James Copestake, Department of Economics and International Development, University of Bath, UK
2nd draft of an article for the UNESCO Encyclopedia of the Life Sciences.
The article starts with a brief review of the history of development
economics as a sub-discipline. Four sections then review theories of economic
development according to whether economies are (a) relatively open or closed
to international trade, (b) actively managed by the state (dirigiste)
or reliant upon private activity (laissez-faire). All these theories
are concerned primarily with explaining variation in long-term economic
growth. Three sections then critically explore the relationship between
economic growth and (a) income distribution and poverty, (b) cultural and
institutional development (d) population.
Agricultural transformation, Capital, Dependency, Development,
Dualism, Economic Development, Economic Growth, Economics, Human Development,
Industrialization, Institutional Economics, International Trade, Labor,
Planning, Population Growth, Poverty, Rational Choice, Terms of Trade,
1.1 What is economic development?
1.2 Classical development economics and its aftermath
2. The closed economy under laissez-faire
2.1 Dual economy theory
2.2 Intersectoral terms of trade and agricultural transformation
3. The open economy under laissez faire
3.1 The advantages of free trade
3.2 Adverse barter terms of trade and immiserizing growth
3.3 Coercive capitalism and the double factoral terms of trade
3.4 Cumulative causation
4. Dirigisme in a closed economy
4.1. The case for state planning
4.2. Investment planning strategies
5. Dirigisme in an open economy
5.1 Inward and outward oriented trade strategies
5.2 The Ricardian Ladder
6. Economic development, income distribution, poverty and well being.
6.1 A utilitarian approach
6.2 Alternative approaches
7. Economic development, culture and institutions.
7.1 Agricultural transformation and imperfect information
7.2 The new institutional economics
8. Economic development and population
8.1 Determinants of fertility
8.2 Economic consequences of population growth
How is it that poverty and plenty coexist? Theories of
economic development have much to say on this matter. This section starts
with definitions and then dips briefly into the history of the subject,
introducing the three main themes of classical development economics -
dualism and structuralism, industrialization and trade, and the strategic
role of the state. It then contrasts such ‘grand theory’ more recent contributions
to understanding the micro-level foundations of economic development. Four
sections then review theories of economic development according to whether
economies are relatively open or closed to international trade, and actively
managed by the state (dirigiste) or reliant upon private activity
(laissez-faire). All these theories are concerned primarily with
explaining variation in long-term economic growth. Three sections then
critically explore the relationship between economic development and (a)
income distribution, poverty and well being (b) culture and institutions
(c) population growth.
1.1 What is economic development?
The term ‘economic development’ refers to long-term changes
in systems of production and distribution of goods and services affecting
human welfare. In contrast to ‘economic growth’ it involves changes in
the form as well as the scale of economic activity. In common
usage, development is usually assumed to be by definition a good thing.
However, students of development cannot assume this. Economies development
is almost always fickle in its effects – some benefit at others’ expense,
long-term gain may require short-term pain (and vice versa), and one person’s
indicator of progress may be another’s indicator of regress.
The classical economists such as Smith, Ricardo, Malthus,
and Marx were all directly concerned with understanding economic development
(particularly early industrialization) in their own age. But as a contemporary
sub-discipline of economics, development economics is often in practice
defined geographically as the study of low and middle income countries,
predominantly in Latin America, Africa and Asia. In 1995, the World Bank
classified 49 countries (each with a population of more than one million)
as low income and 58 as middle income. The basis for this classification
was that their per capita Gross National Product (GNP) fell below 750 and
9,000 US dollars respectively. Together these countries contained approximately
85 per cent of the world’s population, and commanded 21 per cent of estimated
global GNP. However, their economies are so heterogeneous that no satisfactory
distinction can be drawn between them and the residual category of ‘rich’
countries. Neither is it possible, given the many linkages between them
(in the form of trade, capital flows, migration, media and shared environmental
resources) to study the economic development of the one group in isolation
from the other. Third, economic development does not stop once countries
industrialize. However, it is beyond the scope of one article to embrace
such a wide sweep of literature. For this reasons alone, this article concentrates
upon those theories that have been most influential in explaining economic
development of low and middle-income countries during the second half of
the twentieth century.
1.2 Classical development economics and its aftermath
A useful reference point for this discussion is the establishment
of ‘classical development economics’ during the 1950s. Figure 1 illustrates
its diverse intellectual origins. As the name suggests, it identified strongly
with the early classical economists, particularly with the assumption of
unlimited supplies of cheap labor. In attempting to build theories that
incorporated institutional rigidities, and in its preoccupation with dynamic
processes of change, it also had a strongly Marxian and Keynesian flavor.
But while critical of the unhistorical character of much neoclassical economics
at the time, classical development economics nevertheless also shared with
it many underlying concepts and ideas. Equally importantly, it was also
influenced by the contemporary historical context. For example, both decolonization
and the emerging literature on dependency in Latin America challenged liberal
economists to prescribe new and more radical development strategies.
Press here for Figure 1 – A schematic
view of the history of development
Three specific sets of ideas set classical development
economists apart from mainstream economics. First, they emphasized the
importance of institutional constraints to the efficient functioning of
domestic markets. Market infrastructure, institutions of private property,
and the predominance of individualistic self-interest were all weaker in
less developed countries. Input and output markets were thin and segmented,
with small modern enclaves located within a sea of traditional or informal
economic activity embedded in a distinct set of values and institutions.
Second, they emphasized the constraints as well as the opportunities to
prospective late industrializers arising from their unavoidable interaction
with countries that had already industrialized. These included higher barriers
to entry into markets for industrial goods and weak bargaining power in
negotiating the terms of access to foreign capital and technology. Third,
they argued that this combination of weak domestic market institutions
and external trade possibilities reinforced the case for a more dirigiste
development strategy. Optimism about the scope for state planning was also
reinforced by the widely perceived success of late industrialization in
the Soviet Union, as well as of Keynesian demand management, wartime planning
during the Second World War, and post-war reconstruction.
Classical development economics theory had its critics
from the outset, but its influence was eroded particularly by neo-liberal
criticisms from the 1970s onwards. While defending informal markets and
emphasizing the gains from trade, the criticism centered on the willingness
and ability of politicians and civil servants to live up to the ambitious
role ascribed to them. Development economists of all persuasions were also
criticized by historians and other social scientists for failing to adapt
their theories sufficiently to diverse local contexts, and for being over-preoccupied
with industrial development, economic growth and capital constraints. These
criticisms helped to stimulate a mushrooming of research in the micro foundations
of economic development. This has in turn resulted in considerable theoretical
reunification of classical and neoclassical development economics, as well
as greater awareness of the connections between economic, political and
sociological understanding of development.
