Summary of The Dynamics of Socio-Economic Development (Szirmai)

Summary of The Dynamics of Socio-Economic Development by Szirmai written in 2014, donated to WorldSupporter

Chapter 1: Diffusion of generalisations on development

The book is about getting an insight into the similarities and differences in the development process in different countries. It’s doing it by representing different views and perspectives of long term economic and social development. But you have to remember that there are no final answers, in a field as controversial as that of economic and social development there’s no scientific certainty!

First some generalisations about development have to be refuted:

  • “Developing countries are trapped in a vicious circle of stagnation”. You have to keep in mind that every economic advanced country was once a developing country. And in later chapters you will see that some developing countries exhibit strong economic growth.

  • “Given the pace of the population growth, food scarcity in developing countries will always be a problem”. This is simply not true; because in the long term the food production is increasing more rapidly than the world population, even in developing countries. However, this does not mean that hunger and malnutrition can be eliminated in the near future.

  • “Agricultural and mining exports cannot contribute to the economic development of a country”. There are many countries where agricultural and mining exports have been the foundation of later economic prosperity. And in later chapters you will see that even today agricultural and mining exports can make a positive contribution.

  • “Dependence of developing countries on the advanced economies leads to a net outflow capital”. This is true for the first half of the 20th century, but in the second half of the 20th century developing countries have profited from net inflows of capital.

  • “Rapid population growth is always a threat to economic development”. It’s impossible to deny that this is a problem, but rapid population growth does not preclude economic growth. And under certain conditions a too low population growth can form an obstacle to economic growth also.

What does the term ‘development’ mean? Implicit in the term ‘development’, is the notion that some countries in the world are extremely poor, whereas other countries, representing a small fraction of the world population, are very prosperous. But developemt is more than economic development only. So writers came up with a set of similar developmental goals including reduction of poverty, increased economic welfare, improved health and education, and increased political and social freedom. But remember that economic growth always remains one of the necessary condition for the long-term development! On the other side we have to understand, according to Myrdal and Seers, that development is unavoidably a normative concept involving very basis choices and values. This means that discussions about development have implicitly been based on a series of modernisation ideals or values (development is a highly value-laden concept). And what one understands by development in a particular period is strongly influenced by dominant cultures and powers of that period. Nowadays Western countries have become the models for ‘modern’ societies (the so-called ‘Westernisation’).

But you have to consider that it isn’t another attempt to project the blueprint of Western development on Non-Western societies, because of the following reasons:

  • There is no question of Western society being considered ‘superior’ to other societies

  • It doesn’t say that all countries or societies should or can adopt one and the same ‘Western’ development path

  • The relationship between developmental values and westernisation don’t have to be a lasting one. Asia is becoming more and more the centre of economic and political power.

And it looks like that the option to be a traditional society for developing countries just isn’t possible anymore. The developing countries have already been ‘opened up’ to international trade, investment, colonial domination and partial penetration by the money economy a long time ago. This means that the traditional self-sufficient societies already have been disrupted. And that the needs of the population in these ‘new’ societies with modern technologies cannot be met by traditional technologies and methods of production.

To measure growth and development

The most used indicator of growth and development is the national income per capita of a country. The most used way to calculate this is by the GNP (Gross National Product) per capita (‘’the sum of all value added in an economy in a given year”). But there are all sorts of technical objections to the use of per capita GNP as an adequate indicator of the level of economic development of a country summarised below:

  • The GNP principally refers to that part of the nation income that is traded via the market for money. However, in developing countries there’s widespread subsistence production that’s not visible in the GNP. So if there’s a change from subsistence production to production for the market, it seems as if national income is increasing, whereas in reality there is no increase in production at all

  • The output of the informal or non-registered sector of the economy is not adequately accounted in the GNP

  • Differences in climate and conditions of life that require different types of clothing, food, transportation and housing are not allowed by the GNP

  • The GNP does not account the costs of environmental pollution and depletion of natural resources adequately

  • The costs of transporting goods and people, the costs of the disposal of waste and the costs of urban living do not occur in pre-industrial societies because this our typically costs that come with economic growth and industrialisation

  • The comparisons between countries of the GNP are usually made with exchange rates, but this doesn’t provide a realistic estimates of the standards of living in the developing countries (because many goods are much cheaper in developing countries)

These are not the only objections, because there are also substantive objections that are all based on the fact that development involves more than economic growth only. A number of objections:

  • GNP does not account the distribution of income and consumption, which is often very unequal

  • The level of the national income is not directly related to the standard of living

  • Social indicators are missed


Therefore the HDI (Human Development Index) is introduced which contains an average of three variables: an index of per capita gross domestic income, life expectancy at birth and the level of education (contains: literacy and number of years of schooling). These indicators are valuable as an addition to national income data.

But there are a couple of reasons why in practice they haven’t replaced the GNP per capita as an indicator of growth and development:

  • The quality of many social indicators is often still inadequate for comparing between countries

  • The weighting of social indicators is rather arbitrary. You can choose by example the weight of higher incomes and that has a big impact on the ultimate results

  • If you look at the long term, many social indicators appear to be closely connected with per capita national income trends.


Third World

After the World War II the term ‘Third World’ was used as a term for the developing countries. This Third World contrasted with the First World (the advanced capitalist countries) and the Second World (the industrialised socialist countries in Eastern Europe). The implicit of the term ‘Third World’ is that on the one side all developing countries have common characteristics and on the other side that there’s a huge gap separating the third world from the industrialised countries. The first comment is isn’t true at all. There’s a great diversity in the world economy in 2000 with enormous increasing differences in per capita incomes, and great inequality both between rich and poor countries and among poor countries themselves (see table 1.1, page 17 till 19). Also there’s a lot of income inequality in developing countries, considerably more than in affluent countries. The countries can be divided in four categories: low-income countries, lower-middle-income countries, upper-middle-income countries and high-income countries. The lower-income country category contains many African countries, several countries in South and Southeast Asia and some of the new states in Eastern Europe and Central Asia, which became independent after the break-up of the Soviet Union. The lower-middle-income country category contains many countries from Central and South America, several North African and Middle Eastern countries and several countries that used to be part of the Soviet Union. The upper-middle-income category contains the large and populous Latin America countries and a couple of smaller ones, and the more successful former socials countries. The high-income countries contain the rich Western countries, Japan, Israel, the United Arab Emirates, Kuwait and new Asian economies such as South Korea.

An enumeration of the differences between developing countries:

  • Great differences in levels of per capita income both between and within the above named categories

  • Differences in demographic characteristics; differences in population size etc.

  • Differences in natural resources; difference in climate, soil quality etc. An important distinction is that between oil-exporting developing countries and oil-importing developing countries

  • Differences in the structure of the population; some developing countries are still predominantly agricultures, while others have developed large industrial sectors.

  • Differences in the economic regime; some developing countries are inward-looking other are outward-looking, some are planned regimes other are market economies etc.

  • Differences in colonial experiences; differences in the stage that countries have been colonised and differences in the nature and intensity of the colonial relationships.

  • Differences in pre-colonial history; differences in cultural and religious development etc.

  • Differences in economic dynamism; long periods of growth in some countries and in others long periods of stagnation

  • Differences in regional characteristics; developmental experiences differ by region

So a lot of differences and also a lot of inequality between countries as already mentioned somewhere above. So the question is: Can the gap be bridged? You cannot speak of a fixed order and an unbridgeable and immutable gap. It’s a constant process of change in the ranking of countries. Examples of very poor countries that realised to bridge the gap in the relatively short period of one or two generations are by example Japan, Korea, Singapore and Taiwan.

There are also a couple of common characteristic of developing countries that you have to keep in your mind, summarised here:

  • Widespread poverty and malnutrition

  • A relatively large share of agriculture in output and employment

  • Pronounced dualism (wide gap between traditional and modern sector) in economic structure. Where the modern sector is closely linked to the international economy, but isolated from the remainder of the domestic economy. This will lead to the problem that there’s an absence of technological diffusion from the modern technologically advanced sector towards the rest of the economy. Also other forms of dualism can occur, like regional dualism, cultural dualism and ethnic dualism.

  • Very rapid growth of population

  • Explosive urbanisation

  • Large-scale underutilisation of labour. This means either that only a part of available labour is utilised, or that labour is begin used so unproductively that labourers can hardly make a living despite working very long hours.

  • Political instability, pervasive corruption

  • Environmental degradation. Though the advanced economies contribute most to global environmental problems, localised environmental degradation is typically concentrated in developing countries.

  • Low levels of technological capabilities. The advanced economies provide the most technological change. The developing countries import their technology. The success of this import of technology depends on the technological efforts and capabilities of individuals and organisations. New technologies have to be selected, adapted, implemented and further developed in mining, manufacturing, agriculture and services. But developing countries have these low levels of technological capabilities and that will limit the rate of technological change and economic growth. Also it keeps developing countries dependent on outside knowledge and expertise.

