Development theory from 1950 to 2000s is it useful?

Development theory from 1950 to 2000s is it useful? Introduction I have chosen question number 2: The issues of poverty and socio-economic inequality have been the key concerns for development theory since the 1950s. Describe the evolution in the main theoretical positions on these issues and discuss the relevance and validity of these theoretical positions in today s development setting. Please illustrate your argumentation with empirical evidence from developing countries or regions. From the beginning development theory has had the goal of increasing welfare for the poorest people in the world. It is the raison d être of political economy of development; so to say. Thus very few theories from the political economy of development field do not deal with poverty alleviation or inequality reducing which can be seen as two interrelated goals. How it is to be accomplished varies a lot according to different theories and different researchers. Different regions and countries have chosen diverse development paths and some have been more successful than others; hence it is important to identify the successful strategies and examine whether the success can be replicated in other regions. I will start this paper addressing the discussion of the 1950s between modernization theory (Rostow) and dependency theory (Frank). From there I will move on to the debate of the 1970s and 1980s about the validity of the so-called Washington consensus and its counterpoint: developmental state theory (Evans) and look at how these strategies were implemented. I will then look at some of the recent paradigms in development theory (New minimalist approach, pragmatic neo-liberalism, just growth etc.) Lastly I will discuss the validity of the different theories in a globalised setting Modernization theory vs. Dependency theory After the Second World War (WW2) Europe lay in ruins and the Americans wanted to build it up again so the Europeans could buy American goods. This was the basis of the Marshall plan which created huge flows of aid and investment into the European economies which rapidly began to recover and grow. The 1 of 9

Western world wanted to do the same with other regions in the world to create new markets and allies in the Cold War. By looking at the historical development of European states Rostow came up with the modernization theory. He assumed that all country had to go through different stages and third world countries 1 was not at the same stage as the Western, first, world. According to Rostow a state had to go through 5 stages: 1. Traditional society 2. Pre-conditions for takeoff 3. Takeoff 4. Drive to maturity 5. Age of mass consumption / maturity Traditional society was characterized by pre-newton science, no growth, low investment and decentralized power (feudal society). In the pre-condition for takeoff the state becomes more centralized and the state prepares for the takeoff. The takeoff is characterized by high investment (10-20%) and economic growth and compounded interest becomes the norm. In the drive to maturity the state can produce whatever it wants and technology is no longer an obstacle hence comparative advantages determine what to produce in a country. USA in the 1950s is characterized by the last stage The age of mass consumption where people can acquire goods that do not only cover basic need but can be considered luxury goods (TVs, refrigerator etc). Rostow believed that if you merely injected enough capital, similar to the Marshall plan, you could make states develop faster. This lead to a neoconservative paradigm emphasising comparative advantages, free trade and investment as described by the economists Ricardo and Smith. In opposition to modernization theory Frank developed his Marx-inspired dependency theory. Frank refused the fact that all states went through the same stages criticising that modernization theory neglected the importance of different historical trajectories. All countries will not follow the same path. According to Frank the third world was not un-developed because of archaic structures but 1 After WW2 the world was split up in three worlds. The first world was the capitalist, liberal west. The second world was the communist planned economies of the USSR and its allies in the Cold War. The third world was the developing countries which were poor, had no influence and tried to stay out of the Cold War dichotomy. After the end of the Cold War this tripartite has become blurred because the second world is gone and a lot of countries combine traits prior connected with first with traits of the third countries. 2 of 9

