Theories of Development and
Underdevelopment
Heterodox Theories
Structuralism
Institutionalism
Marxian Dependency School
Ch. 6 in Cypher & Dietz
What is Heterodox Economics?
• orthodox / mainstream / neoclassical economics
• heterodox / non-mainstream / alternative economics
Heterodox / non-Mainstream / alternative economics such as:
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Keynesian economics / post-Keynesian economics
Marxian economics / neo-Marxian economics
Structuralist economics
Institutionalist economics
Ricardian economics
Feminist economics
What is Heterodox Economics?
Heterodox economists as distinct from Neoclassical economics:
• do not propose that “capitalism” (i.e. “the free market system”)
is an ultimately perfect system of organizing society;
• unlike neoclassical economists they criticize the shortcomings
of the market system to various degrees;
• call for government intervention to overcome these
shortcomings;
• emphasize political, social, cultural, historical, structural and
institutional factors that interplay with economic factors.
Heterodox Theories of Development
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Structuralism
Institutionalism
Neo-Marxian Underconsumptionist School
Neo-Marxian Dependency School
Classical Marxian School
Latin American Structuralists
(Furtado, Prebisch; Singer)
Emphasize structural and institutional differences between lessdeveloped and developed nations.
1. Structural characteristics of underdeveloped economies:
2. Juxtaposition of traditional low-productivity agricultural sector with
3. A modern sector usually dominated by foreign capital towards
primary exports
4. No domestic design and production of K goods for modern sector
5. Small employment in modern sector
6. Land tenure systems restrict increase in agricultural output
7. Domestic supply rigidity in key branches of the economy & low
price elasticity of export demand → low growth of exports
8. High income and low price elasticity of import demand in the
modern sector → high growth of imports
9. High population growth
The structuralism of Raul Prebisch
• Until early 1920s, Argentinaan outstanding example of the theory
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of comparative advantage.
Cost advantage for producers in the production of beef & wheat for
the world market.
Enormous growth of the Argentinian economy from 1980s until the
second decade of 20th century.
In 1920s-30s, Argentina faced the adverse effects of Great
Depression and the dominance of US in the world market and had
difficulties with its primary trade partner; Britain.
Both prices of and demand for its exports started to fall; it started
to accummulate foreign debt.
Prebisch’s work showed that during Great Depression:
export prices of agricultural primary goods fell much more and faster
than prices of manufactured, secondary products.
This observation lead Prebisch to develop a critical perspective on
the static formulation of the neoclassical comparitive advantage
theory of international trade; and rather emphasize the dynamic
effects of real economic forces.
Elasticity of Supply and
Equilibrium Price Adjustment
Figure 6.1, on p. 161 in Cypher & Dietz
The Prebisch-Singer Hypothesis
• The distinction between nations: the center and the
periphery.
• The center gets all the benefits of international trade
whereas the periphery gets nothing.
• Opposes to the Ricardian Theory of Comparative
Advantage.
• Argues given the differences in the existing economic,
productive and labor market structures between the
periphery and the center,
-in the application of technology in traded goods.
-in the market structures; oligopoly vs. competitive
Calls for implementation of specific developmental policies
by governments of developing countries and the solution
to the development problem can not be left to the
market mechanism alone.
Latin American Structuralists
Given these structural differences less-developed countries
can not replicate what developed economies have done
in the past.
This is not a phase through which every growing economy
passes but a specific historical condition.
Furtado:
Industrialized countries → supply-lead growth through
technological change first in consumer goods, then in
capital goods.
Industrializing countries → (export) demand-lead growth
through external interaction with industrialized
economies, which has resulted in hybrid structures.
Latin American Structuralists
But external export demand cannot be relied on to sustain growth
indefinitely because:
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It’s susceptible to trade cycles (transitory or permanent demand
shortages)
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Risks of declining ToT (especially primary products)
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Productivity increase is limited, hence wage increase is limited
when specilization is in labor-intensive export goods.