Chapter 2: History of economy

This chapter is about the history of the economic orders in the world, and first we start with an enumeration of important characteristics which say something about what international economic orders is about:

  1. Flows of goods and services (for example capital goods and primary products)

  2. Financial flows (for example loans and investments)

  3. Flows of people (for example migrant labour and voluntary migration)

  4. Flows of knowledge (for example diffusion of science and knowledge)


Other important characteristics include:

  • The intensity of economic relationships between the various regions

  • Relations of dependence between countries and regions

  • The institutional framework of the economic and political relations between countries and regions

  • Differential patterns of growth and stagnation

  • The size of the income gaps between countries and regions


If you look at the history; the European expansion led to an economic breakthrough and the formation of a world economy in which all countries and regions in the world are interrelated in networks of interdependence (first started by Portugal in the 15th century).

But first it didn’t look like that. Because in the 14th century China was still the most advanced society in the world if you looked at the level of technology. But they lost their advantages when the empire turned inward in the beginning of the 15th century. The impact of that was that rapid scientific and technological development came to an end and a more mystical attitude came in.



Reasons of Chinese inward-looking development and European expansionism in 15th century:

  • China was divided by several opinions about expansion. And in the Chinese world view China was the centre of the world and the Chinese empire already contained everything of importance in the world. So why then expansion?

  • In Europe their was, because of population growth and the availability of animal power, an intensification of food production which was a stimulus to further economic development. But in China there was a shortage of labour, which hindered economic development.

  • The Chinese empire was strongly centralised and the feudal systems in medieval Europe were strongly decentralised. To control such a centralised empire you need big expenses in military and administrative sectors, which may eventually hinder economic development (called imperial overstretch).The consequence of the in Europe developed economic system was that economic relations were more important than direct political control. This gave rise to powerful centralised small national states that were competing with one another


European expansion

How did the European expansion look like? First there were three types of colonisation: colonies of settlement, colonies of occupation and trading posts.


The colonies of settlement can be divided into: see next page

  • The ‘pure’ settlement colonies. In this colonies the complete original inhabitants ware crowded out and destroyed by the immigrants from Europe (example: United States)

  • The ‘mixed’ colonies. In this colonies a quite large minority of European colonists settled in the colony, trying to absorb the local population (example: Mexico)

  • The plantation colonies. In these colonies a tiny minority of Europeans settled permanently here and then imported slave labour from elsewhere (example: Brazil).

In colonies of occupation an extremely small elite of foreign colonial officials sent out to rule over native inhabitants (Examples: India, Indonesia).


Second there were four phases of expansion and contraction. In the first wave of expansion in the period of 1400-1815, there were colonies of settlement in the Americas and trading posts in Africa and Asia. This expansion was initiated by Portugal and Spain. Mainly The colonisation of Latin America done by Spain was extremely destructive (called conquest imperialism). The consequence of this was that economically Latin America was really underdeveloped. Economic surpluses have been transferred to Europe for centuries, but maybe more important was that social institutions such as landlordism and slavery have been introduced. They formed an obstacle to economic development long after the colonial period. So has this colonial exploitation mainly led to the successful economic development of Western Europe? For sure colonial exploitation contributed to Western growth. But research shows that domestic savings, a gradual increase in productivity in handicrafts and agriculture and substantial technological progress have been of more importance than the external plunder, taxation and foreign profits. An example of this is that the first countries (Spain and Portugal) that profited from colonial revenues and plunder were not capable of converting economic surpluses into productive domestic investments. So their leading role came soon to an end and first the Dutch and later the British became the new world leaders. The next phase was the first wave of decolonisation in North and South America of 1776-1824. The new phase was a phase of expansion again.


In the second wave of expansion of 1815-1913 there were colonies of occupation in Africa, Asia and the Middle East. Portugal had a colony of occupation in Brazil, the Netherlands in Indonesia, and the UK in India (called merchant capitalism). In the dividing of Africa the colonial powers made artificial borders, not thinking about geographical characteristics and ethnic, cultural and historical dividing lines. The present-day instability of African states can mainly be explained by the consequence of this dividing process. The period 1870-1913 can be described as a period where an integrated world economy came into being, in which trade became really important (called free trade imperialism). International trade was of an asymmetric nature. This means that poor developing countries exported primary agricultural and mining products, whereas rich and political powerful countries exported industrial products. This long period of expansion and contraction ended with a second wave of decolonisation of 1930-1980 where all colonies achieved independence.


Migration flows

In most parts of the world native societies continued to exist unchanged alongside European enclaves and there wasn’t really a Western economic influence. Only in two aspects there was really a big influence to notice. One: The enormous destructive impact in Latin America as seen above. Second: The Atlantic slave trade which changed the entire population structure of Latin America and the Caribbean and which has left deep scars on the African continent. The consequences of the slave trade, where millions of mostly young men were forcibly removed from Africa, has been one of the obstacles to economic development in Sub-Saharan Africa.

During the 19th century there were two enormous migration flows. One was from Europe to regions with a temperate climate (United States, Canada, Brazil, Australia e.g.). In these countries the original habitants were pushed aside by the immigrants. In these countries labour was scarce and the migrants had a relatively high education, so the coming of the immigrants led to a high capital-labour ratio. And nowadays these countries, where the immigrants arrived, are among the world’s richest countries.


The other enormous migration flow was from very densely populated areas in India, China and Java to tropical areas in the Caribbean, Africa and Asia. This migration flows has changed the demographic composition of many Asian, Latin American and African countries. It led to the availability of large number of uneducated and cheap labourers. And Western entrepreneurs invested little in educating their inexpensive raw labour. The consequence was that it had a negative effect on the development of productivity in mines and on plantations.


The history after the colonial period

The period 1913-1950 was the reverse of the economic order of 1870-1913. This period (called defensive autarky) was characterised by conflict and autarky. This led to a decline in economic growth in both the rich and the developing countries. Especially the developing countries, that were most involved in international trade from 1870-1913, were hit hard. The demand for their primary products collapsed and their prices was unfavourable compared with the development of the prices of industrial imports.


The period after World War II, 1950-1973, was called the golden age of growth. The growth rates of the national income and the volume of international trade were very high. Some developing countries were doing well to and had rapid process in industrialization. Some even succeeded in producing competitive industrial products for the global market.

This period ended in 1973 by the oil crisis. The consequences of the oil crisis were tremendous. The Latin American economic stagnated for 10 years. Most of the African countries experienced economic declines or stagnation. And also the rich countries experienced less growth.


Two perspectives on the developments

If you look back at this chapter than you can distinguish two perspectives on the developments in the world economy of 1500-2000:

  • The perspective of the formation and dynamisation of the world economy. This perspective shows the benefits of the development. The development has been a breakthrough in recurring cycles of poverty in economic history. The Western economic development and the threat of Western penetration and domination led to the universal pursuit of development in other parts of the world. This perspective says that without this breakthrough, there wouldn’t be a concept of development.

  • The perspective of the exploitation and increasing inequality in the emerging world economy. This perspective shows the negative consequences of the development. First there were no great differences in the level of prosperity in the various countries and regions in the world. But the formation of the world economy involved a truly explosive growth of global income inequality. It led to an increased dividing gap between rich and poor countries.

But looking on these two perspectives, not one of them is the absolute truth. There are important elements of truth in both perspectives. Keep that in your mind!


Chapter 3: Theories on economic growth



This chapter is about various theories on economic growth and the empirical experiences on economic development. First we start with giving an enumeration of the basic sources of growth of per capita incomes (GPD):

  • First you can say that the discovery of riches and natural resources (by example: gas, gold or oil) can lead to more prosperity. But this growth will not be sustainable, so the revenues of the windfall discoveries have to be transformed into more sustainable sources of growth.

  • A second thing is: effort. By working harder, increasing hours worked per year etc. a country can experience a growth of per capita incomes.

  • Third there is the saving and accumulating of capital. When you’re saving money you can invest these savings in order to accumulate capital goods, which increase the productivity of labour.

  • Fourth are education, training and health that can lead to improvements in the productivity of labour.

  • Fifth there is theft. You can use appropriating resources from other societies to accumulate capital. But same as the first source, you have to reinvest the revenues to get a sustainable effect.

  • Sixth there is efficiency. When you become more efficient and effective in the use of capital, labour and intermediate inputs and in the ways in which these can be combined in production countries can experience more growth of per capita incomes.

  • Last but not least the technological change. By developing or acquiring new knowledge about how to produce valued goods and services and by applying such knowledge in production a country can experience growth.


Classical theories

In this paragraph I will describe a couple of classical theories which still have some influence on the thinking about development today. First, Adam Smith (1723-1790) was a real liberal and he attacked tradition obstacles (by example monopolies) to free trade and free competition. He argued that the more individuals were left free to pursue their own interests, the more the invisible hand of the market would promote collective welfare.

David Ricardo (1792-1823), Thomas Malthus (1766-1834) and John Stuart Mill (1806-1873) shared Adam Smith’s preference for free markets. The government should intervene as little as possible in the economic process. On the importance of international trade Ricardo formulated his famous ‘law of comparative advantage’. This law says that all countries who become participant in international trade will profit from such trade if they will concentrate on the production of those products in which they are relatively most efficient.

Malthus has presented a more pessimistic view in his work. He thought that food production would not be able to keep up with the population growth in the long run. Because of his pessimism the term ‘Malthusianism’ has become the general term for all modern pessimistic views.


