Essay on Economic Development and Underdevelopment

Essay on Economic Development and Underdevelopment!

To analyses the economies of developing countries, we need to study economic development in historical perspective. The story of growth is important as it helps determine whether socie­ties can meet basic needs of food, clothing, housing, health and literacy, and widen human choice to enable people to control their environment, enjoy greater leisure, acquire learning and use more resources for aesthetics and humanistic endeavors.

Capitalism rose in the West from the 15th to 18th centuries with the decline of feudalism, the breakdown of church, authority, strong nation-states supporting free trade, a liberal ideol­ogy tailor-made for the bourgeois, a price (market) revolution that speeded capital accumula­tion, advances in science and technology, and a spirit of rationalism. In the last 150 years, sustained economic growth occurred primarily in the capitalist West and Japan. But the devel­opment of underdeveloped countries was held in check by colonisation.

It started as a form of economic exploitation and has distorted the economic structure of the Third World countries from the very beginning. The underdeveloped countries were forced to become suppliers of raw materials to industrial countries. This unhealthy development effectively blocked indus­trial development in the primary producing countries.

The foreign domination of these coun­tries has limited the growth of the domestic market and the establishment of basic national industries for widespread development throughout the whole economy.

Thus the gap between developed and developing countries of Asia and Africa and Latin America has increased greatly over the years. A study of economic history reveals the following basic differences in the historical processes of development between developed and developing countries.

1. Peripheral Capitalism:

According to Celso Furtado, since the 18th century, global changes in demand resulted in a new international division of labour in which the peripheral countries of Asia, Africa and Latin America specialised in the production and export of primary products in an enclave controlled by foreigners while, at the same time, importing consumer goods that were the result of techno­logical progress in the central countries of the West.

The increased productivity and new con­sumption patterns in peripheral countries benefited a small ruling class and its allies, who cooperated with the developed countries to achieve modernisation (economic development among a modernising minority). The result is peripheral capitalism, capitalism unable to generate innovation and dependent for transformation upon decisions from the external world.

2. Adoption of Western Economic and Political Systems:

According to A.G. Frank, contemporary underdeveloped countries (UDCs) do not reassemble the earlier stages of now-developed countries. To him and many others modernisation in UDCs is simply the adoption of economic and political systems developed in Western Europe and North America.

3. The Creation of Underdevelopment:

For Frank, the presently developed countries were never underdeveloped, although they may have been underdeveloped. In his view, underdevelopment does not mean traditional that is non-modern economic, political and social institution but subjection of UDCs to colonial rule as also imperialism, i.e., imperial domination of foreign powers.

Frank sees underdevelopment as the effect of the penetration of modern capitalism into the archaic economic structures of the Third World countries. In his view the deindustrialization of India during the British period and the disruption of African societies by the slave trade and subsequent colonialism are examples of creation of underdevelopment.

4. Ancillary Development:

Simply put, the economic development of the rich countries lead to the underdevelopment of the poor. Development in an LDC is neither self-generating nor autonomous, but ancillary. The LDCs are economic satellites of the highly developed regions of North America and Western Europe in the international capitalist system.

Thus Afro-Asian and Latin American countries which were the least integrated into the system tend to be highly developed. For Frank, Japa­nese economic development after the 1860s is the classic case illustrating Frank’s theory. Ja­pan’s industrial growth remains unmatched. The reason is that, Japan, unlike most of the Asian countries, was never a capitalist satellite.

5. Satellite Relationship and Underdevelopment:

Brazil perhaps best illustrates the connection between the satellite relationship and underdevel­opment. Since the 19th century, the growth of its major cities has been satellite development — largely dependent on outside capitalist powers, specially Britain and the USA. Consequently some regions in interior Brazil have become satellites of these two countries and, through them, of the Western capitalist countries.

Frank suggests that satellite countries experience their greatest economic development when they are least dependent on the world capitalist system. Thus, Argentina, Brazil, Mexico and Chile grew most rapidly during World War I (1914 -18), the Great Depression (1929-33) and World War II (1939-45), when their trade and financial relations with the major capitalist countries were the weakest. Interestingly enough and significantly, too, the most underde­veloped regions today are those that have had the closest ties to Western capitalism in the past.

They were the greatest exporters of primary products, and the biggest sources of capital for developed countries and were abandoned by them when—for one reason or another — business fell off. Frank gives examples of undivided Bengal, the one-time sugar-exporting West Indies, and Northeastern Brazil, the defunct mining areas of Brazil, highland Peru and Bolivia; and the former silver regions of Mexico in this context.

He contends that even the large plantations that had contributed much to underdevelopment in Latin America, origi­nated as a commercial, capitalist enterprise, not a feudal institution. This very fact contra­dicts the generally held thesis that a region is underdeveloped because it is isolated and pre capitalist.

