General theories of development economics

Abstract

The early development economists regarded development as synonymous with economic growth, in particular real income per capita. Lionel Robins defined development as “movements in real income per head and to potential in this respect – real income being conceived as a stream of availability of goods and services as distinct from the experiences or satisfactions to which it gives rise” (emphasis added)1; the emphasis is on income per head, not the absolute size or aggregate income regardless of the size of the population.2 In their attempt to answer the why questions, the early generation of development economists tried to find the single most important factor causing under­ development, by comparing underdeveloped economies with developed economies. They found that a striking feature of underdeveloped countries is that they are “capital poor.” In other words, underdevelopment is due to capital deficiency, or the lack of an adequate amount of capital per head. For example, a pioneer development economist, Oscar Lange, despite his socialist orientation, believed that “An underdeveloped economy is an economy in which the available stock of capital goods is not sufficient to employ the total available labor force on the basis of modern techniques of production.”3 To this generation of development economists, insufficiency of capital equipment per head explains the low level of productivity per worker, and hence low per capita income, which, in turn, causes low saving. Thus, capital deficiency is also reflected in the form of low rate of saving and capital formation. Thus, they answered the how questions by emphasizing saving and capital accumulation. The role of foreign aid was seen in this context as supplementing domestic saving to fulfill capital requirement for sustaining growth. The issues like power, income distribution, institutions, history or culture did not play much role in their formal theory. In this framework, therefore, there are no interactions between economic, social or political factors, and the causation runs in one particular direction-from economic factors (saving and investment) to growth of real income per capita, and development proceeds in a unidirectional way from a low level of development to a higher level. The best known growth­ focused model that influenced development practitioners and planners is the Harrod-Domar growth model and its extension into two-gap models by Hollis Chenery and his associates, Michael Bruno and AlanStrout.4 A number of pioneer development economists attempted to extend the basic growth model to incorporate structural and institutional issues in answering the how and why questions. Among them, Arthur Lewis’ surplus labor or two-sector (rural-urban) growth model,5 and the Mahalanobis’ two-sector (consumer goods-capital goods) planning model are noteworthy.6 Endogenous growth models consider the role of education, health, science and technology with feedback loops between growth and these variables. These models allow for increasing returns to capital as well as to scale, economies of scope and externalities. They can produce multiple equilibria, one of which is characterized by low per capita income and low rates of saving and investment in a manner of circular causation, or a “vicious circle.” Coordination failure, weak institutions and information asymmetries are among the factors that can produce a low-level equilibrium.7 Endogenous growth models suggest an active role of public policy in increasing complementary investment. Thus, they are more in line with Rosenstein-Rodan’s “big push”8 and Nurkse’s “balanced”9 growth theories, where concerted public policy and complementary public investment can mitigate market failure. Regardless of all these extensions, the predominant focus still remains on growth of per capita income. The other dimensions of development, such as low level of poverty and inequality or social change are assumed to follow from higher per capita income. In other words, the fruits of higher economic growth are expected not only to trickle down, but also to spread across society. However, there was a great deal of disappointment by the end of the 1960s and early 1970s. Many countries, despite achieving reasonably high GDP growth, failed to transform their economy and reduce poverty, hunger and malnutrition. Thus, there were attempts to redefine the concept of development to include structural and social change. For example, Gunnar Myrdal defined development asthe movement upward of the entire social system . . . This social system encloses, besides the so-called economic factors, all noneconomic factors, including all sorts of consumption by various groups of people; consumption provided collectively; educational and health facilities and levels; the distribution of power in society; and more generally economic, social, and political stratification; broadly speaking institutions and attitudes . . . .10