Abstract
The vision of the first generation of development economists about the purpose of their young subject was quite promising. They aspired towards an economic sub-discipline that applied new methods and propositions to establish relevant theories about economic development in the then so-called Third World. In their view, both neoclassical and Keynesian economics were inappropriate for analysing the economic characteristics that set developing countries apart from advanced economies. The price system determined through supply and demand on markets, a central element of neoclassical analysis, was considered less relevant as markets in developing countries were fragmented, imperfect or even non-existent. Moreover, the interest of early development economists was much more in studying structural changes in the economy rather than in analysing the effect of incremental changes in variables on economic decisions and outcomes as common to marginal analysis in the neoclassical tradition.
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Notes
- 1.
For further reference on the affinity of early development economics with Keynesian economics see Seers (1963).
- 2.
The low labour productivity in the traditional sector was explained by the unlimited availability of labour vis-à-vis a limited amount of land that can be cultivated, and the fact that no capital can be formed through savings from subsistence farming in the traditional sector. The marginal product of an additional farmer was therefore assumed to be zero.
- 3.
It has to be noted that the dual economy models of Lewis and other early modernisation theorists exhibited a rather naïve view of pre-modern societies. As a result, they largely ignored, for instance, the social implications of moving vast numbers of workers from a rural subsistence economy to an urban industrialised sector. These sectors differ not only in the prevailing wage rate but they can also be considered as representing two distinct economic styles: One in which economic activity is embedded in traditional societal life, and the other where societal life is subordinated to economic market criteria. At about the same time, but largely unnoticed by early modernization theorists, did Karl Polanyi ([1944] 2001) warn of the dangers of the disintegration of social relations that this move entailed. The social consequences of the transformations postulated in early modernisation theories may actually be as forceful as to reduce the postulated effects of an elastic labour supply to insignificance. See Part III on the concept of economic styles, and especially Sect. 13.2.1 for a further discussion of Polanyi’s work.
- 4.
Balanced growth is just one strategy to deal with the negative consequences of narrow markets. Another strategy to broaden an industry’s markets would be to expand industries with a comparative advantage into foreign markets. Nurkse did not object to export-led growth, but was rather pessimistic about international trade and thus gave priority to achieving balanced growth through the simultaneous expansion of mutually supportive domestic industries and markets (Nurkse [1957] 1961, pp. 244, 241).
- 5.
A country’s domestic capacity to save (and hence its ability to accumulate capital) was assumed to be further restrained when poor people obtain knowledge of consumption patterns in advanced economies. According to Nurkse (1952 and 1953), such international demonstration effects raise poor peoples’ propensity to consume, and hence further discourage saving and investment activity.
- 6.
In its most extreme form, Nurkse summed up the effect of the vicious circle of poverty in this 1952 Commemoration Lecture in Cairo by the tautologous proposition that “a country is poor because it is poor” (Nurkse 1953, p. 4).
- 7.
See also Drechsler (2007) and Kattel et al. (2009) for a discussion of the timely nature of Nurkse’s work.
- 8.
See Sect. 8.4 below on the more recent discourse on good governance in developing countries.
- 9.
In spite of his strong emphasis on capital formation, Nurkse saw capital as a necessary but not as a sufficient condition of progress (1953, p. 1). He equally recognised the importance of attitudes, political conditions and historical events, but left these noneconomic aspects largely outside the scope of his analysis.
- 10.
Rostow placed particular emphasis on the role of politics in the early phases of modernisation, and argued that the nationalism in developing countries that emerged in reaction to the intrusion from more advanced economies was a more powerful motivating force in the transition from traditional to modern societies than the profit motive (Rostow 1984).
- 11.
The recognition of the role of politics in economic development is notable in the works of both Gerschenkron and Rostow. See also footnote 10 above.
- 12.
Hirschman’s conviction that economic processes in developing countries are often characterised by seemingly irrational or “wrong-way-around” sequences grew out of several field studies he did in Latin America. For instance, Hirschman observed in Argentina that a large poor but well-organised community of families occupied previously idle land in Quilmes at the outskirts of Buenos Aires. They built on it exceptionally solid houses from wood, brink and cement, even though they had no formal title to the land. While the conventional wisdom is that secure land titles are a precondition for people to be willing to invest in the construction and maintenance of their houses, these squatter families argued that the more solid and respectably built the houses are, the less likely it is that the authorities will send bulldozers to demolish the whole new settlement, and the more likely it will instead become that people are eventually granted official titles to the land (Hirschman 1984a). Another such “wrong way around” sequence that Hirschman describes is that certain attitudes and beliefs, that are believed to be conductive to economic progress, are actually acquired “on the job” in the course of the development process. In this respect, Hirschman (1984b) mentions how narrow latitude in standards of performance (a task has to be performed just right) brings pressures for efficiency, quality performance, good maintenance habits etc. and thus substitutes for a pre-existing performance attitude or actually creates it.
- 13.
- 14.
Myrdal was well aware of the limits and problems of state planning, and noted that the state may, especially at the beginning of the development process, itself be in the hands of social groups that have an interest in preventing the traditional status quo (Myrdal 1957).
- 15.
According to Pioneers in Development by Meier and Seers (1984). The other pioneers in development included in that volume are Peter T. Bauer, Colin Clark, Albert O. Hirschman, Arthur Lewis, Gunnar Myrdal, Paul Rosenstein–Rodan, Raúl Prebisch, Walt Rostow and Jan Tinbergen.