Friedrich List (1789-1846) was less enthusiastic about the blessing of international free trade. He said that mainly the dominant powers would profit from free trade instead of all countries.


The argument for this is the so-called ‘infant industry argument’; latecomers to economic development will be hindered in their development by competition from economically more advanced countries. To overcome this problem, according to List, late-developing countries need an active government that intervenes in the market, so they can build up an industrial sector and further structural transform of agrarian into industrial societies.


The sociologist Spencer (1820-1903) came with his Social Darwinism theory, using metaphors from biology, to argue for free markets. But social Darwinism can have some rather crude social implications such as rejection of all welfare systems, minimum wage regulations etc.


Another sociologist Ferdinand Tönnies (1855-1936) focused on the changes in social relationships that accompanied economic growth. He noticed the change from more communal social patterns (based on family, kinship, clan and local community) to more individualistic, impersonal relationships (rational and anonymous). He highlighted that in these new relationships people are bound together by contractual relationships focusing on well-defined exchanges.


One of the greatest classical sociologists Émile Durkheim (1858-1917) focused on the negative social effects of such a transformation. He pointed out that in highly individualistic modern societies there’s rise in divorce and suicides rates and a lack of shared, common norms.


Karl Marx (1818-1883) focused on the dynamic role of capitalism. The essence of capitalism according to him is the production for profit and reinvestment, rather than production for the satisfaction of human needs. In contradiction to the classical economist he didn’t see capital accumulation and economic growth as a harmonious process leading to increased collective welfare. He sees economic development as a process characterised by continuous exploitation, appropriation of surpluses for the purpose of reinvestment and social conflict.

He also predicted that socialist revolutions would take place only in the most advanced capitalist countries. This came out to be not truth, because revolutions only took place in societies with low levels of industrial development, such as Russia, China, Cuba etc.

Under the name of ‘imperialism’ theorists tried to explain the absence of the predicted revolutions in the most advanced capitalist countries. The theory of imperialism states that the Western countries succeeded in transferring its internal contradictions to the world economy and the developing countries (by colonisation and exploitation).


Two important post-Marx theorists were Max Weber (1864-1920) and Joseph Schumpeter (1883-1950). Weber stated that the development of capitalism was part of a wider long-run social trend of rationalisation and bureaucratisation in Western societies. The Weber thesis states that the Protestant ethic, that distinguished the Western world from other regions where the breakthrough of capitalism did not take place, was the factor that favoured economic development. Weber also thought that the system of capitalism would be destroyed by its own inefficiencies. Schumpeter focused more on the capitalism of the 20th century. He thought that in the long run capitalism would be undermined by its successes rather than its failures. Gradually and unnoticeably the system would be transformed into something like a socialist planning system, through the planning and administrative procedures of the very large capitalist firms.

The economy and society in developing countries are characterised by dualism. Dualism means that there’s a side by side existence of a modern and a traditional sector. Between those two sectors there’s the main problem of the social and economic gap.


There are two approaches to the problems of development: the internal and external approaches. Internal approaches focuses on unfavourable circumstances and factors within a society, which form an obstacle for development. External approaches are almost the same, only they focus on the outside of the society.


Internal approaches

Rostow’s modernisation theory of the stages of economic growth describes five stages in which each society sooner or later will passes through:

  • Traditional society; in this period the production technology is static. And there’s a low level of living conditions.

  • Preconditions to take-off; in this period the idea emerges that people can improve their low level of living conditions by their own efforts. In this period the conditions for industrialisation are created, and the most important condition is an increase in productivity of the non-industrial sectors (agriculture and mining). This will create financial surpluses which can be used for investments in the industrial sector. But first there have to be some investment realised in the infrastructure (railways, roads etc.) which are prerequisite for industrialisation.

  • Take-off; this period is the crucial stage where investment should be increased substantially and should be directed towards industrial sectors with the strongest linkages with the rest of the economy.

  • Drive to maturity; in this period the new production technology will spread from the leading sectors to the rest of the economy.

  • Mass consumption society; in this period it becomes a society where the whole population benefits from the increased opportunities for consumption (this society looks like the North American society).


Kuznet’s is one of the critics of this theory of Rostow. According to him you can’t distinguish the Rostow stages of growth empirically. The changes in investment and growth rates are more gradual than the dramatic term ‘take-off’ suggests. Also there’s a great diversity of social and economic circumstances in pre-capitalist societies that you can’t just put in one category ‘traditional societies’. And the main point of criticism focuses on Rostow’s idea that every society follows one and the same path of development. It makes a huge difference whether a country is an early or a late industrialiser etc.

But there are also important similarities between Kuznet and Rostow and that’s the fact that they both emphasise the importance of industrialisation and the conditions for industrialisation in development.


Gerschenkron disagrees on two respects with Kuznet. First, Gerschenkron mentioned that there are important differences between the patterns of industrialisation in different countries and different historical periods. The role of banks, financial institutions and governments becomes more and more important in late industrialisation in comparison with the early industrialisation. In this late industrialisation period many changes have to take place simultaneously in the economy in a short period of time if they want to be successful.


Second, Gerschenkron mentioned that the economic development of a country should be studied in the context of international technology transfer.

If an economy and society is able to absorb new technologies, latecomers in development can experience faster economic growth than early developers. They profit from the advantages of backwardness. This ability to absorb new technologies depends on the social capabilities (Can they make use of it? Can they acquire it?) of a developing country and the congruence between technologies developed in the lead countries and conditions in the follower countries.


In neoclassical theories of growth they predict that, if markets function smoothly and the factors of production can move freely across the world economy, sooner or later rich and poor countries will convert and developing countries will catch up (the hypothesis of unconditional convergence). Empirically this can’t be proven, there’s no convergence between rich and poor countries. The hypothesis of conditional convergence states that countries with similar initial conditions will tend to converge in income level.


The new growth theory offers an explanation of the divergence in economic performance between rich and poor countries. The countries with a head start in accumulation of physical capital, human capital and knowledge will tend to forge ahead. Countries which are backward will tend to stagnate further. But there are countries that started at very low levels but arranged dramatic catch-up in a short period of time. This can be better explained by the theories of conditional convergence and the advantages of backwardness.

Evolutionary theories of economic change, built on the Schumpeter tradition, which focuses on the central role of technological change and innovation in growth and development. This theory notice that relatively small initial differences can be greatly reinforces in the long run (this is called ‘path dependency’). And new technological developments, chocks and changes in the environment can make past successful paths irrelevant, and can open new opportunities for dynamic growth for low-income economies.


One aspect is still underexposed but North and Thomas focussed in their study on the emergence of efficient institutions. Efficient institutions are defined as ‘institutions which motivate self-interested individuals to act in ways which contribute to collective welfare’. Among the efficient institutions is the protection of intellectual property (patent rights), which guarantee that individuals will profit from the fruits of their own exertions. This is one of the conditions for a continuous stream of innovation.


But efficient institutions do not automatically supplant less efficient institutions. There’s a path dependency; when a society has embarked on a certain institutional path, later development depend on choices made earlier on in the development process. That is one of the explanations for the increasing divergence of richer and poor countries.


A last approach is that of Myrdal that focuses on the important differences in institutional structures in different countries, regions and historical periods in contradiction to the simple unilinear development schemes. He mentioned that ‘the initial conditions in developing countries (climate, technology, demography etc.) are so different from those of the currently rich countries that copying earlier development experiences of Western countries is not a viable option. Also he mentioned a couple of obstacles to economic development in poor countries:

  • Extreme social inequality; poverty undermines the productivity of workers and rich people consume more than they invest. Also is the modernisation of agriculture hindered by unequal distribution of rights to land and large landownership

  • Inefficient and ineffective state bureaucracies and widespread corruption.

So for the process of development there’s need for drastic internal reforms (redistribution of income and productive assets and equalisation of social and political power).




External approaches

Theorists of internal approaches are convinced that it depends on internal characteristics, institutions and policies how a country will respond to external threats, challenges and opportunities. On the opposite of that the theorists of external approaches believe that developments in different countries are mutually interrelated in the context of the international economic and political order.


A prominent group of theorists have argued for an ‘underdevelopment or dependency theory’. This theory argues that relationships between rich and poor countries are detrimental to the developmental chances of the economically and politically weaker parties. This means that the low level of development in developing countries is the result of active negative influences from the outside. The characteristics of dependent development are:

  • Importance of export of primary commodities leads to an infrastructure that’s completely oriented towards the interests of the export sector. There are few backward and forward linkages between the export sector and local producers and buyers.

  • Dependence on imports of manufactured goods

  • Dependence on imports of intermediate goods, capital goods and technology

  • Foreign firms and transnational companies dominate the modern sector of the economy.

  • Economic surpluses are transferred to abroad.

  • It’s not only about the economic sphere. There are also cultural, psychological and political relations of dependence with the advances nations.


Neo-Marxist say that more developed countries exploit the less developed countries. Within these less developed countries there are elites, within the modern sector, that exploit sectors in their own countries. And at the level of the rural sector, there are landowners that exploit the rural labourers.