The next four sections provide an overview of the main theories of economic development. Table 1 provides a summary. Section 2 (and Column 2 of Table 1) begins with theories that abstract from the role of both external trade and state intervention in order to analyze the scope for autonomous capitalist development. Section 3 (and Column 3) then relaxes the closed-economy assumption, to yield theories that are relevant to politically weak peripheral economies open to trade with countries that are already industrialized. The dirigiste closed economy theories described in Section 4 (and Column 4) reflect the reaction against this position of dependence. Finally, Section 5 (and final column of Table 1) is particularly applicable to the experience of newly industrialized countries (NICs). In all cases the main concern of theory is to explain the determinants of aggregate economic growth.
Press here for Table 1 – A typology of
theories of economic development.
2. The closed
economy under laissez-faire
2.1 Dual economy theory
At least three distinct models can be distinguished within Arthur
Lewis’ seminal article entitled "economic development with unlimited supplies
of labor". The simplest describes a single modern enclave or capitalist
nucleus that expands by attracting migrants from a traditional low-productivity
hinterland. Profits earned within the enclave are reinvested in new capital
stock and this further raises demand for labor. However, wages do not rise
because the extra demand is met through immigration. Thus profits remain
high and can continue to be reinvested in new capital stock. Within this
model there is no trade in goods with the hinterland, which exists only
as a labor reserve.
Three assumptions underpin this simple model. The first is the classical
assumption of unlimited supply of labor at a slight premium to the wage
in the traditional sector. Empirical support for this assumption was provided
in the form of evidence that non-capitalist agrarian institutions often
encouraged populations to grow beyond the point at which the marginal product
of labor was equal to the marginal return. The second assumption is of
the existence of a dynamic business class (or state cadre) that reinvests
the bulk of profits in new capital stock within the enclave. This assumption
highlights the potential importance to development of ‘entrepreneurial
culture’ and the evolution of institutions conducive to risk taking and
investment (see Section 8). The third assumption is of balanced growth
of supply in goods and services (hence responsive allocation of capital
and skilled labor) to meet changing patterns of demand (for both wage and
investment goods) as growth proceeds. This assumption highlights the possibility
that growth may also be constrained by sector specific bottlenecks (see
Section 4) and the terms of external trade (see Section 3).
Even without relaxing these assumptions, the model can readily be
extended to accommodate more complex labor and capital allocation. With
respect to labour, it explains how labor absorption into the modern enclave
is governed not only by the simple wage differential, but also by the costs
and probability of finding employment there. This explains why rural migration
can persist even when there is widespread unemployment within the modern
enclave. With respect to capital, on the other hand, the model highlights
how economic growth can be expressed as a function of the rate of saving
(determined within this model by the profit rate) and the marginal rate
of return on capital in the modern enclave. For example, a 20 per cent
saving rate combined with a marginal return on capital of 5 percent gives
a growth rate (assuming zero depreciation) of 4 per cent per year. This
explains the preoccupation of classical development economists with mobilising
extra capital. It also provides an explanation for increasing inequality
(or appropriation of the surplus over subsistence needs by the dynamic
capitalist class) in the early stages of economic development. Finally,
applying the concept of surplus labor to the entire world economy as a
closed system highlights the importance of continued access to a pool of
cheap labor (particularly in China and India) to global profit and hence
2.2 Intersectoral terms of trade and agricultural transformation
It is a relatively simple step from the above dual economy model
to a two-sector model in which the traditional sector is defined as rural
and agricultural, whereas the modern sector is mainly urban and industrial.
Relations between the sectors can then be extended to include product market
specialization according to comparative advantage. In addition to surplus
labor, the traditional sector now provides the principal wage good (food)
and raw materials as well as being an additional source of demand for industrial
goods and part of the arena for savings mobilization. The inter-sectoral
terms of trade then acquire particular significance. If this swings in
favor of industry then industrial profits and reinvestment will rise, but
rural demand for industrial goods will be reduced. Conversely, high agricultural
prices will reduce industrial investment but increase demand. The important
implication is that expansion of the modern industrial sector may be held
back by a failure to raise productivity of the generally larger population
working in agriculture. Hence agricultural transformation, rather than
industrial modernization may be the key constraint to economic development.
Within this framework, market structure in both sectors becomes an
important determinant of economic growth. For example, mark-up pricing
of industrial goods in small modern industrial enclaves is likely to undermine
attempts to stimulate agriculture through price incentives alone. Meanwhile,
agrarian structure will determine how any surplus income over and above
subsistence requirements is distributed, and how it is allocated between
investment and consumption goods. But market structure itself changes with
economic development. For example, rural to urban migration (and accompanying
changes in institutions and culture) may proceed to the point at which
the opportunity cost of labor in the agricultural sector ceases to be zero.
Further migration will then raise food prices as well as changing demand
and supply of labor in each sector. At this point dualism has disappeared
and the economy comes to resemble an orthodox neoclassical general equilibrium
2.3 Growth theory
The idea that economic development should naturally result in the
erosion of dualism (in labor and other markets) establishes a link from
classical development economics back to growth theory as pioneered by Abramovitz
and Solow. This, in brief, seeks to break economic growth into separable
components, the most important being (a) growth in the supply of labor
and capital, (b) improvements in the efficiency with which they are allocated
between sectors in line with their marginal productivity, and (c) sector
specific improvements in technology. Within this framework, dual economy
models may be viewed as a special case that highlight one historically
important set of barriers to efficient resource allocation. Empirical studies
confirm that growth in low income countries is attributable more to capital
accumulation, whereas in high income countries it is attributable more
to technological change.
More sophisticated ‘endogenous’ growth models also incorporate causal
links between these sources of growth, and the effect of increasing returns
to scale. For example, technological change has to be embodied in capital
stock and can proceed more rapidly where this is growing. The pace of technological
change in different sectors is also determined by expenditure on research
and human capital accumulation. Economies of scale also result from expansion
of the size of markets and opportunities for specialization. But the relationship
between growth and the institutions that govern resource allocation remain
important. In this sense, the dual economy model is just the leading example
of a range of disaggregated models that can accommodate more complex market
fragmentation, and inter-sectoral rigidities. An additional important factor
is the contribution to growth of natural resources. Where abundant, these
help to sustain the rate of profit. But natural resources may also be a
‘curse’ on growth, by attracting labor and capital (and the attentions
of policy makers) away from sectors with higher economies of scale and
therefore longer-term growth potential.
3. The open economy
under laissez faire
3.1 The advantages of free trade
An obvious limitation of the theories considered so far is neglect
of the links between the modernizing nucleus and other more advanced economies.
External influences were important even to British industrialization. This
sub-section briefly summarizes the three main explanations of why trade
has a positive influence on economic development. The remaining sections
then consider why trade may also be a source of underdevelopment or regress.
