Development Economics

B

Dependency Theories

There were also less Marxist but still radical views known as “dependency” theories, which were particularly prominent in Latin America. Dependency theorists stressed how markets favored industrialized countries, which received raw materials cheaply from the developing world. In addition, industrialized countries owned the technology that developing countries needed and had the economic power to admit exports from developing countries only when it suited them. Such views gave a strong bias in the developing world to a belief in the virtues of autonomous (self-sufficient) development. According to the dependency theorists, developing countries could only grow behind protective trade barriers that kept out exports from the industrialized world. Dependency theorists also believed that investment by Western multinational corporations would mainly harm developing countries and so regarded such investment with suspicion. Since free markets alone could not generate adequate growth and structural change, governments had to have a major hand in planning and promoting the economy, including public sector enterprises to undertake the investments that the market would not provide. For some dependency thinkers even foreign aid was suspect, seen by some as a “neocolonial” instrument to preserve the dominance of the industrial countries and make the world safe for capitalism.

IV

Orthodox Theories

Quite opposed to these ideas were the standard, or orthodox, views of most Western economists. They believed free, unregulated markets played a mainly positive role in development and argued that developing countries’ policies of interfering with free markets were largely self-defeating. In particular, they argued that attempts to hold agricultural prices down and force savings out of farmers (“surplus extraction”) were destructive of agricultural growth. Orthodox economists pointed to economic history to show that agricultural growth was important for industrialization. Furthermore they argued that governments in the developing countries were often incapable of the tasks they took on. In their view foreign investment helped growth and the transfer of technology, and foreign aid supplied the additional savings and foreign exchange that poor countries could not generate themselves.

V

International Aspects of Development

This conflict between radical theories and orthodox theories of development often played out as part of the Cold War between the industrialized capitalist countries and the Union of Soviet Socialist Republics (USSR). During the Cold War the chief capitalist countries and the Soviet bloc competed for the allegiance of the developing world, and the rhetoric of exploitative versus benign capitalism played a part in this competition. But many developing countries wanted to separate themselves from this competition. A movement grew up, much of it organized in an official body known as the Nonaligned Movement, which reached its zenith in the 1970s. There was a demand for a New International Economic Order in which the inequities of the world economy as the developing world saw it would be corrected. When the power of the oil-producing countries within the developing world was at its height, it looked as though the developing countries might have some leverage to get what they wanted. See the Sidebar, “The New Global Economic Order.”

But eventually oil prices collapsed, and related swings in financial markets produced a problem of international indebtedness that both weakened and divided the developing world. At the end of the 1970s a new set of world leaders—United States president Ronald Reagan, British prime minister Margaret Thatcher, and German chancellor Helmut Kohl—brought a new conservatism to international debate, and the kinds of international cooperation implied by the New Economic Order went off the map of political possibility.

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VI

Theory and Reality

If one looks across the developing world at the beginning of the 21st century, there is a huge range of national experiences. At the more prosperous end of the spectrum are the successful economies of East Asia, such as China and South Korea; Southeast Asia, such as Thailand and Singapore; some oil-rich countries of the Middle East; and some Latin American countries. At the poorer end are the heavily populated countries of South Asia—such as Bangladesh, Pakistan, and to a lesser extent India—and most of Africa south of the Sahara. What has produced these outcomes? It certainly is not just a matter of where the countries began. South Korea, one of the most successful countries today, was regarded as a hopeless case in the 1950s. Argentina in the 1930s had living standards similar to Australia and a quite similar economic structure; yet Australia today is far more prosperous. Many African countries were going backwards in development terms in the 1980s and 1990s and were actually worse off economically than they had been in earlier decades. Population growth in Africa, which is often an indicator of a troubled economy, continued at very high levels, unlike most of the rest of the world where it was declining. Few of the broad theories of development really explain this varied experience, although they have all contributed useful insights.

The success of the East Asia and Southeast Asian economies has been a powerful influence on thinking since the 1970s and 1980s. These countries did not accept the pessimism about exports that most of the developing world did. Despite the protective barriers erected by industrial countries, these countries managed to generate rapid expansion of manufacturing exports by skillfully selecting products and markets. With this came fast economic growth, first for the “four tigers”—Hong Kong, South Korea, Singapore, and Taiwan—now being followed by others such as Indonesia, Malaysia, and Thailand. It became obvious that “dependency” did not prevent their development. So why could not others follow suit?

Far from developing rapidly, economies with large-scale government intervention, trade protection, and inward-looking development were looking very sick by the end of the 1980s. Recession in the world economy exposed their weakness. An unsustainable balance of payments, domestic deficits, rapid inflation, international debt, and low growth or even economic decline reached the point where it was widely acknowledged that things had to change. The fact that socialist economies too were beginning to throw off the rigidities of the command economy (centrally planned economy) and move into varying degrees of reliance on free-market economy was influential.

A worldwide consensus began to arise that greater reliance on market forces was essential for speeding up development where it was lagging, although how far governments should be involved in the development process remained, and remains, controversial. In the 1980s and early 1990s, more and more economies as different as China and India, Brazil and Tanzania, underwent market-oriented reforms. The East Asian and Southeast Asian experience for some was a triumph of the marketplace; but for others it demonstrated the power of combining market forces with skillful government intervention—more skillful perhaps than could be easily copied by others.

In the mid-1990s it appeared that much of Asia and Latin America was set on a more effective development path than before. But the failure of development in much of sub-Saharan Africa gave economists cause for concern. Much has been learned about how development happens; but without effective government and good policies, and without people in good health and equipped with education and skills, this knowledge is hard to put into practice. The main lesson for development economics may be that it has given insufficient attention to the human factor and to political development. See also Globalization.

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