Theories of unequal exchange have been formulated both by neo-Marxist as by non-Marxist. These theories reject the economic proposition that free trade and specialisation in those lines of production in which a country is relatively most efficient (a comparative advantage) will increase all countries welfare. In contrast to this proposition they state that participation of developing countries in the international trade has a detrimental impact on the economic development. Arguments in favour of this theory:

  1. Developing countries mainly export primary products. The demand for primary products will not experience high growth when people become more prosperous. So prices therefore will not keep up with prices of industrial exports for which world demand is much more buoyant.

  2. The abundance of cheap labour in poor countries will limit technological advance.

While in rich countries the high wage levels stimulate investments in capital and technological development. The consequence is that the technological gap between rich and poor countries will tend to increase.

  1. Most investment in developing countries is in foreign hands and therefore the investment behaviour is determined by foreign rather than by national interests.

  2. The consequence of the absence of well-organises trade unions and monopolistic corporations in developing countries is that productivity gains in these countries are passed on to the consumers in the rich countries.


But you can argue for a development strategy which would make developing countries less dependent on international trade. To achieve this, the domestic industrial sector has to be build up and protected, so the import of industrial goods can be replaced by domestic production (called the ‘import substitution strategy’). This strategy has been applied with a certain measure of success in Latin American, African and Asian countries.


If you evaluate these underdevelopment theories than they have increased our insight into the negative aspects of the Western penetration in the world. Western influences can give rise to institutions and constellations of interest groups, which form serious obstacles to development. But these underdevelopment theories have also many shortcomings. They can’t explain why former colonies such as the United States, Canada, Australia or New Zealand have achieved such economic success. Also the experiences of dynamic capitalist developments in South Korea, Taiwan, Singapore, China etc. do not fit in these underdevelopment theories. Also many propositions of underdevelopment theories are empirically not correct. It’s just not correct that there’s always a net outflow of capital from poor to rich countries. Also, there isn’t empirical support for a law of declining terms of trade for developing countries. Sometimes the terms of trade deteriorate, sometimes they improve. We can conclude that though underdevelopment theory has contributed to our understanding of historical development processes, it has little to offer for the formulation of adequate development strategies in the present!

Empirical information

When you take a look at the data (table 3.1, page 99) of growth of income per capita there can be seen that for most of the period since 1870 the economic developments in rich countries and developing countries tend to run parallel. This means that the suggestion by theories of underdevelopment is simply not true; growth in rich countries is not accompanied by stagnation in developing countries. And in this date in table 3.2 (page 101) you can see from 1973 divergent trends of the growth of GPD per capita in the developing world with catch-up in Asia, stagnation in Africa and a mixed record in Latin America. The data in table 3.3 (page 103) shows the gross domestic investment as percentage of GPD of the developing countries. The data can be interpreted in two ways. First, through comparing table 3.1 and table 3.3 you can see that, on average, high rates of investment and capital accumulation are associated with rapid economic growth since 1950. But second, differences in growth performance between individual countries are not directly related to differences in investment efforts. The results of similar investment rates can result in very different growth outcomes. The African economies provide a good example for this; a combination of rather high investment rates and low or even negative growth. The tables 3.4 and 3.5 (page 104 and 105) deal with export performance. And table 3.5 refutes the stereotype of developing countries as exporters of primary agricultural or mining products. From 1953 to 2000 the average share of manufactured exports in tot merchandise exports increased from 6 per cent to 53 per cent (in Asia even more; from 7 to 77 per cent).


Table 3.6 (page 106) deals with the external finance. It shows that between 1950 and 1981 there was a net inflow of capital in developing economies, averaging between 0.7 and 2.6 per cent of GPD. This refuses the assumption of the underdevelopment theories that there is a permanent outflow of capital from poor to rich countries. And table 3.7 (page 108) shows that in the long run the stock of foreign capital has increased, indicating net inflows of capital. This provides a positive impulse to the economic development of a country and can contribute to rapid economic growth. But this also means a higher degree of foreign domination of the economies of developing countries. This especially happens when domestic economy and political structures are weak and governments are unable to bargain with powerful multination firms.


So for modern economical development there’s a need for structural change in the economy. As already mentioned this means that there has to be a change of importance from the agrarian sector to the industrial sector, where productivity per worker is much higher than in the agrarian sector. And a later stage the industrial sector has to be overtaken by the service sector and this sector then will become the most important sector in terms of its share in employment and production. In table 3.8 (page 111) you can see the structure of employment by sector and in table 3.9 (page 112) you can see the structure of production. And from the data in that table we can conclude that developing countries have not followed the classical sequence of shifts from agriculture to industry to service. Rather the service sector developed parallel to the industrial sector, as the shares of agriculture declined. The last table is table 3.10 (page 114) that contains the date of the distribution of income or consumption. This table gives no conclusive evidence of increasing inequality in developing countries from the time period 1980-2000. But large country studies such as China, Indonesia and India do point to rapidly increasing inequality in recent years.


Chapter 4: Technology



This chapter is about technology. Technology refers to the state of knowledge about how to do things, in particular how to produce valued goods and services for the satisfaction of human needs. There are people who experience technology as something that comes from outside and drives us inexorably in certain directions. Maybe most people experience it that way, but this isn’t correct. Technological change is the result of focused human efforts in research laboratories etc. This means that it is driven by human actions and choices and thus can you influence it.

The history of technological change mainly started in the 15th century, because of the technological breakthrough that occurred in Western Europe. Nowadays, and since the World War II, the United States is the undisputable world technological leader. If you look at figure 4.1 (page 120) it shows the leadership of the U.S. and you can also see the catch-up of Taiwan, Korea, and a major catch-up by Japan. In the modern world economic of today competitiveness depends more and more on technology and innovation. And simultaneously the world economy is becoming more and more interdependent, because of the growth of international trade. When this is combined, you can conclude that the increasing interdependence implies that developing countries are more and more influenced by international technological trends.

The main indicator of technological performance is the increase in labour productivity. There are many sources of increase in labour productivity, they are:

  1. The labour productivity can be increased by adding machines and capital goods, so by capital accumulation

  2. The labour productivity can be increased by large-scale production of standardised products, so by increasing the scale of production

  3. The labour productivity can be increased by schooling and education of workers, this makes them more productive (also known as the accumulation of human capital)

  4. The labour productivity can be increased by increased efficiency, by example through making better use of technologies and higher capacity utilisation

  5. The labour productivity can be increased by changes in the organisation of production, such as systems of motivation and flexible production systems

  6. The labour productivity can be increased by advances in our technological knowledge concerning products and production processes.

Two remarks with regard to the efficiency in developing countries. First, owing to a variety of institutional, educational and infrastructural factors, the technical efficiency of production in developing countries is lower than in advanced economies. Second, developing countries with an abundance of cheap labour should choose for more labour-intensive technologies. The mostly capital-intensive technologies developed in the advanced economy may not be appropriate to the conditions in the developing countries.

The characteristics of knowledge are that it is non-rival and non-executable. Non-rival means that if one person makes use of it, it doesn’t diminish the possibilities of use by other people. Non-executable means that it is hard to prevent others from using knowledge. Once there, knowledge has a tendency to diffuse or spread (the so-called ‘spillovers’).


These spillovers from advanced economies to developing economies frequently fail because of the relationships between new technologies and the wider environment in which they have to function are neglected. Much of the modern technology was, according to Abramovitz, developed in the context of the standardised mass markets in the United States. You cannot transfer that technology of the U.S. automatically to a place where markets are smaller and more fragmented. This is called a lack of technological congruence.


But if you can overcome this lack of technological congruence, than technological backwardness offers potential advantages and opportunities for accelerated growth. But the realisation of these advantages and opportunities depends on the social or technological capabilities of a national society. These social or technological capabilities refer to the use a country can make of advanced technology and its capacity to acquire it in the first place. This has to do with the technical competence of a country’s people, indicated by levels of general education and the share of population with training in technical subjects.


The role of technological change in economic theories

Solow makes in his theory the assumption that technology and knowledge are freely available to any country in the world. So this would lead to high growth margins in countries all over the world. This is the so-called neoclassical economic model of growth.

Gerschenkron thought the same about the free availability of technology and knowledge. However, he pays much more attention to the conditions under which certain countries can profit from diffusion of technology. In contrast to the theory of Solow; diffusion is certainly not automatic and it depends on the changes in the social structure and modernisation of society. It also calls for a greater role of governments and large financial institutions in mobilising resources. The theorists Romein and Veblen focus our attention on the potential dangers and disadvantages of being the leader in technology. When you’re a leading country you may have invested too heavily in given technologies and their surrounding infrastructure that you may be unable to move to new generations of technology (the so-called ‘technological lock in’).


In new growth theories the more advanced economies are the better prepared they are to profit from spillovers. Firms in developing economies are not so well prepared to profit from spillovers. So this will lead to an increasing gap between the advanced countries and the developing countries.


In evolutionary growth theories they conclude that whether convergence or divergence between the advanced countries and the developing countries takes place depends on the balance between the generation of new technology and increasing returns in lead countries on the one hand and diffusion of technology and spillovers to follower countries on the other.

Both theories, the new growth theory and the evolutionary theory, mention that technology does not develop automatically as in the earlier neoclassical theories. It depends on deliberate efforts, investments in science, R&D, education and training by firms, governments and universities.