The most widely cited argument linking trade and economic development
is Ricardo’s theory of ‘comparative advantage.’ This can most easily be
illustrated with reference to two countries, each producing two goods with
two factors of production, neither of which is mobile between the two countries.
Ricardo demonstrated that by permitting specialization in production of
the goods, trade offers a means to raise the national income of both countries
- even if one country is less efficient in producing both goods. Thus,
for example, a poor country can benefit from exporting agricultural commodities
and importing machinery from a richer country, even if productivity of
both labor and capital in the agricultural sector is lower than in the
rich country). The theory provides the point of departure for international
trade theory generally; extending to multiple product, factor and country
cases, allowing for factor mobility, identifying how market relative market
power determines the distribution of gains from trade and so on.
A second reason why trade may act as an engine of economic development,
going back to Adam Smith, is that it provides a ‘vent for surplus’. Goods
that in the closed economy have very low or zero marginal value (and are
consequently unused) acquire value when integrated into the global economy.
Natural resources (including mineral products, forest products, uncultivated
land) are the leading example, although the argument can also be applied
to surplus labor (in poor countries) and even capital (from rich countries).
In contrast to neoclassical trade theory, the argument emphasizes the transformative
nature of trade and plunder - stimulating institutional changes that increase
access to untapped resources, rather than voluntary and marginal reallocations
of resources within a framework of established property rights and trading
A third argument for trade is the dual gap theory. While the dual
economy model highlighted shortage of capital (and hence domestic resource
mobilization) as the key constraint on economic growth, this theory suggests
that a more important bottleneck is likely to be access to foreign exchange.
More specifically, this determines the rate of import of key factors of
production (such as oil, modern machinery, technical expertise) that have
an almost infinite marginal value. Given a relatively constant marginal
propensity to import these goods, then short-term domestic economic growth
in excess of the growth of foreign exchange earnings will be inflationary.
The theory goes beyond the short-term, however, in suggesting that price
incentives are insufficient to stimulate domestic production of essential
imports. Thus growth is constrained by the ability to export, to attract
foreign investment or aid.
3.2 Adverse barter terms of trade and immiserizing growth
Perhaps the most celebrated explanation for trade pessimism, attributable
to Prebisch and Seers, is that specialization according to comparative
advantage may lock some countries into production of goods with low income
elasticities of demand. As world income grows, so their share of it consequently
declines. Producers may try to maintain demand against this trend by accepting
lower prices for their goods, but if demand is price inelastic then they
will end up even worse off. Conversely, if they seek to maintain income
by raising output, then induced price falls may result in a net income
loss - the case of immiserizing growth. Export taxes or quotas across all
exporters can prevent this, but this is hard to organize given the temptation
to cheat and to free ride on the agreement.
Barter terms of trade are determined not only by demand and supply
for different products, but also by product-specific variation in market
structure. Profit mark-ups for newer and more highly differentiated products
are likely to be higher than for established and homogeneous goods. Hence
gains from trade will accrue largely to the former.
These arguments explain the ‘Prebisch-Singer’ hypothesis that the
terms of trade tend to move over time against primary commodities. If this
was not bad enough, the prices of these products have also been found to
be more volatile. Thus countries highly specialized in them have a more
difficult task achieving macro-economic stability. Nevertheless, many countries,
particularly in temperate parts of the world, have achieved rapid economic
growth and industrialization from a position of being specialized primary
commodity exporters. This suggests that specialists in primary commodity
benefit in absolute (if not relative) terms from trade so long as global
demand grows rapidly enough. The argument is also complicated by the acquisition
of ‘primary commodity status’ by labor-intensive industrial goods, as their
markets expand and become more perfectly competitive.
3.3 Coercive capitalism and the double factoral terms of trade
Neoclassical trade theory generally assumes the existence of market
institutions that ensure trade only takes place with the mutual consent
of buyers and sellers. It also assumes that these parties are fully informed
and that the consequences of their actions on third parties are fully reflected
through the price system. But even a cursory examination of the history
of trade relations between the early industrializing countries and the
rest of the world reveals that much of what passed as ‘trade’ (in slaves,
for example) is better described as theft or (following Marx) as ‘primitive
accumulation.’ Even when the rudiments of a market system were established,
traders from the ‘core’ countries not only took advantage of local monopolies
in the ‘periphery’, but also ruthlessly created and protected them with
help from their sponsoring states.
Out of this terrible episode and the political reactions it inspired,
the foundations of a more anonymous and mechanical market-based system
emerged, not as an act of benevolence but because it best served the evolving
interests of the rich and powerful. Marxist and post-Marxian scholarship
serves as an important and continuing counterpoint to development theory
that abstracts from the way political power continues to manipulate market
institutions and trade. An important example of this is Emanuel’s theory
of unequal exchange. This takes as its starting point Marx’s labor theory
of value, and explains how the process of equalization of profits through
the price system distributes the global surplus (over the cost of reproduction
of labor) unequally between core and periphery within the world economy.
One strand of the theory is based on how markets distribute the surplus
in proportion to capital invested rather than in proportion to the rate
of labor exploitation. To the extent that countries in the core are specialized
in producing more capital-intensive goods they capture a share of the global
surplus generated from labor exploitation in the periphery.
A second and more important argument hinges on relative wages in
core and periphery and need not be rooted in a labor theory of value. The
argument also helps to explain why economic development of former colonies
(like Australia), that specialized in temperate agricultural goods such
as meat and wool proceeded more rapidly than colonies specialized in tropical
goods such as coffee, tea and rubber. The key feature of the world economy
at the time was the existence of a segmented or dualistic world labor market.
The pricing of temperate goods were based on the wage required to attract
mostly European immigrants whose reservation wage was linked to their marginal
productivity in Europe and the North American frontier. The pricing of
tropical goods, in contrast, was influenced by the wage required to attract
surplus labor into plantations out of traditional agricultural livelihoods,
particularly in India and China. The barter terms of trade between the
two types of commodity thus reflected the racially instituted segmentation
of the world labor market. The double factoral terms of trade - or the
number of hours of periphery labor that could be purchased per hour of
core labor was thereby set heavily in favor of the core.
3.4 Cumulative causation
The historical contribution of trade to global inequality as well
as to growth can be linked to the argument that peripheral countries have
remained dependent on the core into the post-colonial era. The argument
is primarily political rather than economic to the extent that it hinges
on the ability of core countries to manipulate the institutions governing
global economic activity to their advantage. However, dependency theory
also has a purer economic dimension. Consider two identical and adjacent
economies C & P. Assume an exogenous shock (such as industrialization)
raises output in one. Neoclassical theory suggests first, that specialization
according to static comparative advantage can help spread the benefits
to both. Second, it suggests that free factor movements can further reduce
the inequality - labor migrating from P to C until wages are again equalized,
while capital flows (assuming diminishing marginal returns to capital in
the C) flow in the opposite direction until rates of profit are equalized.
