to manufacturing. The government would have to facilitate this process by helping to create
the conditions needed to allow this to happen such as:
-
-
the specialisation and promotion of specific primary sector areas which would allow
a surplus income to be created and for that to be saved. This ties in with the
Ricardian idea of specialising into the area of comparative advantage.
This could be achieved through raising agricultural productivity. It could also be best
done through exporting this surplus agriculture to generate incomes to save.
It needed to foster a basic financial sector to allow these funds to be saved and then
loaned back out to create the possibility for reinvestment.
This “stages of growth” model was further supported by the Harrod-Domar economic
growth model developed in the early 1940s to explain how rates of economic growth
depended on the savings ratio of the economy and the productivity of its investments,
stemming from Keynesian analysis of the flow of income in an economy.
The take-off could take between 10-50 years on Rostow’s account and would again occur in
specialised manufacturing areas (unbalanced growth) rather than more widely in the
economy, following the Ricardian idea. As the investment built up to 10-20% of GDP over
time other industries would become attainable and the manufacturing would be able to
diversify as well allowing even faster rates of growth and it would take 50-100 years to drive
to maturity. Finally in the age of mass consumption the tertiary sector would expand until it
reached the 65-75% of GDP that we see in modern Western societies.
The Lewis-Clark theory (Theory of Economic Growth 1955) of urbanisation also develops this
idea of STRUCTURAL CHANGE as the key to development but instead sees it from the
perspective of the labour market in the nation. Many developing nations have abundant
labour which is unproductive in agriculture for much of the year. As the wage level that they
can command is close to zero in the primary sector then as the basic manufacturing
industries start to develop there will start to be a wage premium in those sectors above that
available in agriculture due to the higher productivity of workers using capital in those
areas. Once this hits a critical level (they thought around 30%) it will encourage the
migration of workers to the areas which are “industrialising”. This will raise the productivity
and wages available to those who remain in the agricultural sector (assuming constant
population!) and reduce wage levels in industry. This creates an URBANISATION momentum
which increases profitability in industry and promotes investment further as a part of the
take-off. Gunner Myrdal (1957) and Albert Hirschmann (1958) were the first critics of this
kinf of wage equilibrium analysis pointing out that significant backwash effects from
migration could accentuate wage inequalities between the sectors rather than seeing them
converge.
Many separate attacks on modernisation theory argue that it presupposes Western norms
and ideals and that it is neither necessary nor desirable for citizens of developing nations to
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converge on a material standard of living equivalent to that of their Western counterparts.
Some criticise the notion that “development” and “material prosperity” are the same and
point to societies where collective endeavour for self-reliance and communal provision is
valued more highly than individual self-interest. Others challenge the ecological viability of
such a materialistic conception of living standards.
Modernisation and Take-Off Problems:
These modernisation theories of development are frustrated if there is not the possibility of
the original SAVINGS to generate the INVESTMENT needed to start structural change and
diversification into manufacturing. In reality many developing nations have subsistence
agriculture which struggles to produce enough to feed its own inhabitants and which has
little in the way of a “market” mechanism therefore to create the funds for savings.
-
Even if surplus crops and funds could be generated they would be consumed rather
than saved immediately (but this creates incomes for someone else, but will it leak
out in consumption of imports?)
There is no, or an inadequate, banking sector in these nations to channel such small
savings into investments on this small scale. (Grameen bank and micro-finance
initiatives)
Savings that are generated may therefore flow abroad, particularly if the wealth
created by the market flows into the hands of the capitalist who owns the factory.
Thus the sectoral change may exacerbate income inequality and fail to produce
domestic savings.
Many of the investments made might be in inappropriate technology or go bankrupt
in the short term due to the lack of a formal financial sector to allow these industries
to develop through their start up phases.
-
-
-
Each of these problems makes it more likely that developing nations will have to rely on:
•
A greater role for the STATE in the channelling of resources and promotion and
sustaining of certain “strategic” industries than the liberal market prescriptions
allow. In the Cold War era the Soviet Union actively supported nations adopting this
approach as opposed to the economic liberal market-orientated approach so that
development theory became a conflict between market versus state approaches.