Some empirical information

In table 4.2 (page 131) you can see that there’s great inequality in technological efforts in the world. A big part of all the scientific, research and development activities takes place in the advanced economies. There are threats to this situation. Because when a country is unable to keep up in the technology race and is unable to profit from technology transfers; it is threatened with increasing marginalisation in the world economy.


And when this gap will increase, this will lead to technologies that will be less in conformity with the local needs and competences. A second threat is that technology transfer may lead to increased inequality within developing countries. Because some groups will have access to the new technology and other groups don’t have that access. This problem is already been noted in the areas of agriculture and communication technologies.



There are different ways to copy new technology. These wide ranges of mechanisms of technology transfer are:

  • Acquisition of technology licenses

  • Technology transfer as a part of a package of FDI (Foreign Direct Investments) or joint ventures

  • Acquisition of technology through imports of new products, which are copied through reverse engineering

  • Competing on international export market and having to meet international quality standards has important learning effects

  • Original equipment manufacturing: producing for foreign firms, according to specifications supplied by these firms

  • Acquisition of technological know-how through the hiring of expatriate experts

  • Sending own personnel abroad for training and schooling (Japan did this in the beginning of the 20th century)


Lundvall and Nelson have introduced a new perspective on the innovativeness of an economy. The innovativeness of an economy does not simply depend on the sum of innovative actions by separate actors, but also on their interrelationships. For success their has to be strong interrelationships (strong linkages) between firms, private and public research institutions, fundamental and applied researchers, and governments. Because such networks promote the flow of knowledge and diffusion of technology within an economy and contribute to the production of new knowledge.


Protection of intellectual property rights

As already mentioned knowledge is non-rival and non-excludable. But there’s a problem that comes along with this and that is that this reduces the incentive for firms and individuals to invest in the development of new knowledge. The solution for this is the protection of intellectual property rights. This means that instruments such as patens allow inventors and investors to profit from the efforts to generate new knowledge and technology. And the consequence of this is that increasing protection of intellectual property rights can result in increased foreign direct investment and accompanying inflows of technology if there’s adequate protection in this developing country.


But there is the potentially negative effect of restricting access to knowledge and slowing down the diffusion of technology. This can be especially a problem for developing countries, because owners of technology can prohibit the use of technology by others or charge prohibitive fees for its use. A second negative effect is that firms and commercial organisations will tend to underinvest in areas where the private returns are less than the social returns. Examples of this are the underinvestment in the field of research on aids, malaria and global warming.


Biotechnology and information and communication technology

Two major new, influential developments are in biotechnology and information and communication technology.

In developing countries there were very substantial increases in land productivity because of research in biotechnology. And without these increases global food production would not have been able to keep up with global population growth. On the other side there are also negative effects like increasing rural inequality. Farmers are more dependent on the biotechnological multinational companies. The intellectual protection of new seed varieties prohibits farmers from using their own seed and they are required to buy their seed from these multinationals.


The rapid developments in the information and communication technology have provided great possibilities for improving both access to and the quality of education. A relatively cheap option is education by distance learning, where large groups of people can be reached who till now had no access to education. But the outcome of research is that countries with insufficient technological capabilities will not be included in and profit for the global production chains, so they will be further marginalised. This applies for the most of the developing countries.


Chapter 5: Population change

This chapter is about the various relationships between population change and economic development. Below they are summarised:

  1. The labour is supplied by the population growth, which is available as an input into economic production

  2. As the consequence of population growth there can be employment problems

  3. The growth of production can be stimulated through a rapidly growing population that leads to expanding market for goods and services

  4. The level of consumption in a society depends in part on the relationship between population growth and growth of production

  5. A growing population will lead to opportunities for productive investment and it can stimulate savings

  6. The size and growth of the labour force is one of the determinants of the need for savings and investment. When investments will lag behind the growth of the labour force, this will lead to declining labour productivity and growth of production will not be able to keep up with the growth of population

  7. When there is no technological change, the pressure on the environment can be increased by a growth of population

  8. This increasing pressure by a growth of population on scarce resources can stimulate technological change


Before 1750 the growth of population was very slow (see also table 5.1 at page 144). But after 1750 there was a dramatic acceleration of growth. This reached its highest peak after the World War II, between 1950 and 1975. Most of the population growth takes place in developing countries. The population growth in rich countries has almost stabilised. The predictions for the future are that in 2050 there will be 9.3 billion people, of which 87 per cent will live in developing countries. The prediction for 2150 is that there will be between 3.2 billion to no less than 24.8 billion people, depending on the low or high assumptions about fertility.



The demographic characteristics of developing countries are summarised here:

  1. Rapid population growth that was faster than in 19th century growth in the currently rich countries. Also the most rapid population growth takes place in the poorest countries

  2. There’s a very rapid decline in mortality, irrespective of the income per capita, which is faster than in the 19th century. It’s related to the advances in medical technology and it leads to increased life expectation

  3. There are high birth rates and high fertility rates that are higher than previously in the currently rich countries. There’s a beginning tendency of decline in some countries, especially in Asia, but there’s no beginning tendency of decline in Africa. There’s also a much lower age of marriage in developing countries than in the 19th century European countries

  4. The population growth is out of step with the demand for labour

  5. Emigration is not an option for excess population

  6. A rapid urbanisation takes place, but there’s also an increase in rural population. The urbanisation is caused by both rural-urban migration and internal population growth

  7. There’s a high dependency ratios (the proportion of economically non-active to economically active people), that means that there’s a youthful age structure. So that means that there’s a large group of young people that do not make economically productive contributions. Also a large proportion of women will be in a reproductive age category in coming years


Theories about population growth

Till the 1970’s the debates on population growth were dominated by the Malthusian perspective. This means that they focussed on the negative consequence of rapid growth of population in developing countries, that it will threaten their chances of economic development. This is because of the physical limits to the increase in production, such as availability of land, scarcity of energy and raw materials, and the carrying capacity of the global environment. There are also neo-Malthusian theorists that say that developing countries are in danger of getting caught in equilibrium at a low level of economic development (the so-called ‘neo-Malthusian Trap’. They have to past a point where national income grows more rapidly than population, so the economic growth becomes self-sustaining. But recent the dominant perspective changed towards a less negative vision on population growth, because there’s no empirical support for the conclusion that the effects of population growth on economic development are always negative. The food production has increased even more rapidly that the population since the 19th century.

The predictions of both the Malthusian theorist and the neo-Malthusian theorist were wrong because they neglected the crucial factor of technical change. In optimistic perspectives they mainly focus on this technical change and they say that people will always find new technological solutions to the problems of scarcity. As already mentioned in the summarised demographic characteristics of developing countries, population growth can have positive effects on factors such as technological change and growth of output. Also high population growth can succeed in positive outcomes. This is already seen in some countries that succeeded in substantially razing their per capita incomes with high population growth rates. But there are also other countries with rapid population growth that show declines in per capita income. So there can be positive effects, but still we may assume that the challenges with which developing countries are confronted become greater as population growth becomes higher.


It’s mainly the combination of population growth and a high dependency ratio that has a negative effect on overall economic development. With regards to savings; a large family size forms a heavy economic burden for a family and may indirectly have negative effects on its long-run capacity to save. There’s also evidence that the life chances of children from very large families are less favourable than those of children from smaller families. With regards to investment; a rapid population growth leads to additional burdens on already strained economies by increasing the need for investment. With regards to education: developing countries succeeded in substantially increasing educational participation, but nowadays there’s a tendency for educational expenditure per student to decline. This will threaten the quality of education, and the quality of education is already low in developing countries. There’s a similar problem with regard to health care. The existing health facilities have to be spread among more and more people, creating new dilemmas with regard to government expenditures. With regards to employment; the unemployment rates can be seen in table 5.4 (page 157). Unemployment is not very common in the poorest developing countries. There’s more underutilisation of labour.


Many people are forced to make a living by engaging in low-productive activities in the traditional agrarian sector or in the urban and rural informal sectors of the economy. So a large supply of labour promotes increasing income inequality in two ways:

  1. First, the abundant labour supply weakens the position of employees compared with owners of capital

  2. Second, the incomes of workers in the low productivity sectors lag behind the incomes of workers in the formal sector of the economy. This means more income inequality between the various categories of workers

With regards to the environment; Malthusian theorist weren’t right about the prediction that there will be scarcity of raw resources in the future. The economic invisible hand of the market will drive prices up, where shortages of raw materials occur in the short run. This means that in the long run these raw materials will be used less, while making alternative techniques of resource extraction and alternative materials economically more profitable.


A negative relationship between growth of production per capita in given countries and regions and localised deterioration of the environment is also not obvious. On the one hand the growth of production leads to the emission of various noxious wastes in air and water, which put a severe burden on the environment. On the other side, in the rural areas of developing countries there’s much more pollution of air and surface waters than in richer countries. The developing countries can’t afford it to reserve an increasing part of their national income for purposes of environmental protection, provision of clean dinking water, disposal of solid wastes, sewage systems and soil decontamination. This is also in line with the ‘environmental Kuznets curve’ that predicts that economic growth initially results in increasing local environmental deterioration, followed by environmental improvement at higher income levels. So the environmental problems in developing countries are on the increase. This give rise to the question of developing countries have to copy the path of ‘growing first and cleaning up later’ implied by the Kuznets curve. But cleaning up later may be more expensive than taking preventive measures. There’s also new technology available that is less destructive for the environment.