If these are called ‘spread’ effects (using Myrdal’s terminology), then they need to be juxtaposed with ‘backwash’ effects that arise from a failure to achieve this particular equilibrium. Migration from P to C reduces effective demand in P and hence the size of its market. This reduces opportunities for realization of economies of scale and undermines incentives to invest there. It also denudes P of entrepreneurial talent and skilled labor. Restricted in its ability to diversify into new products, the remaining capitalists in P specialize in traditional exports. Rather than reinvesting profits locally, they are more likely to invest them in C (capital flight) or use them to purchase luxury consumption goods from C - the ‘Dusenberry effect’.
In contrast, in C we have a post-Keynesian perspective on growth. Investment responds to growth according to Harrod's ‘accelerator principle’, that investment is a function of the rate of growth. Labour productivity also rises in proportion to the size of the market (Verdoorn's law). In other words, growth has external effects that stimulate further growth. Likewise C specializes in those industries that are subject to greatest economies of scale through learning by doing and investment in human capital..
Overall a process of cumulative causation (virtuous cycles in the
center, vicious cycles on the periphery) magnifies the initial shock and
result in a polarisation of average incomes. However, average income growth
in P, while slower than in C, may nevertheless be higher than they would
have done in the absence of trade.
in a closed economy
4. 1. The case for state planning
Pessimism about the effect of free-trade on national economic development,
coupled with weak domestic market institutions helped to pursuade many
governments of newly independent countries to play a more proactive role
in relation to economic development. Eonomic historians also drew attention
to the ‘Gerschenkron effect’ or growth over time in the minimum efficient
scale (and hence investment cost) of industrial plant and machinery. Underdeveloped
domestic capital markets seemed incapable of responding to the challenge,
thus the onus was placed on the state to use a wider range of more or less
coercive mechanisms (taxation, printing money, asset seizure, forced labor)
to mobilize the necessary resources.
A further reason for doubting the ability of the private sector to
modernize the economy was provided by the "big push" theory, of Rosenstein-Rodan.
At its most general, the theory highlights a co-ordination failure among
capitalists whose individual investment decisions all depend on demand
and supply linkages (or pecuniary externalities) arising from each others’
investments. If they could co-ordinate these decisions then the problem
could be overcome. But in practice mutual suspicion, risk and uncertainty
make this difficult without the state taking a lead. The interdependence
of investments also adds to the indivisibility of investment and hence
the overall financing problem. In the more rigorous version of the theory
the switch to more capital-intensive technology within any sector also
entails having to offer labor a wage premium. But this extra cost can only
be justified at a level of production (and hence demand) that can be attained
only by all other firms making the switch (and paying higher wages) at
the same time.
4.2. Investment planning strategies
The existence of market failures only constitutes grounds for intervention
if the state can achieve the necessary resource allocation at least as
efficiently. To assist in this task, input-output modeling was used to
work out the intermediate inputs required at the beginning of a planning
period in order to achieve a desired combination of outputs at its end.
The challenge was to avoid both surplus production and bottlenecks, without
being able to eliminate them through external trade or a competitive market
pricing system. Power to ration consumer goods and to appropriate resources
from outside the plan allowed some room for maneuver, albeit at the expense
of individual rights. Planning could also be restricted to highly interdependent
complexes of sectors within the economy (linked to armaments or heavy industry,
for example) leaving other sectors (hopefully) to the private sector or
to later generations.
A feature of this approach is the ability of the state to impose
its own time horizon on the economy by surpressing private consumption.
A long time-horizon also held out the alluring prospect for latecomers
of being able to take short cuts. The heavy industry argument, for example,
justifies surpressing current production of wage goods in order to accelerate
production of capital goods. Future bottlenecks in the supply of capital
goods are thereby eased, permitting the economy to acquire a larger capacity
to make wage goods in the future. In a milder form, planners sought to
invest strategically in goods and services (such as infrastructure) that
would create investment opportunities that could then be taken up by the
private sector. Taking a regional trading block as a closed economy, the
core economy might similarly strategically leave some sectors for peripheral
trading ‘partners’ to specialize in, so as to release domestic resources
for entry into new sectors.
In its cruder and more ambitious form, central planning within a
closed economy has proved unable to deliver sustained growth. The central
problem was perhaps the political one of determining who should decide
what to produce. Other problems included the creation of incentives to
ensure compliance with the plan at all levels, while at the same time encouraging
innovation. All these problems were further compounded by the growing complexity
of input-output systems led by consumer demand rather than the requirements
of rearmament or initial industrialization. However, disaggregated models
of the economy have emerged as an important tool for analysis of policy
options that are sufficiently important to have linkage effects throughout
the economy. They include general equilibrium models that allow some flexibility
in input-output ratios in response to price, and models based on social
accounting matrices that allow analysis of the distributional impact of
structural change and policy options.
in an open economy
Many of the problems of external trade under laissez faire, and of
dirigisme in a closed economy can potentially be overcome through state
regulation of external trade. For example, an active ‘developmental state’
may be able to renegotiate terms of trade and of inward investment to increase
‘spread’ effects and reduce ‘backwash’ effects. Meanwhile, if transaction
costs are sufficiently low, then external demand can be used to drive modernization
of a particular sector by itself, thereby avoiding the big-push problem.
This section first reviews the policy instruments available to governments
for strategic management of trade, and the infant industry argument that
underpins them. It then uses the idea of the ‘Ricardian ladder’ to develop
a theory of how state intervention contributed to the successful late industrialization
of much of East Asia. It finishes by reviewing briefly the potential pitfalls
of both the import-substitution and export-led components of this strategy.
