The postwar project: Economic
development in practice
IS290/IS190
ICT4D: Context,
Strategies, and Impacts
Fallacies in development theory
1.
2.
3.
Underdevelopment has a single cause
A single criterion suffices for evaluating
development performance
Development is a log-linear process
Fallacy # 1 Underdevelopment has but
a single cause
. . .or “panaceas that failed” (Easterly)
Classical theorists – Adam Smith, Karl Marx, Joseph
Schumpeter had multidimensional historical views of
development: resources, technical knowledge, social
and institutional structures, diversity of economy,
political structures, culture, etc.
Mainstream postwar development theory tended to be
mono causal and suggest uni-dimensional solutions
X-factor as the magic bullet
Underdevelopment is due to constraint X; if
loosen X, then development will be inevitable
result. X=capital, skill, technology, etc.
[Each may have limited applicability in
particular places at particular times, but not
necessary and sufficient for development]
X = physical capital, 1940-70
Investment is key to growth: “capital
fundamentalism”
Soviet model of growth: continuing investment
in capital intensive industry, infrastructure
Memories of Marshall plan reconstruction
Bretton Woods institutions: World Bank (IBRD),
International Monetary Fund (IMF), postwar
bilateral foreign assistance programs all
based on this assumption
Digression on growth theory I
Harrod-Domar model :
 Growth depends on the quantity of capital & labor;
investment leads to capital accumulation, which
generates economic growth (Keynesian.)
 Developing economies have plentiful labor but
scarce physical capital, and low incomes mean low
savings/investment.
 Policy implication: economic growth depends on
policies to increase saving and investment
 Assumes fixed capital-output, capital-labor ratios
Growth poles as spatial counterpart

“..belief in the power of heavy industrial
investment to radically alter the structure of
the economy. . . It was argued that sufficient
capital could produce instant modernization.”
–

Lisa Peattie Planning: Rethinking Ciudad Guyana 1987
Big ticket infrastructure: modern steel mills,
huge hydroelectric projects. Confidence that
“leading sectors” would pull rest of economy
along in a march to societal progress.
X = entrepreneurship (1958-65)
Influenced by Schumpeterian theory
“Deficiency of entrepreneurship” need private
sector industrialists to lead growth
Creation of International Finance Corp (IFC) as
part of World Bank Group
Government seeks to influence supply of
entrepreneurship or to substitute for
entrepreneurship
Entrepreneurship = private investment


IFC, founded 1956: “Our mission is to
promote sustainable private sector
investment in developing countries, helping
to reduce poverty and improve people's
lives.”
Products: innovative financial arrangements
such as loans, equity and quasi-equity
investments, guarantees and stand-by
finance, etc.
Digression on growth theory II
Neoclassical (Solow) growth model:
 Key addition: Capital subject to diminishing returns
 Long run growth via increase in productivity of
labor—not capital accumulation
 Difference between capital intensity (K/L) and
technology (output per worker hour)
 Solow (1956, 1957) calculated that the “residual”
accounted for four-fifths of US economic growth
 Growth rate depends on technological innovation
and so is exogenous (outside model)
X = incorrect relative prices (1970-80)
ILO observation of growth and industrialization
with high unemployment and inequality
Economic dualism: capital intensive modern
industry v. low productivity, small firms
Belief that relative factor prices did not reflect
relative economic scarcity; subsidies =>
capital under priced, labor overpriced relative
to availability => inappropriate technology
Solution: favor labor intensive prodn via import
substitution, raise tariffs for capital intensive
X = international trade (1980- )
Inefficiencies of government sponsored
industrialization (protection, subsidies, etc.)
International trade promoted as substitute for
inadequate domestic demand: removing
barriers to trade in commodities will
automatically => rapid export-led growth
Comparative advantage plus domestic and
trade liberalization as sufficient (panacea?)
X = hyperactive government (1980-96)
Government is not the solution to development,
it’s the problem: it corrupt & distorts market
incentives
Solution is to minimize role of government in
domestic (as well as international) markets
=> “Washington consensus”
Commentary
Growth theory: technology is exogenous
Microeconomics: theory of static resource
allocation
Assumptions for market equilibrium least
applicable in developing economies where
factors are not mobile, information is not
perfect, institutions poorly developed, etc.
Market equilibrium depends on initial
distribution of wealth; if that is not optimal
them won’t achieve welfare maximization
Digression on growth theory III
New growth theory (1980s):
 Technological change endogenous to model
 Increasing (not diminishing) returns to capital
investment via virtual cycles of innovation
and human capital improvements “spill over”
 “Learning by doing” and economies of scale
 Policy: R&D and/or human capital investment
X = human capital (1988- )
Low human capital endowments as obstacle
“New growth theory” human capital and
knowledge magnify productivity of capital &
raw labor
Multiple growth trajectories: high growth, high
factor productivity, econ of scale when have
high levels of human capital and knowledge
=> “Brain drain” and underemployment due to
lack of demand, complementary opportunities
The limits of growth theory?



Emerging consensus that new growth theory no
more successful than neoclassical growth theory in
explaining income divergence btwn developed and
developing economies. (Both predict LT income
convergence. . .)
Why? Econ factors: institutional arrangements,
internal market barriers, trade barriers, etc.
What about other factors: “bad” govts, polarization
due to ethnic conflict and inequality; excessive red
tape, black markets, high levels of debt, inflation, etc.
X = ineffective government (1997- )
Reevaluation of optimal role of government:
1. East Asian successes govt role in shift
from import-subs to export promotion
2. Backlash against neo-liberalism in
advanced economies; focus on corruption
3. Mixed success of market reforms in 1980s
lead institutions like WB to see need for
capable, committed governments to reform
Fallacy #2: Single criterion suffices for
evaluating development performance
GNP per capita only national potential for
improving welfare of majority, not actual
Need for multidimensional criteria such as
Human Development Index (UNDP) that
involve distribution measures and other
indicators of human welfare
Ideal: battery of disaggregated performance
indicators to index national welfare &
evolution
Fallacy #3: Development is a log-linear
process
Solow: a single unique production function that
characterizes all countries, based on supply of
inputs, capital, labor, and natural resources
Growth of total output is function of rate of
change of physical inputs; rate of growth of per
capital output is function of rate of change of
capital-labor ratio, natural resources, and
residual (technological change)
Ignores: initial conditions & history, levels, path
dependence
Alternative propositions
Development process is highly nonlinear
2. Development trajectories not unique
3. Initial conditions shape subsequent devel.
4. Development trajectories can be altered via
policy, they are malleable
Economic development is a highly multifaceted,
non-linear, path-dependent, dynamic
process that involves shifting interactions
between different aspects of development
1.
Additional resources



Gerald Meier and Joseph Stiglitz, eds.
Frontiers of Development Economics (2001)
Lisa Peattie Planning: Rethinking Ciudad
Guyana (1987)
Jane Jacobs Cities and the Wealth of Nations:
Principles of Economic Life(1984)