Causes of Underdevelopment:

According to Frank the following economic activities have contributed to underdevelopment, not development:

1. Replacing indigenous enterprises with technologically more advanced, global, subsidi­ary companies.

2. Forming an unskilled labour force to work in factories and mines and on plantations.

3. Workers migrating from villages to foreign-dominated urban complexes.

4. Opening the economy to trade with, and investment from, developed countries.

According to dependency theorists, the causes of underdevelopment are not to be found in national systems alone but must be sought in the pattern of economic relations between hegemonic, or dominant, powers and their client states.

Secondly, both within and among states, the unfettered forces of the market-place tend to exacerbate rather than to mitigate existing inequalities. The dominant foreign power benefits at the expense of its client states and the clientele class benefits at the expense of other classes.

For these two reasons development does not take place through the trickle-down of wealth or through the gradual diffusion of modern attitudes and modern technology and thus the up­ward mobility of individuals expressed by their gradual absorption into the modern sector is no solution to the problem of the impoverishment of the masses.

To dependency theorists, foreign investment and aid did not promote development in the Third World, but were used as a means of exploitation, that is, of extracting capital from client states. Even where such transfers from the developed states generated economic growth de­pendency, theorists would expect it to be a distorted pattern of growth that exacerbated in­equalities among classes as well as among regions within client states.

6. Unequal Exchange:

Dependency based on the international division of labour led to unequal exchange relation between the rich and the poor. The terms of trade of LDCs deteriorated because LDCs had to pay high prices for developmental imports and received less prices for their exports. So their balance of trade position deteriorated.

According to Frank, a Third-World economy can developed only by withdrawing from the world capitalist system. However, this implies a large reduction in trade, aid, investment and technology from the developed capitalist countries.

In the post Second World War (1939 – 45) period, developing countries grew much faster than they did earlier. Yet, the post War growth of such countries has not been no faster than that of developed countries. Whether this means convergence or divergence depends on time, scope and definitions.

Although conditions in the poor countries are for different from those in the advanced capi­talist nations, the mainstream of development thought has still been rooted in traditional neo­classical economies. Despite the earlier anticipation of some development economists, however, an entirely new sub-discipline of development economies has not arisen. On the contrary, devel­opment economists have come to rely more and more on conventional principles of price analysis and the market mechanism.

Even the revision of development strategies during 1970s has been dominated by interna­tional trade liberalisation. It is believed that there are mutual gains from trade to be realised by both rich and poor countries alike if they liberalise their foreign trade regimes. Foreign invest­ment from rich country to a poor country yields some gains both to lender and borrower. The promotion of a liberal international economic order should yield a positive sum game – not a North-South confrontation.

Conflict of Interests:

But the orthodox liberal ideology is not true in the real sense. The rich, capitalist developed nations gain from trade liberalisation at the expense of poor countries. In an earlier period, Lenin’s warnings of imperialism contradicted Ricardo’s mutual gains from trade as a result of free trade. In recent decades, parallel to the rise of the new development economies and the revision of development strategies, there have been a number of dissenters who propound a radical critique of mainstream development thinking.

There are many proponents of “Conflict of Interests”. They are Rail Prebisch, former head of Argentine central bank and first Executive Director for the U.N. Economic Commis­sion for Latin America (ECLA); Gunnar Myrdal, Secretary of the European Economic Com­mission and author of the American Dilemma; and Hans Singer, an economist who had studied the “depressed areas” of Britain and joined the United Nations as early as 1946. Unlike Marx­ists who concentrate on the unfavourable effects of imperialism or colonialism, these crities did not base their critique on any notion of “deliberate exploitation” by the advanced capital­ist nations.

A. Myrdal’s View:

As he argued that “Market forces will tend cumulatively to accentu­ate international inequalities, [and] a quite normal result of unhampered trade between two countries, of which one is industrial and the other underdeveloped, is the initiation of a cumulative process toward the impoverishment and stagnation of the latter.”

Myrdal based his argument on the possibility that the factors that made for increasing dis­parity between rich and poor countries – what he called “backwash effects” – could out weight the factors that made for the spread of prosperity from rich to poor countries – what he called the “spread effects”.

By backwash effects Myrdal refers the destruction of local handicrafts and small scale industry by cheap imports from the industrialised countries, the drain of spilled labour force from the less developed countries, and the biasing of the economy toward en­claves that produce primary product exports.

Believing that trade in primary products will only produce a polarisation effect that is stronger than the spread effect, Myrdal argues that “economic development has to be brought about by policy interferences” instead of through a dependence on international markets that “strengthen the forces maintaining stagnation or regression.”

B. Prebisch-Singer Thesis:

Raul Prebisch and Hans Singer are the main critics of this ideology. The found that after opening up trade the terms of trade of the developing nations have fallen. This occurs because the technological innovations take place in the highly industr­ialised developed nations. They export manufactured goods and increase their relative terms of trade.

