What has been the evolution of development theories since the “linear stages” period? Have these theories added value to the understanding/explaining the causes of underdevelopment? Give reasons for/against your position.
Among the many fundamental questions that continue to confound economists today, is the issue, what are the causes of economic growth and decline? Economic theories have emerged to locate, understand, and thus, develop the reasons behind the successes and failures of economies. While the original answers for this question were in the form of simple theories, nowadays, the complexity of this question has been better understood as these theories raise more questions and provide fewer answers. Economic theories are thus continually reformed to deal with several emerging issues. Some of the issues that plague economic analysts are as follows: What are the factors that cause some economies to battle underdevelopment, whereas some continue to flourish? Is it possible that events such as globalization will push economies together so that the less developed countries (LDCs) will begin emerge as developed economies, or will the LDCs continue to stay behind? How can the growth and development of an economy be driven towards a desired status? What will be the factors involved here? (Handelman)
The linear stages theory is one of the earlier theories of economic development. According to this theory, economic growth can be achieved by investments that employ domestic and international savings (Rostow 12). However, the basic fallacy of this theory is situated in the fact that it does not take into account the effect of social and political factors on accumulated wealth (Todaro and Smith 111). This theory is also irrational in assuming the presence of appropriate institutional and infrastructural conditions, which are absent in most growing economies, for successfully utilizing the savings (Todaro and Smith 111). It also believes that developmental capabilities of a LDC are dependent on external factors that are not under the influence of the nation (Todaro and Smith 111). The liner stages theory was followed by the theories of structural change, the international-dependence revolution, and neoclassical counter changes and neoclassical and free-market counterrevolution (Todaro and Smith 111).
The structural change theory employed contemporary economic theories and statistical analysis to show that every developed country in history has undergone structural stages of change to attain development and to create and maintain a process of economic growth (Todaro and Smith 111). It thus justified the need for every developing country to undergo such structural changes for ensuring its development and growth. This theory wrongly assumed that urban development is superior to rural development and that people in traditional economies would cause the modernization of their economies by transforming agrarian occupations to industrial ones or by relocating from rural to urban locations (Handelman 16). Modernization theories, such as the structural change theory, have been criticized for being culturally biased towards western values (Handelman 18). Moreover, the very foundation of such theories is overly simplistic (Handelman 17). Economic analysts soon began to comprehend that such theories led to serious problems. For example, in some Latin American countries, following this theory caused great imbalance in income distribution, and this led to class differences that in turn led to political instability (Handelman 17). However, as this theory underlined the importance of the conditions and requirements for structural changes, it was an important influence on local and regional developmental policies (Pike, Rodríguez-Pose, and Tomaney 79).
The international-dependence revolution theory for understanding of the causes of underdevelopment emerged due to the inadequacy of the modernization theories. This theory was far more radical and political in orientation (Todaro and Smith 145). Here, underdevelopment was viewed in terms of economic rigidities in institutions and structures, relationships between international and domestic powers (Todaro and Smith 145). It also considered the emergence of dual economies, which refers to the different levels of development in different sectors or areas of a country depending on the demand levels (Todaro and Smith 145) (Singer 202). The external as well as internal factors, such as political or institutional situations, were considered as constraints on economic development (Todaro and Smith 145). Reduction in the disparity of income levels within a country were suggested by eradication of social ills such as poverty and lack of education (Todaro and Smith 145). Thus, social equality and not economic growth was the prime focus of this theory.
The neoclassical counter changes and neoclassical and free-market counterrevolution theory emerged next. According to this theory, open economies, privatizing unproductive public ventures, and developing free markets are beneficial tactics for advancing the economies of developing countries (Tabb 94). Here, contrary to the dependence theory, the lack of development is not indicative of internal and external authoritarian forces. Moreover, excessive government intervention in monitoring and regulating a country’s economy is propounded as a bane to development (Tabb 94). Unbalanced allocation of resources owing to imbalanced price policies is viewed as a factor that deteriorates development (Tabb 94). Today, we can observe a greater acceptance of this theory in the markets and economies of countries (Tabb 95).
Does economic development cause democracy? What is the effect of economic development in regime change? Does economic development help a regime change from non-democratic to democratic? Are democracies better at promoting development than non-democracies?