There are some indications that the growth of world population and the associated growth of world production are beginning to form a threat to the environment at a global level. These indicators are:

  • Deforestation; tropical rainforests are rapidly disappearing mainly under human influences. But in the advanced countries, forest coverage is increasing

  • The greenhouse effect caused by increased emission of CO2 and other gases may lead to irreversible climatic changes, such as global warming

  • The dilution of the ozone layer increases the danger of skin cancers and related diseases

  • The declining biodiversity leads to a alarming rate of interesting species that are disappearing from the world, and can also pose a threat towards continued human existence in the longer run

  • Land degradation, salination and desertification


The conclusion is that the global environmental effects pose the most serious limits to unchecked population growth and growth of per capita income. But you can also blame institutions for the environmental problems. By example: in many African countries there are still traditionally defined common rights of land use, so the individual users of the land don’t have incentives to invest in maintaining or improving land quality.

And market imperfections also play an important role in the case of air pollution, water pollution and deforestation. These market imperfections contain that the costs of these environmental problems are not charged to producers and consumers.


As a conclusion you can say that the exponential growth of world population is the most convincing argument in favour of control of population growth. Because if we want to provide an ever-growing world population with an adequate standard of living, the carrying capacity of the natural environment will sooner or later be exceeded!



Explanations of high fertility in developing countries

As already said there’s a high rate of population growth in the developing countries. This growth could be explained by the rapid declines in mortality in combination with continued high birth rates. These high birth rates are determined by the youthful age structure of the population and the high number of births per women (the so-called ‘high fertility rate’). There are a lot of variables that can explain the variation in fertility rates. Shown by empirical research the four most important variables are:

  • The percentage of women who, in the fertile period of their levels, are married (or who have a stable sexual relationship). In Europe later marriages were the norm, whereas in Sub-Saharan Africa people marry very young

  • The use and the effectiveness of birth control techniques

  • The practice of induced abortion

  • The duration of the infertile period after the birth of a child owing to lactation and post-partum infecundability. This infertile period can be substantially extended when women breastfeed their children



There are also economic explanations of the fertility that assume that people to a certain extent weigh the costs and benefits of having children. The factors that influence the decision to have a child are the following:

  • The cost of educating children

  • The contributions of children to household income

  • Financial sacrifices made by parents. Especially women, that have to take care of many children, cannot take paid jobs outside their home.

  • The greater the educational opportunities for women, the higher the costs of bearing and raising children

  • The distribution of costs and benefits between men and women. It often happens that the biological father doesn’t have to dedicate for the costs, so in such situations biological fathers have little incentive to limit family size

  • Provisions for old age. Where publicly guaranteed systems of old age pensions are lacking, children function as a provision for the old people

  • Child mortality. Couples tend to have more children in order to ensure a sufficient number of surviving children when there’s high child mortality


So when you generalise these factors you can conclude that the higher the level of income and education, the higher the opportunity costs of children become. This effect dominates the effect of that the higher the income the more children as well as other desirable things in life one can afford. In developing countries with people with lower income levels, the advantages of children will be relatively greater and the opportunity costs lower. So large families are related to poverty and a decline in poverty will contribute towards lower fertility.


At last there are cultural and institutional explanations of fertility. By example if cultural norms and institutions make for early marriage, fertility will be higher than in societies where late marriage is the rule. And another example is a religious taboo on the use of contraceptives, with the consequence of higher fertility. The following cultural and institutional factors contribute to high fertility rate in Sub-Saharan Africa:

  • Ancestor worship. The spirits of the deceased have to be tended by their descendants. You need large numbers of children for such continued existence

  • Social prestige. A woman’s social prestige is dependent on having large numbers of children

  • Respect for elders. In African societies there’s an upward flow of wealth from younger to older generations, therefore parents profit from large numbers of children

  • Male dominance. Males often don’t pay for the costs of having children, but they do make the decisions concerning reproductive behaviour

  • Kinship relationships. Women are not considered to be part of the kinship group of their husbands. The access of the women to land depends on having children, so woman also have an interest in high fertility

  • Shared costs of raising children. The costs of raising children are spread over many relatives, as aunts and grandmothers

  • Sexual abstinence


As a result of this we can derive four lessons:

  1. There’s little chance of success when birth-control programmes go against the grain of strong culturally determined attitudes

  2. The intermediate determinants of fertility and the economic considerations which play a role in determining family size are both influenced by cultural factors

  3. The cultural determined attitude concerning male-female relationships is of great importance in explaining high fertility levels and trends. So you can say that improvements in the social position of women contribute to a lowering of birth rates. You can think about higher education, greater economic and social independence etc.

  4. The cultural factors and institutional arrangements can be seen as responses to risks and uncertainties to which people are exposed over time in stagnant low-income economies


Government policies

The cultural determinants of high fertility are most resistant to policy influences. So the best a government can do is change the balance of costs and benefits involved in individual choices with regard to family size. The following policies and legislation can be recognized to lower family size:

  • Minimum marriage age

  • Promoting breastfeeding

  • Improving the status of women

  • Children’s education and work

  • Active encouragement of birth control


The following government expenditures can be recognized to lower family size:

  1. Education

  2. Primary health care

  3. Family planning

  4. Incentives for fertility control

  5. Old-age security


The following tax programmes can be recognized to lower family size:

  1. Family allowances

  2. Tax penalties for larger families


The following areas of policy can to aim at influencing the choices parents make with regard to children:

  • Improvement in the socio-economic status of women

  • Improved educational opportunities for children to increase the costs of having children

  • Regulating or even prohibiting child labour so children cannot make potential economic benefits

  • Expenditures of old-age pensions and provisions so children don’t have to function as a provision for the old people

  • Improved functioning of capital markets makes it possible to set aside savings for old-age provisions

  • Educational expenditures will lead to greater educational opportunities for women, so the greater the sacrifices they have to make in order to have many children

  • Expenditures for primary health care will contribute to lower child mortality, so less children per family

  • Affordability of contraceptive techniques

  • Rewards and sanctions. You can give positive rewards, such as tax cuts or subsidies, to families with few children. And you can give negative sanctions, such as the loss of tax advantages and subsidies.



Chapter 6: Health care


This chapter is about the health care in developing countries. There are three main indicators of the state of health:

  • Health service indicators; such as the number of doctors etc.

  • Morbidity statistics; a chard of the prevalence of different types of diseases

  • Demographic indicators; such as mortality rates etc.


The first indicator doesn’t give a reliable picture of the state of health; it doesn’t provide any information on the functioning or effectiveness of systems of health care. The second indicator offers the most complete picture of the state of health, but in practice there are no complete medical records of the population, especially in developing countries. The third indicator is therefore the most frequent used indicator. They reflect some of the important aspects of health, and also they are relatively easy to register.


The following of these demographic indicators will be discussed here; infant and child mortality; average life expectancy at birth; patterns of illness as reflected by causes of death. First, the infant and child mortality. Infant mortality is defined as ‘’the chance of dying between the age of 0 and 1 per 1000 births’’. Child mortality is defined as ‘’the chance of dying between the age of 0 and 5 per 1000 births’’. There’s a huge difference in the infant and child mortality rates of developing countries and developed countries. In developing countries the average infant mortality rate was 65 as compared to 8 in the more developed countries in the period 1995-2000. And the average child mortality rate in developing countries was 95 and in the more developed countries 10 in the same period. There’s also a great difference among developing countries. Africa has by far the highest infant mortality with 91 per 1000 births, compared to the developing regions with the lowest infant mortality rates Latin America with 36 and East Asia with 41 per 1000 births. And the gap between these least developed countries and other developing countries seems to be on the increase. But since World War II there’s a positive tendency towards strongly decreasing infant and child mortality rates in developing countries. Even in Africa infant mortality dropped from 181 in 1950-1955 to 91 in 1995-2000 (see table 6.1, page 180). Some people fear and think that the decrease in infant mortality has been slowing down since the 1980’s. But so far this hasn’t look founded. Because from year to year, infant and child mortality rates continue to decline.

Second, the increase in life expectancy (see table 6.2 and 6.3 pages182 and 183) in developing countries is one of the most marked manifestations of the dynamics of development. This huge increase is primarily owned to reductions in infant and child mortality. To give an example of the results; on average, a child born at the end of the 20th century will live 21 years longer than a child born two generations earlier in the 1950’s. Also the gap between the economically advanced countries and the developing countries is substantially narrowed. But still Africa is worst off. Since 1992, the life expectancy has declined from 55 to 51 years, whereas there was a trend of increasing life expectancy. This all because of the shocking impact of the AIDS epidemic in the African countries. Africa lags behind even more and more compared to other developing countries.


Thirdly, the patterns of disease and health (see table 6.4, page 185) are incomplete because it’s really difficult to obtain reliable date on the causes of death in developing countries. Still you can distinguish the differences between rich and poor countries.


