 percent of the world’s resources are consumed by the
world’s wealthiest 20
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Background ---oil crises of 1973 and 1979 triggered
slowdown creating recession and precipitated “Global
Financial Crisis in the South 19881-82.
Brazil, Maxico and Poland failed to pay back their loans to
Northern creditors.
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North realized if necessary measures were not taken, entire
International financial system will be undermined and will
collapse.
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IMF assumed lead role …
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Introduction of SAPs
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Removal of SAPs with PRSP
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Enhanced Structural Adjustment Facility (ESAF) with Poverty
Reduction and Growth Facility (PRGF)