5.1 Inward and Outward Oriented trade strategies
One policy measure open to governments is to maintain an overvalued
exchange rate; that is a rate at which demand for foreign exchange (from
importers and those wishing to save abroad) exceeds supply. This confers
on government discretion to direct foreign exchange towards some activities
and organizations, and away from others. For example, it could allow a
favored company to import materials relatively cheaply, and at the same
time protect it from foreign competition by restricting licenses for import
of its final products. An overvalued exchange rate also often serves as
a general tax on exporters. Specific import quotas and tariffs can also
be used to encourage import substitution within specific sectors. To the
extent that these instruments raise domestic prices and divert investment
from other activities they also discourage investment in exports. These
different instruments can all be used to differing degrees in pursuit of
an ‘inward oriented’ industrialization strategy. In contrast, an ‘outward
oriented’ strategy is based on a liberal exchange rate market, the removal
of restrictions on imports and possibly use of selective subsidies to promote
Economists have well worn tools for calculating the short-term budgetary
and efficiency costs of using these instruments. However, they also recognize
the possibility that these costs can be justified if the interventions
offset market failures. For example, there may be benefits to society from
the entry of a local firm into new markets - demonstration effects, for
example. But if the firm itself does not reap the full reward from its
investment it will hold back. A public subsidy may then encourage the firm
to risk entering into the market. This then results in wider long-term
benefits to the economy and these benefits more than offset the initial
subsidy cost. This is an example of the ‘infant industry argument’. The
important points to note about it are (a) the subsidy should only have
to be temporary, (b) it is justified by benefits that cannot be captured
by the investor, and (c) the resulting benefits should be more than sufficient
to offset the original subsidy cost. Selective subsidies and tariffs may
also help firms to overcome financial constraints to entry into new markets
(by raising prospective as well as short-term profits). But such constraints
are in principle better overcome by development of local capital markets,
and so financial constraints do not in themselves constitute ‘infant industry’
grounds for subsidies.
5.2 The Ricardian Ladder
The infant industry argument was widely cited to justify ‘first-round’
import substitution policies to encourage domestic production of consumer
goods, such as textiles. These industries generally required less advanced
technology, less skilled labor and were subject to less economies of scale
than more capital-intensive intermediate goods (like chemicals, machinery)
and ‘knowledge-intensive’ services. For this reason, ‘second-round’ import
substitution policies designed to assist local firms to penetrate these
markets often proved less successful. An alternative strategy was to switch
from first round import substitution to promoting exports of consumer goods.
The theory of the ‘Ricardian ladder’ builds on these observations by suggesting
a path for late industrialization that is based on selective application
of incentives to inward and outward oriented investment. Success in export
of primary products on the basis of comparative advantage can help to raise
wages and hence build a market for domestic consumer goods. Success with
import substitution in this market lays the foundations for export-led
growth based on these same sectors. This in turn may help to increase the
size of the domestic market and the skills of both labor and entrepreneurial
classes to the point at which import substitution (and in time export)
of more complex products becomes possible.
One precondition for successful ascent of the Ricardian ladder is
the willingness and ability of policy makers to implement such a complex
strategic plan through timely creation of appropriate economic incentives.
If firms receive strategic subsidies for activities, but fail to become
internationally competitive in them, then the whole strategy can easily
degenerate into a system of political patronage that permanently sustains
inefficient use of resources. Moreover, if industrial success is seen to
depend mostly upon obtaining government licenses, grants and licenses for
local monopolies, then this will divert entrepreneurial talent and resources
away from the task of improving international competitiveness. Such behavior
is called rent seeking. The efficiency cost to the economy does not equal
the value of the rents themselves, such as bribes to officials for licenses.
For these are pure transfers. Rather the cost arises from the directly
unproductive activities (and use of resources) that they stimulate. Thus
implementation of the policy depends not only on the existence of policy
networks with the necessary technical ability, but also on their ability
to insulate themselves from the politics of patronage. Such networks have
tended to be associated within ‘developmental states’ unified by a strong
national ideology or by external threats. Successful economic development
can itself undermine the developmental state that delivers it. For it stimulates
a proliferation of new economic interest groups (both within the business
class and labor) that challenge the old networks directly, as well as the
culture and ideologies that sustained them.
Another precondition for successful economic ascent of the Ricardian ladder, is access to external markets. If too many countries seek to penetrate strategic export markets simultaneously then the market may become glutted. The strategy may also provoke retaliation, particularly if it threatens local industries and if export subsidies are being used. Achieving international competitiveness may also hinge on the terms of access to foreign capital and technology, assuming these cannot be generated locally for lack of adequate financing, skills or research capability. If those
at the top of the Ricardian ladder can control access to lower rungs
among satellite economies, then the theory can be transformed into a multi-sector
closed economy model with a core and periphery. On the other hand, if the
core needs growth in the periphery as a source of demand, then there is
the potential for a global co-ordination problem – immediate fears of labor
displacement blinding economic leaders from sanctioning trade liberalization
to stimulate global growth from which new employment opportunities should
6. Economic development,
income distribution, poverty and well being.
This review has so far concentrated on how predominantly agrarian
low and middle economies can transform themselves so as to raise resource
productivity and hence economic growth rates. But the latter (as measured
by changes in GDP per person, for example) is widely recognized to be a
deeply flawed indicator of human welfare. An important response to this
problem is to broaden the definition and measurement of GDP to incorporate
consumption of non-monetized goods and services. However, the more fundamental
issue is how to take into account the unequal distribution of GDP on human
6.1 A utilitarian approach
A utilitarian approach to poverty definition can be easily summarized.
First, overall well being or welfare is defined as a function of the welfare
of individuals (or households). Second, individual income (better still
consumption) is taken as a proxy indicator of individual welfare. Overall
welfare can then be defined as a function of individual income. Third,
all individuals are ranked according to their income, and ascribed weights
according to their position. For example, a ‘progressive’ set of weights
attribute a greater gain in welfare to one dollar transferred to a poorer
individual than to any richer individual. In contrast, the ‘dollar democracy’
assumption (employed in most applied welfare economics) attributes the
same marginal welfare gain to an extra dollar of income regardless of who
receives it. This is the same as arguing that income distribution at any
point in time is broadly fair. A poverty line approach, in contrast, gives
zero weight to any income above that needed to secure some minimum set
of basic needs. More complex measures go further by increasing welfare
weights according to how far poor individuals fall below the poverty line.
The consequence of defining development using any progressive welfare function
(rather than aggregate national income) is that maximizing economic growth
will not automatically maximize well being if it also entails a worsening
in the distribution of income.
This approach provides quantitative poverty indicators, against which
the performance of development policies and programs can be evaluated.
For example, the World Bank estimated that the number of people living
in absolute poverty (defined as the local equivalent of one US dollar a
day at 1993 prices and purchasing parities) in the world in 1987 was 1,227
million (or 30.1 per cent), compared to 1,314 million (29.4 per cent) in
1993. The absolute numbers fell (from 464 to 446 million) in East Asia
and the Pacific. In South Asia the numbers rose (from 480 to 515 million),
but the head count ratio fell (from 45.4 to 43.1 per cent). In Sub-Saharan
Africa the absolute numbers in poverty rose (from 180 to 219 million) and
the head count ratio rose (from 38.5 to 39.1 per cent).