In the poor developing countries infectious intestinal and respiratory diseases are the most important cause of death. Whereas in the rich advanced countries the main causes of death are cancers, cardiovascular diseases and degenerative diseases. This also explains the high infant and child mortality rates in developing countries, because infectious and parasitic diseases especially claim the lives of children under the age of 5. And AIDS is the biggest problem in the African region, accounting for no less than 22.6 per cent of total mortality. Whereas the causes of death in the advanced countries mainly are age-related, that is they gain in importance as the population becomes older.


A new category that receives more attention nowadays is that of mental disorders. Mental health problems have been underestimated in developing countries, where increasing numbers of adults and children are traumatised by warfare, civil strife, violence and hunger.


There are several ways how infectious and parasitic diseases are passed on. We can distinguish the following categories:

  • Diseases transmitted through contaminated water or food. Infections of the digestive system, one of the most important causes of death among children in developing countries, and bacterial and viral diseases (like hepatitis and cholera) are in this category. Among the most serious pathogenic factors is the poor hygiene

  • Airborne diseases are transmitted by air, examples are tuberculosis and pneumonia. Tuberculosis is making a comeback and is taking a lot of lives again

  • Diseases transmitted through direct physical contact. In this category AIDS is extremely important, as already mentioned above

  • Parasitic diseases are also quite common

  • Diseases transmitted by animal vectors are also very important. Malaria, Bilharzia, Sleeping sickness, Filariasis and Trachoma are the most common diseases in this category.


There’s a development all over the world that people live longer and this is very much related to the reduction of infectious diseases of the intestines and the respiratory tract. You can see such developments as an integral part of an overall process of economic and social development (the so-called ‘epidemiological transition’.


There are three models of the epidemiological transition:

  1. There’s a classical Western model that’s characterised by a gradual decrease of the death rate associated with modernisation, improved nutrition and hygiene

  2. There’s an accelerated model of epidemiological transition. A typical example of this model is 20th century Japan. There the death rate declined more rapidly and the public hygiene, sanitation and medical factors played a more important role

  3. There’s a model that refers to today’s developing countries, the decelerated epidemiological transition model. It indicates that the transition from older to newer patterns of disease is still unfinished


As other modernisation theories this is again to simple, there’s no unilinear development from a traditional to a modern stage. Changes of patterns of sickness and health never develop along the same path in different societies and during different historical periods.


But there are some common elements in the various patterns of health development. The share of deaths caused by infectious intestinal and respiratory diseases tends to decrease over time, whether gradually or rapidly. And the share of non-infectious diseases, which comes in the place of infectious diseases, tend to increase, but these non-infectious diseases can differ.



Theories on health and morbidity

First we have to distinguish the various factors that may affect the state of health in a particular country:

  • Improvements in medical technology. For example, extremely import are that antibiotics that are used to combat various infectious diseases. Several diseases can be eradicated at relatively modest cost by means of large-scale vaccination schemes

  • Improvements in water supply, hygiene and sanitary facilities. In the developing countries such facilities are often lacking, whereas many diseases are passed on through contaminated water, unhygienic treatment of excrement and unhealthy living conditions

  • Combating animal carriers of diseases. The use of chemical substances are often successfully uses

  • Improved nutrition. Nutrition is the most important factor according to some theorist in reducing susceptibility to diseases and reinforcing natural resistance against diseases contracted

  • Education. Other theorist emphasise education as the most important factor. Improving educational levels is positively associated with practices favourable to children’s chances of survival

  • Health-care policy. When countries make greater efforts in health-care they are relatively more successful in combating diseases, reducing the child mortality rate and increasing life expectancy

  • Egalitarian patterns of growth. Large segments have to share in the fruits of growth to get major improvements in health

The first theory is of Samuel Preston. He said that in the course of time life expectancy in all countries increases regardless of the level of income (see figure 6.1, page 194). So a low level of prosperity does not necessarily hinder improvements in health care and the state of health by application of modern medical technology. He emphasis that the rise of life expectancy is explained to a great extent by improvements in health technology. On the other hand there’s the theory of Thomas McKeown. He claims that the state of health in developing countries cannot be improved without overall improvement in the standard of living and levels of nutrition. Another theory is that of Mosley that emphasis the importance of education and other socio-economic factors. According to him a ‘primary health care’ system should not concentrate merely on medical facilities but rather on the entire complex of nutrition, educational practices, water supply, hygiene, counselling of parents, family planning etc. His theory should not be seen as an attack on health care but more as a plea for considering preventive health care in a broad sense including many socio-economic factors. At last there’s the theory of Caldwell on the importance of health-care policy. He did research on the empirical fact that some countries ranking on health indicators compared favourably with their ranking by per capita income (see table 6.6, page 201). He emphasis that female autonomy is the central factor in mortality declines in poor but open societies. Female autonomy has very positive effects on the quality of childcare. Also central planned economies, like China, score high on health indicators.


An interesting change in the ranking is that in general the discrepancy between health ranking and income ranking has decreased since the early 1980’s. And the main conclusion that arrives from Caldwell’s analysis is that health policy itself is an important explanatory factor. So this means that McKeown’s idea that only the level of prosperity is of importance proves to be incorrect.


On the other hand, one should realise that in countries where per capita income shows secular stagnation, sooner or later the economic basis for the maintenance of a good health-care system will inevitably be undermined. On the other side Mosley’s thesis that education is more important than medical interventions is also slightly exaggerated. As already said the education of especially women is of great importance, but the direct effect of the education is that the facilities of a health-care system are utilised more effectively. But this means that there has to be an availability of health-care facilities. Also underlying conditions as culture and religion are highly important since these factors determine attitudes towards education, the status of women, family planning and a scientific approach to health issues.


In recent research that decomposed changes in mortality and life expectancy between 1960 and 1990 in 115 developing countries, the World Health Report, the different perspectives are integrated in an interesting synthesis. The conclusion is that 45 per cent of the reduction in under-5 mortality is due to generation and utilisation of new medical knowledge, 38 per cent is due to improved education of adult females and 17 per cent is due to changes in income. And in the case of life expectancy, around 50 per cent of the improvement is due to new knowledge; around 30 per cent is based on the educational level of adult females.

As a result of this research there are three main avenues towards improving health:

  • By shifting the income-health curve through advances in technology

  • By moving along the curve by increasing income per capita

  • By changing the position relative to the curve by health-care policy and improving the effectiveness of health systems

The influence of health on economic development

It can be seen that investments and improvements in health have major positive impact on economic growth and development. You can distinguish the influence on the micro economic level and on the macro economic level. Studies at the micro-level focus on the causal mechanisms through which health affect the economic behaviour and performance of individuals and households. Studies at the macro-level focus on the statistical relationships between investments in health, health status and economic development.


At the micro-level the following relationships on labour productivity can be distinguished:

  • Reduction of labour input, because illness can result in a decrease of the number of hours a person is capable of working per year

  • Reduction of labour intensity, because illness can result in a decrease in condition of the workers. Such people become listless, lethargic and passive. Also when people become ill in their youth this can lead to lifelong impairment of mental functions, creativity and learning potential

  • Illness and malnutrition may force people to choose less productive work and lower incomes


The relationships between health and productivity are also stated in the so-called ‘efficiency wage theory’. This theory states that it may be inefficient to let market relations determine the minimum wage for labour. Because this market wage rate may be too low to guarantee sufficient food and health, so that labour productivity is undermined.


At the macro-level the following relationships on labour productivity and economic growth can be distinguished:

  • As a result of health improvements, child mortality declines and life expectancy increases. This will result in an increase in labour supply and a reduction in the dependency ratio. This can contribute to accelerated growth of per capita income. An example of this can be seen in some East-Asian countries

  • Replacement fertility is a result of high infant and child mortality. The result of this is that it will lead to a decrease in the productive potential of women during pregnancy and the period of breastfeeding

  • An increase in life expectancy can lead to higher rates of collective saving and investment

  • A decrease in learning potential may be the consequence of illness. And as a result, this will lead to that investments in education and human capital become less attractive

  • Diseases such as river blindness may make it impossible or unattractive to open up certain fertile areas for agriculture. So eradication of such diseases can lead to improvements in productive potential in the very short time



After World War II developing countries tried to copy Western medical institutions. They came up with hospitals that were located in national and provincial capitals and that were insufficiently accessible to the rural population and to some extent also to the inhabitants of urban slums. They tried to reach the rural population by the so-called ‘vertical’ campaigns. These campaigns outside the hospital system focused on combating the vectors or particular diseases and on preventive vaccination. These campaigns were successful, but were initially not integrated sufficiently into health-care policy as a whole.


The objections to this approach to medicine were the following:

  • There was too much emphasis on the treatment of diseases rather than on their prevention



  • Medical facilities were too expensive and also inaccessible to large segments of the population. A reason for this is that well-trained doctors don’t want to work in remote rural areas. And also many of the doctors trained in developing countries are unable or unwilling to find positions in their own country and instead look for jobs in the affluent countries


In the 1970’s this increased criticism led to the introduction for a system of ‘primary health care’ that includes the same broad range of factors as Mosley’s, already mentioned in the summary of this chapter. This primary health-care approach emphasises the reallocation of medical funds to improve the accessibility of medical services. Investments have to be made in cheaper local health care centres and simply trained paramedic personnel. Another important aspect is the participation of the local population in the preparation and execution of health-care policies. Health-care workers recruited from the local population will function more effectively. Also of importance for the social relevance and acceptance of primary health care, is that health services are adapted to the local culture.