• A reliance of FOREIGN injections of finance to fill the SAVINGS GAP and promote
the original funds available for investment to allow this structural change to occur.
The injection of funding through globalisation could come from four main sources:
- Export-orientated industrialisation and free trade.
- Foreign direct investment by multinational companies into the nation.
- Borrowing from international banks, governments or multilateral agencies.
- Aid from foreign governments, multilateral agencies or NGOs.
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Neo-liberalism
Neo-liberalism refers to the re-assertion of the power of the free market and classical
liberal ideas by thinkers who rejected the rise of social democracy and the power of the
state. Thus it is essence a “reactionary” doctrine driven by its hostility to the welfarism of
the left.
In the late nineteenth century, along with the increases in prosperity and living standards
that industrialisation brought about, came increases in income inequality, poverty,
pollution, poor working conditions and increasingly powerful monopoly firms among other
problems which many viewed as “market failures” which needed to be remedied by the
state. Left wing opposition to the unfairness of the capitalist market outcomes surfaced at
their most extreme with Marx’s intellectual rejection of capitalism from the 1840s onwards.
However even the enlightened liberals viewed the excesses of the free market as intolerable
and began to advocate a more interventionist state to remedy some of these problems.
What emerged was a form of “modern liberalism” which corrected and “tamed” capitalism.
This led to the development of welfare mechanisms and regulation of business by
government in many different ways and affected virtually all political parties in Western
developed nations. For instance in the UK the Conservative party adopted its “One Nation”
tradition under Disraeli at the end of the nineteenth century, the Liberal party pursued state
pensions and welfare systems under Lloyd George’s “People’s Budget” of 1906 and the
modern Labour party was founded in 1900 on the basis of trying to form a political union to
represent working class interests and trade unionism through the democratic parliamentary
system rather than through Marxist revolution. The apogee of this welfarism in the UK
occurred under the Attlee Government and the subsequent post-war consensus on
nationalisation, a national health service, national insurance and the welfare state and
intervention to pursue full employment through Keynesian macroeconomic policy.
Neo-liberal thought stems from the work of the Austrian school of Economics led by
Friedrich Hayek who had rejected the growth in the power of the state after the Second
World War in his polemic against totalitarianism “The Road to Serfdom” (1945). His ideas
were unpopular and ignored throughout the wave of planning and interventionist economic
policy 1950-1970 in most Western nations and indeed at this time the ascendance of such
doctrines of state intervention meant that most developing nations were also pursuing
strategies that relied on state intervention, protection and planning (see import substitution
industrialisation notes later). The Chicago School of Economics led by Milton Friedman
championed the free market as well and predicted the collapse of Keynesian economic
policy and the waves of inflation that would occur in the 1970s. These schools of thought
blamed excessive government intervention as the problem rather than the solution and
neo-liberal ideas swept into power in the 1980s in both the UK and US under Margaret
Thatcher and Ronald Reagan.
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Neo-liberalism and International Development
The problems faced by developing nations stuck in a poverty trap and unable to get to the
sufficient levels of savings needed to generate self-sustaining growth and development led
neo-liberals to advocate openness to globalisation as the solution to generate the funds
needed to transform these economies. However since the Second World War the
interventionist schools of development theory had dominated the policy making of most
post-colonial nations in Africa, Asia and Latin America.
Neo-liberals rejected the reliance on the state of developing nations in the 1950s-1970s as
producing distortions in their patterns of trade which prevented them from growing as fast
as they could rather than helping them. The taxation required to fund large scale state
intervention was seen as choking off individual incentives to work and take risks. High levels
of government borrowing could choke off private sector initiative by raising interest rates
and suffocating private sector investment. The regulations on business and capital
movements that were imposed by many developing nation governments were criticised as
preventing foreign investment from being able to, or wanting to, flow to those economies.