underdeveloped because of the capitalist system that has penetrated the entire world. The developing world is not allowed to develop because all the economic surplus of these regions is captured by the global metropolis as long as the satellite and the metropolis is linked. To make people better off and alleviate poverty and inequality the satellite had to break the link with the metropolis. Empirically Frank noticed that when the link was weakest (during the great depression, WW1 and WW2) the satellites in Latin America flourished. Import substitution industrialization (ISI) and its crisis. Franks dependency theory led to the conclusion that you had to built up protectionist trade policies and nationalize and subsidize domestic firms, which has been labelled ISI. Latin American (LA), Sub-Sahara African (SSA) and East Asian countries began a period of ISI where import was restricted and industries were built up that could produce the former imported products. Initially ISI produced growth in the countries without changing poverty rates all that much especially in LA and SSA. However, after an initial period of ISI the Asian Tigers (Korea, Taiwan, Singapore and Hong Kong) followed a different path. The advantages of ISI were quickly exhausted and the Asian Tigers began transforming themselves into developmental state. A developmental state is characterized by a strong state with an autonomous bureaucracy embedded in society (Evans). This kind of state used a combination of ISI and export oriented industrialization (EOI). ISI was used to support chosen industries that was to develop and upgrade. EOI was used to challenge the firms by making it obligatory for firms to meet certain criteria in order to get support which could be money or the right to export or the likings. This notion of the developmental state and its embedded autonomy was seen by Evans as the main driver for the economic prosperity seen in countries like Japan and Korea in which poverty was reduced and HDI ratings went up. Doner et al. explained the emergence of the developmental states in East Asia by the fact that the Asian Tigers all faced systemic vulnerability: The state need broad legitimacy in the population in order to avoid revolutions and uprisings as seen in China and other places. To get this legitimacy the state had to provide the citizen with some sort of payment (welfare programmes, agriculture subsidies etc). However since none of these countries had any significant natural resources and faced geopolitical security threat which dictated high military expenditure the elite had to promote a bureaucracy that could facilitate economic growth, equality and not corruption, which would hamper the growth needed for military and redistribution. Korea is a great example of this theory. 3 of 9

LA and SSA did not shift away from their ISI strategies and their predatory behaviour (impeding growth). During the oil crisis these countries had to borrow a lot of money in order to grow and when export was low LA and SSA had severe public account problems. Inflation was high and money lenders refused to let the LA and SSA countries continue to borrow and grow. Neopatriomonial authoritarian states lost their legitimacy that was based on growth, equality, stability and non-communism. As the fail of the planned economies of the Second World was inevitable the Bretton-Wood institutions (IMF and the World Bank) had an easy time convincing regimes that what was needed to produce economic growth that would trickle down and help reducing poverty was not ISI but stabilisation, privatization and liberalisation, the corner stone of the Washington Consensus. In SSA austerity and minimizing of the state were seen as major objectives. However growth did not return and SSA had a negative growth of 2 % pro anno from around 1975 to the start of the 1990s. The Washington Consensus approach did not provide any good solutions to the problems of SSA especially not the trickledown effect that should help poverty alleviation. It can be criticized for being a one-size fits all approach that is more ideological than based in empirical evidence. Many scholars research points to the fact that the ingredients of the Washington Consensus have not proved successful in SSA. The remains of modernization theory of comparative advantages and not acknowledging the different historical, political and institutional contexts, is still apparent thus the Washington Consensus will not help SSA. Post Washington Consensus The success of the East Asian developmental states, the apparent failure of the Washington Consensus and the high growth of authoritarian China has lead to a notion of the West is not best. A full change to free market economy has not helped SSA in their quest for poverty alleviation and socio-economic equality. However, no new consensus has emerged. A variety of different paradigms and theories have emerged in I will here only discuss a few. The right wing development researches have produced different but very similar paradigms. One of them is the pragmatic neoliberalism which states that market reforms will lead to economic growth which will lead to democratization and the rule of law which will contribute to the building of state capacities similar to the developmental state however, less extensive. These market reforms need not 4 of 9

only be tariff reduction but also R&D help and other services helping businesses i.e. an active industrial policy. This is very much in line with Schmitz matrix of industrial policy: Challenge / support High Low High Active industrial policy Washington consensus Low ISI Laissez faire Critics of the pragmatic neoliberal approach emphasise the similarity with the Washington Consensus. Too little emphasis is put on institution building and state capacity building. These should be the main focus in order to be able to promote private sector development and stability. The new minimalist approach (NMA) suggests different ways in which to make the Washington Consensus work in SSA. They claim that land-titling, micro-credit, removing of red tape and privatization of services to industries will lead to reduction of poverty in SSA. Again emphasis is put on stable investment environment, privatization, liberalization and a minimal state whose primary role it is to provide a level playing field for businesses. They criticize the state for hampering business development with bureaucratic procedures, corruption and the fact that the state is picking the winners which no institution can do better than the market itself, according to the NMA approach. NMA has been criticized for being just another variation of the Washington Consensus. The empirical evidence shows that the strategies advocated by the NMA are not very useful in poverty alleviation. Land-titling programmes have led to increasing land prices and not increased availability of credit. Micro-credit does not reach the very poor because their only concern is to get food on the table, they will not risk borrowing. However, I would claim that the reduction of red tape would help business development in Africa maybe not for the poorest but creating jobs in rural areas could be a way to alleviate poverty to some extent could help reducing poverty. Critics of the Washington Consensus and similar paradigms point to the fact that a small anorexic state cannot alleviate poverty. Serious problems must be dealt with before free market and unconstrained globalization 2 will lead to poverty alleviation in SSA. First of all the conflicts of SSA have to be reduced. Musah operates with the notion of extreme-tillian states that use violence and oppression to keep control of the state apparatus. To do this they hire private military companies to provide security and in return the PMC get the right to extract natural resources from the country. In this way the country 2 Globalization is here defined in its broadest forms: the increasing interdependence among countries in the world. 5 of 9