Hence use exports to develop the domestic market, but this
is dependent on:
1. Employment scale of production and technology
2. Wages, i.e. supply price of labor from traditional to
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modern sector
Tax paid by modern enterprises which in turn
determines public expenditure
Demand for domestically produced K goods by the
modern sector
Extent of profits and salaries being spent domestically
Policy Recommendations
• Import Substitution Industrialization (ISI) particularly in products
that show high income elasticity of demand
(begining with manufacturing of simple, consumer non-durables →
consumer durables → intermediate K goods → basic K goods)
• Take care of external factors such as BoP constraints
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Cut nonessential imports
Expand primary product and manufactured products exports
Guide investment into key import-substitutiong sectors in infant industries
Advanced economies shold give trade preferences, foreign aid and finace
• Form common regional markets amongst developing economies to
enlarge market size
• Active Gov’t policies to enact effective tariff barriers to protect the new
ISI industries from foreign competition; also providing and allocating public
expenditures to the areas where the highest rate of return could be
anticipated.
Neomarxist Schools of Development:
Underconsumptionists
(Paul Baran and Paul Sweezy)
Advanced capitalism emerged due to a long period of competitive
capitalism which fostered K accummulation and technological
breakthrough
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3 conditions for emergence of capitalism
1. increase in agricultural output and displacement of peasants
2. growth of commodity production and division of labor
3. accummulation of capital by emerging class of merchants and
rich peasants
1&2 occurred everywhere with similar pace; yet ‘3’ was
hindered in the 3rd World because
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Low surplus: European expansion siphoned off the surplus of
the South
Low investment incentives: Economic and social structures in
the South was unable to promote use of surplus for investment
and Capital accummulation
Hence the world economy starting from a state of parity
got divided into rich and poor.
eg. India inhibited by British colonialism versus Japan independent
state support for industrialization
Neomarxist Schools of Development:
Underconsumptionists
(Paul Baran and Paul Sweezy)
• Development in industrialized market economies leads to ever increasing
concentration of capital in fewer hands,
i.e. Capitalist system has a natural built-in tendency to Monopoly Capitalism
• Monopoly eliminates the disciplining device of competition and leads to a
diversion of surplus away from productive investment towards wasteful
uses.
• As monoploies invest less they lead to chronic lack of demand,
i.e. Underconsumption.
• Hence monopoly capital becomes the ultimate cause of stagnation in both
advanced and underdeveloped countries.
• In this process, underdeveloped countries are dominated by foreign capital
with its local hangers on, i.e. mercantile and landlord interests.
Neomarxist Schools of Development:
Dependency School
(A. G. Frank, I. Wallerstein, S. Amin)
• Dependency theory sees the world as divided into a
center/core/metropolis
versus a periphery/satellite.
• Capitalism is the main reason behind such a split; i.e.
the cause of underdevelopment of the periphery.
• Incorporation into the World capitalist system leads to
development in a few areas and to development of
underdevelopment elsewhere; a small core surrounded
by a large periphery.
Neomarxist Schools of Development:
Dependency School
(A. G. Frank, I. Wallerstein, S. Amin)
Metropolis/center uses the satellite/periphery for
– Cheap labor
– Raw materials
– Market outlets
The chain of metropolis-satellite (center-periphery)
relations and dichotomy is created as a necessary part of
capitalist development not only amongst different
nations on a world scale but also within single nations on
a regional basis.
Heterodox Theories of Development
heterodox theories of development as distinct from orthodox developmentalist
theories do not believe
that relatively minor changes in economic conditions would be sufficient to
create the “big-push” or the “take-off” into sustained growth
that economic development is a linear, universal process
that capitalism (market economy) is the ultimate goal
Heterodox theories of development propose the following:
• the process of development has geographically and historically unique
features varying from one place to another
• caution the possibility of adverse path dependence
• emphasize the unequal relations of power between South and North and
Capital and Labor
• underline the importance of socioeconomic and political structures and
institutions in the development process