The interrelationship of democracy and economic development is a matter of intense dispute among economists (Burkhart 148) (Smith 234) (Heo and Tan 463). It is often assumed that economic prowess will lead to people’s demand for a democratic government (Burkhart 148). However, it cannot be denied that factors such as the defence power and oil deposits can also determine the degree of economic development of a country (Smith 234). It is also assumed that a country with greater oil power is less likely to be democratic (Smith 234). While most of the modern world is a democratic society, a laissez faire approach to commerce is only distinctive of capitalist countries, like the U.S. and Germany, and not necessarily of all democracies (Gould) (Tucker 553). For instance, India, which is the largest democracy in the world, employs a democratic approach to commerce—as it has free markets—but not a laissez faire approach—as it is still governed by socialistic practices, such as the focus on labour group and religious bodies’ demands (The Economist). We can thus conclude that perhaps the degree of association between the economic development of a country and its form of government is not the only the basis of evaluating growth. Economic development is also seemingly affected by the prevalent economic tendency of the country, that is, capitalism or socialism.
The U.S is the most obvious example of a country where economic development led to democracy. It has been found that the original founders of the government intended to control the financial markets and trade policies (Bourgin 10). Government intervention was frequent before the onset of the civil disobedience movement (Bourgin 10). The U.S. became a semi-capitalist economy owing to the commercial production of tobacco towards the end of the seventeenth century (Weinberg 1). The working people in this industry included slaves and the poor (Weinberg 1). Towards the beginning of the eighteenth century, this “subsistent” characteristic was overcome and the commercial sectors became more organized (Weinberg 1). By mid-eighteenth century, economic developments occurred fast and steady, and the entire agriculture industry was governed by capitalist policies (Weinberg 1). In the end of the nineteenth century industrialization, that is, building of railroads and manufacturing, gained precedence to land development and acquisition (Weinberg 2). The following quote from A Short History of American Capitalism mentions how the economic growth of the U.S. spurred the development of its financial markets and thus, commercial organizations.
The modern business corporation is an original creation of the American imagination. It was first fashioned to extend local markets; then, it became an indispensable means to create a national market. Both American industrialization and capitalism were crucially dependent upon the corporate form of organization. The corporation was not, however, a disembodied “first cause”; it spread in response to concrete economic challenges External, primarily economic pressures helped generate the corporation. The combined force of those pressures and the nature of American legal thought determined the eventual shape of the modern business corporation No institution was more significant in that growth than the business corporation. The modern business corporation was the country's second great contribution to the world economy. With commercialization and industrialization growing apace, legal thought turned to practical business problems. (Weinberg 2, 4)
Some scholars argue that social mobilization is spurred by economic development, and this event advocates political mobilization and thus, change of regime form a non-democratic to a democratic form of government (Heo and Tan 463). In the case of U.S., as mentioned above, economic development was the reason financial freedom was achieved, and this let to the democratisation of the country. Conversely, can democracy lead to financial problems within a country or is absolute democracy a feeble form of government in times of financial crisis? Let us consider the example of the current European financial crisis in Italy. Italy has resorted to forming a technocratic government, and Mario Monti, a former European commissioner, has been selected as the prime minister, in an attempt to deal with the crisis (Hopkin). While Italy is the eight largest economy in the world, it has a stupendous debt-to-GDP ratio at 119 percent (Hopkin). The Italian economists believe that the lack of growth and structural reform is being reflected in the debit ratio. Monti is expected to carry out reforms that will solve or appease the economical problems that surround Italy (Hopkin). However, the Italian public was already aware of these problems when it selected Prime Minister Silvio Berlusconi, and so the question that here is, whether the technocratic approach is the correct plan of action in this case? The success of the technocratic government in Italy can prove that regimes can change form democratic to non-democratic ones due to economical imbalances. In fact, turning right towards Asia, we see China that is widely notorious for its communist regime, but has emerged a new economic superpower in the past few years (McGregor). The Chinese paradox of “communist capitalism” shows that variability is in the very nature of developmental economics (Yemma). Hence, it cannot be conclusively said that economic development alone can encourage democracy nor can we conclude that economic development will transform non-democracies to democracies.
While democracy has the potential to lead economic development, it not essentially true in every case. Moreover, factors other than democracy can affect the economic standing of a country. As Pike, Rodríguez-Pose, and Tomaney (1264) state, democracy advocates that there should be opportunities for defining social and economic problems, irrespective of the presence of considerable geographical variations in practicing it According to them, the importance of democratic institutions in economic development cannot be neglected, but, all the same, their association with economic development outcomes is not easy to define. The degree of participation in available opportunities is the main factor that decides the effect of democracy on economic development or vice versa (Pike, Rodríguez-Pose, and Tomaney 1264).
What are the major advantages and disadvantages of globalization on development in developing states? Provide examples for each point.