does not benefit from its natural resources and economic growth and poverty alleviation will not materialize. Security issues can best be dealt with by building independent institutions such as judiciary, media and an apolitical military, according to Musah. When the security has been brought under control democratic institutions and a bureaucracy similar to that of the Asian Tiger will need to be built. Only when the shell states of SSA are filled out with institution private sector development can begin. An important criticism of the Washington Consensus approach is, in my view, that it does not facilitate upgrading. According to Global Value chain (GVC) analysis, firms need to integrate into GVC lead by huge western TNCs in order to learn and become more efficient. If the state is not strong enough TNC will, based on empirical evidence, not generate any welfare or poverty alleviation in the country in which they operate and firms will not be able to upgrade in the GVC. An example of this could be Shell s extraction facilities in Nigeria which only created pollution and conflict. Korea has used a lot of energy to constrain TNCs. TNCs should provide learning and knowledge diffusion to Korean workers. Schmitz matrix of industrial policies is good explanation. Korean firm lacked both marketing knowledge and technologic knowledge and hence needed FDI from foreign TNC. The strong institutions of the Korean bureaucracy forced learning and knowledge diffusion so Korean firms, such as Samsung, could move into the global value chain and with time become a high value adding company with own design. Marketing gap / technology gap Wide Narrow Wide Main stragety: FDI GVC Narrow Joint venture or licensing Own design Washington Consensus has not provided this kind of possibility of functional upgrading in the GVC to a more value adding function merely it provides incentives for process and product upgrading. Without value adding economic growth is harder and economic growth will enable the state to initiate poverty alleviation programs as can be seen in modern Korea with low poverty. Kohli introduces the concept of just growth which is economic growth + democracy + redistribution. This combination is very rare in the developing world especially in SSA. Sadly he identifies a kind of trade-off between the three parameters. Democratization and economic liberalization will often lead to an initial recession because of the restructuring of the economy 3. In this period democracy will have very little legitimacy because people are not becoming better off. He also finds that democracy is not compatible 3 According to the J-curve by Mygind. This concept explains that during a transition from state led to market led economy you would have to endure an initial recession before growth returns. 6 of 9

with very high growth (above 7-8 %) because of the inefficiencies of democracy or very low growth (below 2%) because democracy tends to reduce corruption and predatory characteristics. The same goes for equality where communist planned economies can produce more equality because of no property rights, however, democracies tend to produce more equality than predatory states. In line with this argument and the empirical observations of China and the Asian Tigers, democracy is neither necessary nor sufficient for economic growth and equality. The validity of the different development approaches Having outlined and discussed different approaches to poverty alleviation and equality enhancing I will now turn to the usefulness and validity of these approaches in a globalized world. Here globalization is defined in its broadest form in which it characterizes the world through growing interdependence between countries around the globe. Modernization theory and dependency theory are not very relevant in the contemporary world. They are both too broad and generalizing in their view of the world. However, they remain important to the understanding of the development of other theories. The important question seems to be: How do when alleviate poverty and how does developing countries facilitate growth in a globalized world. According to the notion of systemic vulnerability of Doner et al. countries cannot themselves become developmental states which seem to be a good way to facilitate growth and alleviate poverty. Only a very vulnerable state will evolve into a developmental state that can facilitate upgrading which lead to the conclusion that foreign aid is doing the opposite of helping. Foreign aid is only legitimising regimes that do not facilitate economic growth. Then what about ISI which have worked in a period for the Asian Tigers making them able to become competitive in the global economy? However, ISI is not compatible with the globalized world of today. Countries have become so interdependent on each other that a complete closing off will not do very much good. The prime example of this is North Korea (however, North Korea has several other problems as well). Initiating ISI strategies today does not seem as a feasible option for developing countries. Nor does the Washington Consensus, NMA or pragmatic neoliberalism provide a solution to the world s poorest since empirical observations have show that results from these approaches have at best been modest. 7 of 9