Prebisch-Singer have found out that if the income of a particular individual increases, then he prefers manufactured goods than primary products. As the income levels of developed na­tions are very high compared to the developing ones, the normal residents of those countries prefer manufactured goods.

They also support Myrdal’s view of deindustrialisation and economic drain. They also sup­ported Myrdal’s view that cheap foreign goods destroy the domestic industries of underdevel­oped nations. This is nothing but “backwash effects”.

Industrialisation based on import substitution is, therefore, advocated to protect the one-sided gains from trade. Tariff protection and quotas on industrial imports are believed capable of forestalling a further deteriorations in the terms of trade, avoiding BOP fluctuates which check growth when export prices fall and promoting the absorption of the labour surplus in industry.

In their advocacy of industrialisation protection, and planning, Myrdal, Prebisch, Singer influenced the early tenets of the new development economies. Their argument had consider­able appeal to the newly emerging countries, especially when they were combined with Rostow’s “stages” and Rosenstein-Rodan’s “big push”.

By the 1960s, however, the new development economies were subject to criticism from two divergent streams of thought – neoclassical eco­nomics, which underlay the revision of development strategies and the dependency school.

Dependency:

During the 1960s, a number of writers went beyond the formulation of disequalising forces as examined by Prebisch, Singer, Myrdal, to a more vigorous interpretation of external depend­ency. Most prominent were the dependencies in Latin America and the New World Group in the Caribbean.

Not “development economies” but “dependency economies” became their con­cern. They argued that conditions of dependency in world markets of commodities, capital, and labour power are unequal and combine to transfer resources from dependent countries to domi­nant countries in the international system.

1. Marx and Baran Theses:

In an earlier period, Lenin, and Marx warned about the orthodox liberal ideology which contradicted Ricardo’s mutual gains from trade as a result of free trade.

And, from a Marxsist perspective, Stanford Probessor Paul Baran had written: “what is decisive is that economic development in underdeveloped countries is profoundly inimical to the dominant interests in the advanced capitalist countries. The backward world has always represented the indispensable hinterland of the highly developed capitalist West”.

2. The New School of Dependency:

The new school of dependency differs from the disequalising forces approach and the Marxian view. Being heavily represented by sociologists and political factors neglected by economists, dependency theorists argued that the developing countries are nothing but the periphery after trade opens up.

After industrialisation the develop­ing country remains a periphery. Because the rich nations have monopoly power in R and D and are the home of multinational corporations (mines). The quality of technology used in production differs in a developing country from a highly capitalist developed one.

3. Trank’s Thesis:

As a Marxist analyst of Latin American affairs, Andre Gunder Trank states: “It is capitalism, world and national, which produced under development in the past and still generates underdevelopment in the present.” Underdevelopment, according to Trank, is not simply non-development but a unique type of socioeconomic structure that results from the dependency of the underdevelopment country on advanced capitalist coun­tries. This results from foreign capital removing a surplus from the dependent economy to the advanced country by structuring the underdeveloped economy in an “external orientation.”

4. Unequal Exchange:

Centre-periphery trade is also characterised by “unequal exchange”. This refers to deterioration in the peripheral country’s terms of trade. It may also refer to un­equal bargaining power in investment, transfer of technology, taxation, and relations with mul­tinational corporations.

Let us take into consideration the relationship between MNCs and the host country. MNCs siphon off surplus from this country, use inappropriate capital intensive technology, alter con­sumers’ tastes and preferences and even reduce the ability of the government to control the economy.

5. Samir Amin’s Thesis:

A more Marxist analysis of unequal exchange has been presented by Samir Amin, an Egyptian economist who has specialised on African economics. Amin also analyses world capitalism in terms of two categories – centre and periphery. The economy of the periphery is distorted by outward effects. Hence they are affected adversely by rich, capital­ist, developed countries.

By “unequal exchange” Amin means “the exchange of products whose production in­volves wage differentials greater than those of productivity”. He assumes that the tech­niques of production used in those sectors of the periphery dominated by international capital are similar to those used at the centre.

But since wage rates are much lower in the periphery than at the centre, unequal exchange results. Thus, “unequal exchange means that the prob­lem of the class struggle must necessarily be considered on the world scale”.

Conclusion:

If we study the history of centre and periphery argument then we see that the developing na­tions are affected from time to time. If industrialisation in the developing nation takes place; then the quality of the product produced in those countries are backdated than those produced in developed nations.

So the price of the commodities produced from developing countries not only deteriorates terms of trade but also the quality of the product. This is Sarkar-Singer’s “Double Jeopardy Theory” (1991).

If protection takes place then the respective infant industry in present becomes more infant in the future and requires more protection. If export promotion takes place then the respective country may prosper in the future.

But for the case of large internal economies like India and China (which have large internal markets), import substitution is more preferable than export promotion. Economists are yet to reach a consensus about which policy is more attractive. So we are not able to reach a clear conclusion about the policy choice of the developing countries in the long run.