- 16.
Note that this proposition related to foreign investment in export-oriented raw material and food industries. The development effects of foreign direct investment are more likely to be positive if the investment is made in the manufacturing sector with the purpose to primarily service the local market of the host country.
- 17.
This effect could hardly be offset by the effect from higher incomes in advanced countries, as the demand for primary goods was generally not very sensitive to changes in real incomes.
- 18.
This paper was published in 1950 under the title “The Distribution of Gains between Investing and Borrowing Countries” (Singer 1950), and later led to the pairing of Singer’s name with that of Raúl Prebisch in the designation of their contribution as the Prebisch–Singer thesis.
- 19.
See Singer (1971, 1984).
- 20.
Nevertheless, the Prebisch–Singer thesis was never established as part of core trade theory. However, the widely used concept of “immiserising growth” can clearly be related back to the work of Prebisch and Singer. In trade theory, “immiserising growth” refers to a situation in which growth in a poor country would actually be self-defeating if it was biased towards growth in exports which worsened the exporting country’s terms of trade so much that it would be worse off than if it had not grown at all. The concept of “immiserising growth” was first emphasised under this name in 1958 by Jagdish Bhagwati.
- 21.
The particular popularity in Latin America of import-substitution schemes with protective tariffs had also historical reasons. Latin America had been affected more than any other developing region in the world by the negative consequences of the Great Depression of the 1930s. At the beginning of the twentieth century, Latin American economies depended heavily on the export of just a few primary goods (wool was the main export good of Argentina and Uruguay, silver that of Bolivia and Mexico, copper that of Chile, coffee that of Brazil and Venezuela, saltpetre that of Columbia and sugar that of Peru). With the economic downturn in the industrialised countries, demand and hence prices for primary goods dropped sharply. Without export revenues to finance their manufacturing imports, and no domestic manufacturing industry to absorb the loss of economic activity in the export industries, primary goods exporting countries in Latin America were driven into their hitherto worst economic and social crisis.
- 22.
The two main trade agreements among Latin American countries that date back to the time in which import substitution policies were pursued are the Central American Common Market (CACM or Mercado Común Centroamericano, MCCA), agreed between five Central American countries in 1960; and the Andean Community of Nations (Comunidad Andina de Naciones, CAN), a trade agreement between Bolivia, Colombia, Ecuador, Peru and Venezuela (which left the organisation in 2006) that came into existence with the signing of the Cartagena Agreement in 1969.
- 23.
For instance, in 1970, half of Mexico’s industrial production took place in Mexico City alone.
- 24.
The recent expansion of trade between China and African countries has stirred new interest in the questions of whether and how relatively less developed African economies can and should protect their domestic industries from the massive influx of cheap manufactured goods and textiles that are supposed to undermine their own attempts at building a domestic manufacturing industry.
- 25.
Reinert (2007) shows that from the Italian Renaissance to the present day, economic policies of the type proposed by Friedrich List have been a “mandatory passage point” for all successful national traditions out of poverty. In the same vein as List did also the American Treasury Secretary Alexander Hamilton propose measures to protect America from Britain’s manufacturing might in the late eighteenth and early nineteenth century. In his 1791 “Report on the Subject of Manufactures”, he dissented from free-trade doctrines of the classical liberal economists and recommended the government to shelter and promote American industry through its infancy until it was strong enough to compete with the British manufacturing sector. In his 1841 National System of Political Economy, List does not refer to Hamilton, however.
- 26.
This is a distinctive proposition of the German Historical School of Economics. It will be taken up in more detail in Chap. 12 again.
- 27.
Besides that, List shared with the English classical school the recognition of the important contribution of manufacturing to a country’s development – much in contrast to the Physiocrats’ view of the pre-eminent position of agriculture in economic development that prevailed in continental Europe at that time.
- 28.
While in his National System of Political Economy this continental alliance is clearly defined in opposition to the British Empire, List’s later writings suggest a change in his view towards closer alignment of Germany with Great Britain.
- 29.
The approach of basing his analysis on careful and direct observation of conditions in the developing world certainly owes much to Bauer’s field experiences in former Malaya (now West Malaysia) and former British West Africa (now Nigeria, Ghana, Sierra Leone and the Gambia) in the 1940s where he was active as representative of a London-based merchant house and for conducting studies on the local rubber industry.
- 30.
For further discussion see Sect. 2.1.1 above.
- 31.
Elsewhere (Bauer 2000, p. 6), he called the idea of the vicious circle of poverty “a major lapse in modern development economics” and argued that “if the notion of the vicious circle of poverty were valid, mankind would still be living in the Old Stone Age”.
- 32.
See Reinert (1996) who discovers a clear understanding of the effects of diminishing and increasing returns to scale on economic development already in the writings of Antonio Serra and John Stuard Mill.
- 33.
This does not make Bauer an early exponent of the second generation of development economists, though. He also followed development policies in the neoclassical tradition with a critical eye and warned, for instance, against the adverse effects of linking foreign aid to government policies.
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Altmann, M.P. (2011). The First Generation of Development Economists. In: Contextual Development Economics. The European Heritage in Economics and the Social Sciences, vol 8. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-7231-6_6
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