My suggestion is very much in line with Scmitz simple matrix of challenge and support, however, before initiating industrial policies you need to have a strong, well functioning state. This could be done through the building of institutions in which IMF and the World Bank and other aid agencies help especially SSA building institutions: judiciary, media and bureaucracy amongst others. Also the conflict zones of SSA must be helped. Ways to do this is by cutting the link between the conflict and the natural resources. In the diamond business the Kimberley certification scheme has provided rules for diamond export and import which makes blood diamonds useless which then makes warlords less capable of buying private military assistance. The general argument seen in Kohli, Musah and other about the fact that democracy cannot be used as an explanatory factor of poverty alleviation are also debatable. Democracies in East Europe have produced high growth rates and are converging to EU standards and are also doing better in terms of GDP per capita than their authoritarian neighbours (Belarus and Russia). However, also a significant SSA country stands out: Botswana. Systemic vulnerability cannot explain the developmental state characteristics of Botswana because of high mining revenue. The fact that Botswana has never been an authoritarian regime or never had one single political prisoner are seen as explanatory factors for the average growth of 9% pro anno from the 1960s to the 2000s. Hence it is possible to produce just growth and equality without the presence of systemic vulnerability. By building strong states, the developing countries can benefit from the TNCs operating in their countries and also start facilitating upgrading so that SSA can become more affluent and use these resources for poverty alleviation as Korea and the other Tigers have done. Globalization is hard to control and therefore it is better to built up domestic institution that can use the globalization positively instead of trying to change the globalization, such as Eyoh and Sandbrock suggests. Empirically, governing globalization through negotiations such as the ones seen at the Copenhagen Climate Summit (COP 15) has not been able to change the globalization. The neo-medieval picture of different actors both supranational and TNCs have made globalization very hard to constrain thereby deny the possible solution of a social democratic globalization suggested by Eyoh and Sandbrock. Conclusion In the 1950s general theories of development was dominant: Modernization and dependency theory. They provided overall instructions on how to alleviate poverty and help the developing world. The crisis 8 of 9

of import substitution industrialization and the failure of the Washington Consensus have lead to a range of more nuanced theories with more clear suggestion on how to alleviate poverty (NMA and pragmatic neo-liberalism). However, these were both empirically contestable. The most successful in poverty alleviation has been the Asian Tigers and China which has combined initial ISI strategies with EOI and strong state bureaucracy. However, there are other ways of achieving development which could be through democracy as seen in Botswana. Today, globalization has made the strategies of China and the Asian Tigers more difficult to implement. It is hard to cut yourself off from the surrounding world, hence other strategies than initial ISI followed by EOI must be identified. Much can be learned from the Tigers: Their ability to control TNC and extract information from them has lead to functional upgrading in the GVC so that now East Asian firms are competitive also in R&D and marketing, which are both high value adding activities. Also their combination of support and challenge is important to acknowledge, however, today support will often take the form of services provided by governments and other kinds of help rather than subsidies. Most importantly and emphasised by many researchers is the need of state capacity and institutional building in which the Western world maybe can help. By securing stabile and secure environment and strong institutions that can control corruption and help private sector development according to the concept of embedded autonomy (Evans) functional upgrading has good conditions and the economic surplus can then be kept inside the country. This surplus can then be used for poverty alleviation and redistribution through welfare programs such as those seen in Korea and other developmental states hence in the end accomplishing Kohli s goal of just growth. However, this is not easily accomplished and institution building is not something that happens overnight if you succeed at all. Conflicts, authoritarian regimes, the geopolitical environment can all hinder the development of institutions in the third world. 9 of 9