At least five criticisms of this approach to poverty definition and
measurement can be distinguished. First, it assumes that all individuals
have the freedom to purchase the goods and services that they most need,
or that money is fully ‘fungible’. Second, it assumes that all individuals
know what is best for them, or make ‘rational choices’. Third, it ignores
non-market allocation of resources, particularly within households. Fourth,
income measures often fail to take into account important non-tradable
influences on welfare, including work, freedom, envy. Finally, it leaves
undetermined the issue of which particular welfare function should be selected.
For example, the legitimacy of a policy that targets people below a standard
poverty line (such as a dollar a day) is limited if that line is seen as
6.2 Alternative approaches
Problems of aggregation (and failure of the fungibility assumption)
can be avoided by defining poverty in terms of the failure to satisfy a
heterogeneous list of basic needs. Doyal and Gough, for example, start
with just two: survival (requiring both physical and mental health) and
autonomy (requiring mental health, understanding, and some freedom of choice).
From this starting point they list eleven intermediate needs: food &
water, shelter, non-hazardous work environment & physical environment,
health care, childhood security, primary relationships, physical security,
economic security, safe birth control & child bearing, basic education.
These in turn can be met by a host of distinct and culturally specific
The main point of difference here from the utilitarian approach described
above is the emphasis on the limited substitutability of different human
needs. In place of economic growth, it suggests that human development
should be measured by progress towards meeting a checklist of these needs.
This also helps to avoid the problems of stigma and dependency that may
arise from labeling some individuals as poor in more general terms. The
weak correlation between different indicators of basic needs and average
income highlights the limitations of giving too much weight to income,
or indeed any one indicator. On the other hand, alternative indicators
often implicitly adopt welfare weights that are inconsistent or arbitrary.
For example, life expectancy and years of schooling give equal weight to
extra years without any notion of diminishing marginal returns, whereas
mortality and literacy rates are dichotomous like the poverty line. Composite
indicators, such as the Human Development Index, are often even more inconsistent
and arbitrary. Yet without them, the question of how to set priorities
between different needs remains unanswered.
A second point of departure from the neoclassical approach to measurement
emphasizes the relational as well as the distributional dimension of poverty.
One tradition (following Durkheim) emphasizes the importance of alienation,
the break down of social cohesion and solidarity. A second (particularly
in the USA) highlights welfare dependency and the creation of a culture
of poverty or an underclass. A third emphasizes social and political marginalization
and exclusion or loss of rights. A fourth (following Townsend) emphasizes
the idea of relative deprivation or lack of sufficient resources to share
in living conditions (and participate in activities) that are customary
to a wider society. The differences between them are important. But they
all highlight the point that welfare is not separable and additive. Furthermore
they all suggest that economic growth directly adversely effects some important
dimensions of human well being, at the same time as increasing the resources
that are potentially available to improve other aspects.
How then should the goal of economic growth through industrialization
be weighed against human development, defined as fulfillment of a broad
set of human needs? It is possible (following Kornai) to distinguish between
three strategies: industrialize and hope that human development will follow
(‘rushed growth’); go for balance (‘harmonic growth’); and go for human
development first by prioritizing investment in basic services (‘social
overhead capital’). The problem with rushed growth is that it may exacerbate
income, wealth and power disparities in a world that has shown its capacity
to confound Marxian dialectics. The problem with the second, lies in mobilizing
the necessary resources - another version of the big push problem. The
third option is currently fashionable among international development agencies,
not least because it justifies their existence. Empirical evidence on whether
investment in social overhead capital crowds industrial investment in or
out is ambiguous. Much depends upon political, institutional and cultural
endowments of particular states or regions.
7. Economic development,
culture and institutions.
Much of the theory considered so far has implicitly assumed that
there is one universal path of economic development. Consideration of the
diversity of cultures and institutions within which economic activity is
historically embedded leads to a different conclusion. Culture is here
defined as a shared endowment of values and norms. It influences both the
ends of economic activity (e.g. what is regarded as a basic need), and
the means for achieving them (e.g. individual motivation). With respect
to the former, "Western" economics has been criticized for being concerned
too narrowly with the individual and with the material. The bias in favor
of materialism can be addressed, at least in part, by incorporating other
"goods" (most obviously time-use) into the utility functions of different
actors. Against the charge of individualism, it can be observed that many
of the theories cited so far do indeed seek to maximize collective national
development. But there is a widespread tendency to neglect individual interests
(particularly those of women and children) in favor of collective household
interests. Addressing this problem has requires that theory is recast to
reflect more complex power structures and social processes.
The direct influence of culture on the means for achieving economic
development has spawned a large literature, much of it of dubious quality.
The link between the two has invariably been found to depend upon on many
other factors, with culture itself proving to be capable of sometimes quite
dramatic adaptation to changing economic circumstances. Likewise ‘traditional’
or ‘entrepreneurial’ values (however defined and measured) are as much
a consequence of economic conditions as a cause. The relationship between
the two is further complicated by the influence of institutions, or rules
and norms influencing how people behave. While institutions clearly reflect
culture, different institutions arise within similar cultures, and similar
institutions exist across different cultures. For example, not all societies
that owe much to Confucianism have a strong work ethic, and this is an
institution that has been linked to other cultures, most famously Protestantism.
Economists have generally sought to avoid these complexities by assuming
that culture (embodied in tastes and preferences) and institutions (such
as the household) are exogenous or unchanging. Alternatively, they have
assumed that institutions adapt smoothly and costlessly to facilitate efficient
resource allocation and can therefore be ignored. But a long line of institutional
economists have dissented from this position, by seeking to make institutional
change endogenous to their theories. An important conclusion arising from
this work is that the best development strategy is ‘path dependent’ or
depends upon its historical endowment.
7.1 Agricultural transformation and imperfect information.
The importance of the agricultural sector as a source of food and
labor, and as a source of livelihoods and demand for industrial products
has already been discussed. From a modernization perspective, the "moral
economy" of semi-subsistence farmers or peasants was often regarded as
a major obstacle to development - bound by tradition, resistant to individual
advancement, suspicious of innovation and market integration. Systematic
modeling of peasant household decision making, however, revealed that many
seemingly irrational decisions (such as reducing marketed surplus in response
to an increase in crop prices) could be explained using orthodox neoclassical
models, once these were extended to accommodate income-work trade-offs
and risk aversion. These laid the foundations for agricultural development
policies that sought to build on peasant institutions, rather than assuming
that peasants would either disappear (by separating out into capitalist
farmers and landless laborers) or should be forcibly dismantled.
A famous strand of this debate concerned the institution of sharecropping,
under which tenant and landlord agree to divide a crop between them. Marshall
observed that this could be inefficient when compared to fixed rent or
fixed wage contracts (or a mixture of the two) because it discourages labor
and capital from being applied to a plot of land up to the point at which
total marginal cost equals the marginal return. However, sharecropping
was found to be efficient in the presence of information asymmetry (or
non-trivial contracting costs) and the absence of an insurance market.
