economic homework 2
Unit 2 - Development Ideas in Historical Perspective
In this unit we explore the history of grand general theories that have tried to identify key variables and relationships in explaining the process of underdevelopment. These grand theories often focus on one or two big ideas.
Many early models were built on the assumption that market forces and private enterprise had simply failed in the developing world. After 100 years or so reliance on private markets had produced little. For development to be kick started as it were, a major shock would be required. Government was seen as the key engine of development. Where private markets had failed public planning would succeed. The “winds of change” were sweeping the third world. From Beijing, to New Dehli to Lagos plans for various forms of socialism were drafted and implemented.
It seemed obvious that aside from the failure of private markets, capital was the missing ingredient. Early plans called on governments to raise aggregate investment rates often by relying on government-owned firms.
Other non-socialist models also focused on physical capital spending. For example, we’ll look at Rosenstein-Rodin’s “big push” which emphasized expanding many sectors all at the same time to ensure that each was able to provide a market for the other. Rostow’s “stages theory” suggested that the key to development was to raise saving and investment rates from less than 5% to over 10%.
At the same time for many, the concept of development was seen as synonymous with industrialization. Government spending was to focus on the industrial and urban sector, rather than on the backward rural sector.
Marxists and Dependency theorists, and these were major schools of thought at least until the 1980s, argued that capitalist development itself was the problem. Marxists argued that international capitalism really implied development and wealth accumulation at the centre, but poverty and stagnation was concentrated in the peripheral region. Development could only begin then by first overthrowing capitalism.
What have we learned? Any theory of underdevelopment that focuses on only one or two factors is almost inevitably going to be substantially incomplete.
Disasters often followed the introduction of plans based on some of these grand ideas. Most poverty existed in rural areas, and attempts to squeeze the agricultural sector to provide resources for new investments in industry were often a bad idea. These investments were often too capital-intensive given local conditions. Unemployment increased. Government firms and detailed economic regulation too often was accompanied by waste, inefficiency, and corruption.
We now recognize that development is a multifaceted process. Attention must be paid to education, health care and basic infrastructure. When it comes to producing most goods and services market forces and private enterprise in competitive markets cannot be replaced by government firms. Trade opportunities exist and are important. Rapid growth requires taking advantage of those opportunities. We must pay close attention to the institutional framework or rules of the game within which market participants interact. To operate efficiently, markets need rule of law, security of property, law and order and other factors.
Hopefully we are a little more humble now. We need to learn the lessons, both good and bad, from the development experience of many countries over the past half century or so.