Their protectionism against imports used to encourage the growth of favoured domestic
firms artificially restricted competition and prevented these firms from making efficiency
improvements necessary to compete in the free market and this “import substitution”
approach would merely result in the cosseting of stagnant uncompetitive industry.
Neo-liberals pointed to the stagnation of Latin American economies, in particular Argentina
which had been one of the wealthiest nations in GDP per capita terms in the world in 1900
under the import-substitution protectionist school of development. They also argued that
the Western world had thrived through openness to free trade and global capital rather
than protectionism and would increasingly point to the experience of South East Asia Tiger
economies as evidence that the liberal school of free markets was the correct policy
prescription for developing nations. (Many economists dispute the extent of such liberalism
in each of these historical case studies – see import substitution notes later). Some neoliberals believe that globalisation has dramatically reduced the economic and political power
of traditional nation states and led to the transfer of power to transnational entities such as
multinational firms and international capital markets. The only way for nation states to
respond is for them to adhere to the liberal philosophy that these institutions demand in
this new “borderless world” (Kenichi Ohmae “The End of the Nation State” (1994)).
The GATT (General Agreement on Tariffs and Trade) rounds of talks to liberalise trade for
the mutual benefit of all nations were set up after the Bretton Woods Conference in 1947
alongside the IMF and World Bank. However in 1964 Article IV of the GATT agreement
recognised that developing nations should be allowed more freedom to strategically protect
industries until they had developed sufficiently to compete freely and there was therefore
considerable leeway within the trade rounds for developing nations to pursue their own
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policy. However when the Third World debt crisis hit in 1982, with first the Mexican default
on its debts a neo-liberal approach to development was enforced by the International
Monetary Fund (IMF) and World Bank (IBRD) throughthe conditionality required to secure
loans to help developing nations out of their debt problems. These “structural adjustment
policies” (SAPs) were aimed to encourage development according to the liberal economic
paradigm of free trade and specialisation laid out above with the investment finance coming
about through the developing nations’ openness to international investment rather than
their previous autarkical (self-sufficient) approach to development. Loan conditionality
included:
•
•
•
•
Trade liberalisation. The barriers to trade had to be removed for exporters to
earn the currency needed to repay debts. Their markets would have to be
open to imports to facilitate this liberalisation.
Privatisation. State owned enterprises were seen as protectionist and a
source of the lack of funds of the government which was spending
excessively protecting these industries.
Capital market liberalisation. Removal of exchange controls and other
restrictions on investment to allow the free movement of money into and out
of the country. This investment can be financial or “portfolio” investment i.e.
bank loans, bond purchases or share purchases, or foreign direct investment
which could mean the setting up of multinational businesses in the country
or their acquisition of ownership in native companies.
Regulation of the budget, keeping budget deficits down, limiting inflation.
Tom Friedman in “The Lexus and the Olive Tree” (2000) labelled these the “Golden
Straitjacket” to which countries were expected to conform regardless of their individual
circumstances. They became more commonly known as the Washington Consensus.
Alongside this ideological insistence on liberal policy changes from the IMF and IBRD to gain
loans which developing nations had little choice but to impose and take, in the 1980s the
overseas development assistance (AID) budgets of the US and UK in particular began to
make payments conditional upon the instigation and maintenance of these liberal policies
by developing nations, or aid would be cut or removed altogether. The Heavily Indebted
Poor Country Initiative (HIPC) of the World Bank in 1996 was similarly criticised for its
conditionality and to some extent this was amended by the introduction of the Poverty
Reduction and Growth Facility Programme in 1999 which has allowed more policy control
for government and NGOs within the borrowing nation to determine the conditionality of
debt-relief programmes (some neo-colonialists viewed this post-Washington Consensus as
mere window-dressing).
Other critics of the liberal approach would argue that since the World Trade Organisation
(WTO) was formed in 1995 to replace the GATT rounds that the developing nations’ relative
leeway to pursue their own approach to trade policy and strategically protect certain
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