Stiglitz, for example, found it to be a rational compromise between landlord
responsibility (with less risk aversion but higher supervision costs) and
tenant responsibility (with more risk aversion but lower supervision costs).
This insight then helped economists to explain the resilience of other
traditional (and seemingly inefficient) agrarian institutions, such as
the common practice of ‘market interlinkage’, or contracts that combine
transactions in seemingly separable goods and services.
7.2 The new institutional economics
Generalizing these insights still further, it is possible to develop
a broader theory of underdevelopment that is rooted in the weakness of
market institutions. In areas with a low population density, poor media
for spreading information about product characteristics, and weak mechanisms
for enforcing contracts then markets will be highly interlinked or missing
completely. High transaction costs and strong externalities between neighbors
will then encourage non-market resource allocation. Villages, for example,
may be viewed as a form of social organization that internalize many functions
that are performed in industrial countries by the market, firms and the
state. Their identity is often framed around common pool resources and
public goods, such as water, grazing, trust, peace, religious identity,
and mutual knowledge. But they govern resource allocation not only through
explicit forms of hierarchy, but also by accentuating the penalty to any
individual of gaining a weak reputation or being deemed untrustworthy.
However, critics of this strand of the new institutional economics warn
that such institutions (sharecropping, market interlinkage, villages) may
prove resilient over time not only because they are cost-effective responses
to high transactions costs and unequal access to information. They also
often help to reinforce an often highly unequal distribution of power,
and are molded by social history and culture in ways that cannot be reduced
Institutional theories of economic development are not only confined
to the agricultural sector and to microeconomics. The discussion of open
economy dirigisme in Section 5, for example, led to recognition
that a key determinant of economic growth was the willingness and ability
of the ‘developmental state’ to intervene successfully in the market, and
to sustain unified and effective policy coalitions. Conversely, slow growth
in many other countries can be attributed to the dominance of self-serving
behavior (patron-client systems, free-riding, rent-seeking) within the
equivalent policy networks. Economic models based on the rational choice
assumption that behavior is governed by voluntary transactions among politicians,
bureaucrats, senior business people and indeed academics have advanced
understanding of these problems. But this approach should not divert attention
away from the importance of coercive power relations, culture and identity
in explaining diverse patterns of economic development. For example, economic
discourse of the kind represented by this article itself reflects a ‘Western’,
technocratic assumption about the relative importance of technical and
rational processes to the development process.
8. Economic development
No issue within the ambit of development economics is more important,
or raises more controversy than that of the relationship between population
growth and human welfare, particularly given the link between both and
environmental change. This section starts with a review of the multiple
causes of population growth, with an emphasis on the economics of children.
It then explores the positive and negative effects of population growth
on economic growth and human welfare, and concludes with a short discussion
of population policy.
8.1 Determinants of population growth
The theory of demographic transition states that economic growth
(and associated processes of modernization, such as urbanization) results
in a fall in both crude death rates (CDRs) and crude birth rates (CBRs),
but that the CDR falls more rapidly than the CBR. The theory can be explained
in provision of death reducing institutions and services (such as clean
water, sanitation, medical facilities) than of fertility reducing institutions
and services (such as delayed parenthood, birth spacing and contraception).
So long as a gap persists between the CBR and the CDR then natural population
growth (that is growth not attributable to net migration) will be positive.
Furthermore, the temporary burst of population growth thus resulting from
economic development is accentuated by the phenomenon of demographic momentum.
This refers to population growth arising from the increase in the proportion
of women of childbearing age that itself results from population growth.
The theory of demographic transition highlights the importance of understanding
what determines the total fertility rate (TFR), or the number of children
a woman would have if she matched current age-specific birth rates throughout
her life. The TFR may be viewed as a lead indicator of the CBR, since it
does not capture effects attributable to demographic momentum.
Following Becker, a useful starting point for modeling changes in
the TFR is to regard children as a complex durable asset (part investment,
part consumption good) subject to rational choice cost-benefit calculations
of their parents. Changes in the TFR can then be linked to wider changes
that have a significant positive or negative effect on the number of children
that parents consider it beneficial to aim to have. Positive effects include
the expected pleasure or satisfaction to be had from children and from
having heirs, the net present value of income children are expected to
earn for the household, and their role in providing security for parents
during old age. Negative effects include physical and psychological risks
and hardships of bearing and rearing children, the actual costs incurred,
and the opportunity costs of labor required for childcare. Marginal opportunity
costs for average parents are likely to rise as child rearing claims a
larger and larger proportion of their budget, and hence there will be some
optimum desired number of surviving children (DC) at which marginal costs
and benefits are equal.
Models based on these assumptions permit a number of hypotheses to
be advanced to explain the negative correlation between economic development
and the TFR. For example, the TFR is likely (other things equal) to be
higher, the greater is the present value of children’s labor, the less
access parents have to formal social security, and the greater the opportunity
cost of parents’ time. If the costs of rearing children assumed by women
are greater than their share of the benefits, then the TFR will be lower
the more say women have over fertility decisions. It is also likely to
be lower where parents have the option to substitute a larger number of
less educated children for a smaller number of more educated children as
they become richer. However, a fully comprehensive theory of the link between
fertility and economic development also needs to take into two additional
considerations. First, induced changes in culture and institutions (such
as marriage, pro-natalism, inter-generational relations) alter the degree
of autonomy that parents have over the fertility decision. Second, nutrition,
health, availability of contraception and control over intercourse may
all physically prevent men and women from attaining the number of children
8.2 Economic Consequences of Population Growth
Development economists were initially particularly concerned with
the influence of population growth on the savings rate. There were two
distinct approaches. First, changes in worker-dependency ratios (due to
a rise in the proportion of both very young and very old people) might
be expected to reduce savings rates (more mouths, less hands). Second,
population growth would affect the functional distribution of income between
workers and capitalists. If it helped to sustain the existence of surplus
labor and hence restrains wages, then profit rates stay high and this may
increase overall savings rates. But if real food prices rise (due to diminishing
marginal returns in agriculture) then the terms of trade may go against
capitalists and in favor of rich landlords and peasants whose marginal
propensity to save in high productivity activities is lower. However, both
these lines of reasoning are limited because they assume (a) rates of return
on saving are not also being affected (b) parents are not already taking
into account possible rates of return to investment in children for old
age, in line with portfolio and life-cycle theories of saving.
Starting instead from a neoclassical and rational choice perspective,
it can be inferred that the number of children born will be the same as
the number that maximize human welfare only if three conditions are satisfied.