Globalization of the economical world refers to the diminishing barriers in international trade (Croucher 10). Financial globalization is the “rising global linkages through cross-border financial flows or “an individual country’s linkages to international capital markets” (Prasad et al. 7). It has been propounded that the globalization phenomenon has accelerated the economic growth of developing countries due to competitive advantages and specialization (Croucher 10). In industrial and developing countries, financial globalization is an event that encourages a significant increase in capital flow leading to increased growth rates (Prasad et al. 6). However, several developing countries have seen intermittent decrease in their growth rates along with increasing incidences of financial crises that have seriously affected social and macroeconomic costs (Prasad et al. 6). Thus, the effect of financial globalization on developing economies is a matter of contention among experts and analysts (Prasad et al. 6). Questions such as, in developing countries, does financial globalization instigate economic growth? Does it have a significant effect on the macroeconomic stability of the country? Which factors ensure that developing countries are able to benefit maximally from this phenomenon? (Prasad et al. 6). This paper attempts to discuss the effects of financial globalization on developing economies using examples.
An IMF study found that financially open economies showed higher income levels than financially closed ones (Prasad et al. 8). However, it is still not clear if this influenced by any other factors (Prasad et al. 8). A secondary survey of several studies on the impact of globalization by the International Monetary Organization (IMF) shows that there is no documented positive effect of financial globalization on LDCs, and at best, there is only a minimal positive effect (Prasad et al. 8). Tabb (191) has shown that competitive strategy initiated by globalization pressures can actually result in the replacement of labour-intensive elements with technological ones. This can result in an inequality of return within various professional and income groups (Tabb 192). Financial globalization should ideally assist developing counties in reducing macroeconomic instability (Prasad et al. 37). A secondary survey conducted by the IMF complied and analysed researches about the impact of financial globalization on the macroeconomic standing of developing countries. It was found that most developing countries have not benefited in this area. The progression of liberalising capital accounts has generally resulted in increasing the susceptibility of these countries to financial disasters. In fact, before the 1990s, the occurrence of financial disorders was found in both industrialised and developing countries, but after the 1990s, it became an occurrence mostly observed in the developing countries (Prasad et al. 44). It has also been contemplated that globalization could be actually increasing the susceptibility of developing countries to financial crisis due to events such as financial bubbles and increase in debits relative to foreign direct investment (FDI) (Prasad et al. 45–46). It can thus be concluded that while financial globalization can potentially improve the situation in developing economies, there is a lack of empirical evidence to prove this fact.
The following table shows the capital flow and trade contributions of developing countries in the past few decades. It is evident that the countries were lagging behind in their contribution to trade and capital flow, but they experienced significant improvement in trade (possibly due to financial globalization) in the 1990s. However, it is possible that the growth in the 1990s was a response to globalization, but only in terms of recovering the position, which they previously lost in the 1990s (The New Global Economy and Developing Countries). However, it cannot be denied that this growth was essential for the developing countries after the decline they underwent in the period before the 1990s.
Source: IMF, Direction of Trade Statistics Yearbook and Balance of Payments Statistics Yearbook (2001).
Financial globalization and development or consumption instability cannot be linked by a simple relationship, as a certain lack of parallelism or threshold effects in their relationship have always been known to exist (Prasad et al. 10). Nevertheless, growth is initiated and maintained by financial globalization along with quality macroeconomic methods and standard domestic control (Prasad et al. 10). It has been shown that nations with good governance policies and human capital are more likely to attract FDI, and such investments are the best indicators of growth (Prasad et al. 10). Recent studies have shown that whereas FDI and corruption are negatively correlated, government transparency, which is another aspect of quality governance policy, and investment influx from international mutual funds are positively correlated (Prasad et al. 10). While the true effectiveness of globalization on developing economies remains questionable, it has been proved that a faster translation of technological innovations into tools can assist growth (Todaro and Smith 545). The Internet is the best example of this fact.
The Internet was established in the 1970s by the Advanced Research Projects Agency (ARPA) in the U.S. for communication between the government and academic research laboratories (Internet). However, it was not until 20 years later that the public became aware of its usefulness (Internet). Since then, the number of users has grown exponentially; it was estimated that by June 2011, about 30.4 percent of the world had access to some form of Internet connectivity (Internet World Stats, 2011). However, as most of the users are in developed countries, developing countries have yet to reap the benefits of the Internet phenomenon (Internet World Stats, 2011). Let us consider the example of an LDC like the Ivory Coast. The country has an agrarian economy that is almost completely based on cocoa export (UNCTAD).
However, the cocoa producers are never adequately aware of the market requirements, demands, and trends owing to the lack of communication with the cocoa consuming world (UNCTAD). Internet availability and literacy could significant improve this problem. Thus, we can conclude that while globalization has the potential to benefit developing countries, the actual benefits of globalization have either not been observed or documented.
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