These are that (a) parents have perfect foresight (b) they are able to
achieve the number of children they want, and (c) they fully take into
account externalities, or the costs and benefits of their children on other
people. Economists have generally concentrated on identifying and measuring
the external effects. But departures from the first two conditions are
also important. In particular, overpopulation is likely to result where
the infant mortality rate is high and parents are strongly averse to falling
below their target number of children. This argument supports the counter-intuitive
but widely accepted view that reducing infant mortality is essential to
any strategy for reducing population growth. Second, reducing population
growth may be desirable not because it harms economic growth, but because
it indicates that more people (particularly women) are avoiding having
more children than they wanted.
The most important negative externality argument is that population
growth dilutes access to a fixed stock of natural capital, particularly
land. Malthus’ original formulation of this argument assumed that parents
could not control their own fertility (or, more precisely, that any increase
in wages would be dissipated through earlier marriage leading to increased
labor supply that would drive wages back again to subsistence level). But
capital dilution may also result from weak property rights if parents consequently
fail to take into account the marginal effect of their children on availability
of capital for the children of other people. Other forms of collective
capital, such as public services and aid flows, may also be diluted by
population growth even where these are not fixed, but supplied with a lag.
All these arguments hinge on the existence of diminishing marginal
returns to labor, and need to be weighed against empirical evidence in
the opposite direction. Population growth creates opportunities for increasing
specialization and realization of economies of scale. It may also increase
the supply of productivity enhancing geniuses more than productivity undermining
idiots, as well as inducing demand for technological change. Higher population
density may also lower transactions costs, and reduce the cost per person
of investment in non-rival public goods, such as defense, environmental
protection, social infrastructure, public administration, research and
In countries undergoing industrialization, population growth has
almost invariably also been positive, suggesting that the positive external
effects prevail. But the transitional capital dilution effects arising
from population growth of more than a couple of percentage points per year
may also act as a drag on the growth of average incomes, even in areas
with relatively low population densities. However, the case for stronger
policy intervention to reduce birth rates generally rests more convincingly
on the adverse distributional effects of population growth, particularly
on women. In such cases fertility can often be influenced sufficiently
by measures that reduce infant mortality rates, improve women’s control
over their own fertility and raise the opportunity cost of their time by
strengthening their educational and employment opportunities.
This overview of theories of economic development
has evolved over seven years of teaching the subject to undergraduates
and postgraduates at Bath. I am grateful to them and to colleagues for
helping to clarify my thinking in innumerable ways. Thanks also to Edward
Horesth, Liam Aspin and for helpful comments on an earlier draft.
Bardhan P. and C. Udry (1999), Development Microeconomics. New York and Oxford: Oxford University Press [An advanced text, that is strong on the new institutional economics].
Dietz J. Editor (1995), Latin America’s Economic Development: Confronting Crisis. London: Lynne Reinner. [Introduction to current issues in development economics in Latin America].
Dreze J. and A. Sen (1995), Indian: Economic Development and Social Opportunity. Delhi and Oxford: Oxford University Press. [Introduction to current issues in development economics in India, including the relationship between economic liberalisation and social change].
Eatwell J., M.Milgate, P.Newman, Editors (1989), The New Palgrave Dictionary: Economic Development. London and Basingstoke: Macmillan. [Series of short articles on key concepts in development economics].
Escobar, A (1995), Encountering development: the making and unmaking of the Third World.
Princeton, New Jersey: Princeton University Press [Sociological critique of development economics]
Harriss J., J. Hunter, C.M.Lewis, Editors(1995) The New Institutional Economics and Third World Development. London and New York: Routledge. [Critical review of the contribution of the NIE to development thinking, with contributions from influential thinkers, including North].
Hayami Y. (1997), Development Economics: from the Poverty to the Wealth of Nations. Oxford and New York: Clarendon Press. [An intermediate text that is particularly strong in its coverage of theories of induced innovation].
Heilbroner R. (1991), The Worldly Philosophers. The lives, times and ideas of the great economic thinkers. Sixth Edition. London: Penguin. [Highly readable introduction, to the classical roots of many key concepts and ideas of development economics, and much besides!].
Kayizzi-Mugerwa S. Editor (1999), The African Economy: Policy, Institutions and the Future. London and New York: Routledge. [Introduction to current issues in development economics in Sub-Saharan Africa].
Meier G. M.Editor (1995), Leading Issues in Economic Development. Sixth Edition. Oxford and New York: Oxford University Press. [A comprehensive annotated reader, with excerpts from a wide range of seminal contributors to development economics].
Mellor J.W. Editor (1995), Agriculture on the Road to Industrialization. Baltimore and London: Johns Hopkins University Press. [Selection of historical country case-studies exploring agricultural and industrial linkages in the process of economic development].
Thirlwall A.P. (1999), Growth and Development. Sixth Edition. London and Basingstoke: Macmillan. [A particularly comprehensive and clear intermediate text]
Toye J. (1997) Dilemmas of Development. Second Edition Cambridge: Cambridge University Press [Influential review of the conflict between structuralist and neoliberal economists].
Wade R. (1990), Governing the Market: Economic Theory and the Role
of Government in East Asian Industrialization. Princeton: Princeton University
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Asian experience of late industrialization].
Table 1: A typology
of theories of economic development
|ROLE OF THE STATE||LAISEZ-FAIRE||LAISSEZ-FAIRE||DIRIGISTE||DIRIGISTE
|MAIN ECONOMIC TASKS OF THE STATE||To maintain law & order, and
protect property rights
|To maintain law & order and to encourage trade||To overcome market failures through planning||To regulate markets & competing political interests|
|FEATURES OF LABOUR ALLOCATION||Dualism & absorption into the expanding capitalist nucleus||International division of labour; unequal exchange||Coercive mass mobilisation||Comparative advantage influenced by quality of human resources|
|FEATURES OF CAPITAL ALLOCATION||Financial deepening
|External capital flows||Forced saving; comprehensive planning; inward orientation||Regulated competition and outward orientation|
|KEY MODELS & TECHNIQUES||Dual economy models; growth theory||Dual-gap model; centre-periphery models||Heavy industry & big push models. Input-output models||Swan/Salter model; cost benefit analysis|
|Britain during the industrial
|Most countries during the colonial period||Military/war economies; pre-reform Russian, China and India||The Newly Industrialized Countries
|POSITIVE ASSESSMENT||Efficient resource allocation||Benefits of a wider market, including
competition, specialisation and capital inflows
|Economies of scale; Reduced dependency; Faster capital accumulation||Smoother, & more equitable growth|
|NEGATIVE ASSESSMENT||Inequality; business cycles||Private sector monopolies and increasing inequality; immizerizing growth||Low rates of technological innovation; rent-seeking||Rent-seeking: adverse terms of
Diagram 1: A schematic view of the history of theories of economic development