So you shouldn’t eradicate or devaluate the traditional medicines, instead it should be merged with newer medical insights.


This new policy resulted in slow improvements in the percentage of populations covered by elements of primary health care and in the commitment of governments to primary health-care objective.


There were also clear improvements in the availability of safe drinking and sanitary facilities and the vaccination of children against six targeted diseases (diphtheria, tetanus, measles, poliomyelitis, tuberculosis and whooping cough). Also has there been a noticeable expansion of local community health services and numbers of health workers, health volunteers and trained traditional midwives have increased. But the goals of universal access to affordable basic health care have not been realised. Empirical research even seem to show that owing to population growth the absolute numbers of people without access to health-care facilities are increasing rather than decreasing. A major reason for this is that the ideals of community participation in and democratic control of health services have been insufficiently realised. Medical organisations still have highly centralised and hierarchical systems. And the local power structures frequently stand in the way of real community participation. Also there’s still insufficient attention towards preventive health care.

So in the last years of the 20th century important new elements emerged in the thinking about health-care policy. The three new elements of the new policy debate are:

  • A focus on effectiveness. Effectiveness implies trying to target diseases with the most negative impacts on health and welfare. This results in a cost-effective package of basic or essential interventions which should be available for everybody

  • This realistic view on health-care is called the new universalism. This contrast with unrealistic older policy ideas of providing total medical care for everybody

  • There has to come a balance between public and private efforts. In the past there has overwhelmingly been focused on government policies. But private households can account for health expenditures to, like in India were households account for 75 per cent of health expenditures. And these private expenditures also combine and mix expenditures on ‘traditional medicine’ and ‘modern medicine’. So governments should not try to replace private and public provision but should focus on regulation, health standards, access and combating abuses


Chapter 7: Education



This chapter is about the relationship between education and development. The functions ascribed to education are the following:

  • It can promote economic growth and development. It’s not sufficient to only invest in the physical capital stock; it’s required to have investments in ‘human capital’ also

  • It can lead to the modernisation of mentalities and attitudes in society

  • It can contribute to important development goals such as increased life expectancy, improved health and reduced fertility. Especially the education of mothers is of importance, and can make valuable contributions to better health of children and reductions in fertility

  • It can lead to political socialisation, contributing to national integration and national political consciousness in developing countries

  • Social and gender inequality can be reduced and it can lead to increased social mobility

  • It can contribute to personal growth, emancipation and development


After the World War II education became one of the most important factors in development. But since the 1970’s optimism about the contributions of education has been shaken. The quality of education was often disappointing and resources were often insufficient. So not all investment in education proved beneficial to development.



There are many theorists that talk about the contribution of education to economic development. The first theory discussed is the ‘Human capital’ theory. It emphasis that as people became more and more educated they developed more skills and improved their reading and writing abilities. Because of this education they argued that workers become more productive and the workers were better able to handle existing and new production techniques. So increasing the level of schooling will lead to higher labour productivity. Empirical information supported this theory by the empirical foundation that there was a close relationship observed in many societies between the number of years of education received and a person’s income level. The essence of the human capital theory thereby was the notion that individuals were willing to invest in their own education so that they would be able to earn a higher income in the future. The theory didn’t only mention the benefits for individuals it also mentioned the benefits for the society. These ‘external effects’ of education were the more rapid technological change, the reduced fertility and the higher infant health. These external effects are also mentioned in another version of the human capital theory the ‘endogenous growth theory’. This theory suggest that investments in technological change, research and development and physical and human capital are subject to increasing returns owing to spillover effects through which firms profit from each others investments.


Another version of this human capital theory is the theory of ‘conditional convergence’. Countries will tend to converge to common productivity levels and growth rates. So countries with lower initial productivity will grow more rapidly and countries with higher productivity will grow more slowly. Recent empirical information also confirms this importance of education as one of the factors with a positive influence on growth in advanced countries as well as in developing countries. For the systematic evaluation of the costs and benefits of different kinds of education for households the human capital theory provides a framework.


On the point of costs it contains:

  • Costs of books, teaching materials, school uniforms etc. and the school fees

  • The income that’s forgone while receiving education. Because of education the entry of a person to the labour market is delayed for years, so there’s no (or less) income earned


On the point of the benefits it contains: the difference between the lifetime income of an individual with a given amount of education and the lifetime income he would receive if he had not had this education.


As a result of research the following important and interesting findings can be recognized:

  • The rate of return on investment in education in developing countries was higher than the rate of return on investment in physical capital

  • The rate of return in developing countries was substantially higher than those in high-income countries (highest rates in poorest countries!)

  • The rate of return for primary education were consistently much higher than those for secondary and higher education

So following this theory investment in human capital will lead to higher productivity and economic development. To give you an overview the following reasons why investment in human capital (education) will lead to higher productivity and economic development can be formulated:

  • Professional skills; this means that education teaches specific professional skills required for professional practice

  • The three R’s; the three R’s are reading, writing and arithmetic. Workers who have mastered these three R’s are more productive, because they can read instructions, keep records, make calculations etc.

  • Education and literacy lead to changed attitudes, which can lead to higher productivity

  • Education and literacy contribute to the development of financial and commercial activities. For these activities people who can work as book-keepers, who can write letters etc. are required

  • For market mechanisms to function, people have to be able to acquire information and orient themselves amongst alternatives. Education contributes to this

  • Openness to innovation. For technological development you need well-educated employees to understand and apply the continuous flow of new production techniques

  • Literacy has positive effects on the dissemination of new ideas and technologies in a society

  • The rate of technological change depends on continued investment in education, research and development. So there has to be sufficient trained engineers and scientists to rapid develop new technology

  • Education promotes geographic and occupational mobility. This contributes to a more efficient allocation of the production factor labour


But the theory of human capital has also been severely criticised.


The criticism of the human capital theory contains:

  • Marginal productivity is difficult to measure, because the high correlation between education and personal income does not necessarily mean that education makes workers more productive

  • Difficulty in measuring costs and benefits, because the distribution of lifetime incomes is hardly difficult to measure

  • The benefits of education are not merely economic, because it can also increase one’s social status and one’s work satisfaction

  • In most of the cost-benefit analyses of education the quality and type of education is disregarded, only the number of years of education are taken into account

  • Insufficient attention for the ability to pay, because some people just cannot afford education

  • Importance of perceptions of costs and benefits, because if people believe that education will increase their opportunities, they are more likely to make sacrifices for it

  • Individual characteristics and talents of the parental family are the crucial determinants of ones future income, and not education itself

  • Education is not only investment, but also consumption, because the reason for many people to study is that they find it enjoyable or interesting


The next theory is the ‘screening theory’. This theory originated in the most extreme version of the preceding criticism of the human capital theory. The screening theory argues that education in itself does not contribute to a person’s productivity. In educational institutions you don’t acquire skills that are required in a profession. These specific skills are learned on the job rather than at school. The key elements of the screening theory are the following:

  • The importance of learning by doing, because most skills needed in modern industries can be learned in a couple of weeks on the job instead of years of education at school

  • Screening is one of the social functions of education. Educational qualifications serve as an important screening device for job applicants

  • Diploma inflation is the term for the tendency that the expanding of the educational system merely lead to exuberantly much people with a diploma. This will lead to situation where people with higher diplomas displace people with lower educational qualifications without any improvements in productivity

The criticism of the screening theory contains:

  • In line with the screening theory it’s hard to explain why self-employed people with a higher education usually have higher earnings than self-employed people with less education, because the screening theory emphasis that education does not contribute to productivity

  • The correlation between education and income will continue throughout people’s working lives. And not as screening theorists claim, that the relation between education and income will become weaker, as employer gain first-hand experience of an employee’s productivity

  • If the only real function of the educational system is the selection of workers, than you can also use less laborious and expense methods of selection such as psychological tests. But in practice these psychological tests are only used in combination with other selection methods


The proponents of the human capital theory and that of the screening theory are still in debate with each other. So for an evaluation we can say a couple of things. According to Durkheim education will tend to maintain existing structures of inequality, because one of the most important functions of education is the transmission of values, standards, attitudes and knowledge to successive generations.

Another point is that on the other side education may often lead to change. An example of this is the colonial educational system, within members of future nationalist elites received their education. This people later rebelled against colonialism in the name of the very political and humanistic ideals transmitted by Western-style education. Another point is that of upward social mobility. Groups with a few chances of upward mobility within traditional societies were now offered opportunities to improve their positions by way of education. The point of the screening theorists that education adds nothing to a person’s productivity is not tenable. And also the most important contribution is ‘learning to learn’ and not ‘learning by doing’. At basic level reading, writing and arithmetic are necessary to learn later on in life. At higher educational levels, evaluating information independently and learning to think analytically are important preconditions for future learning on the job. This is in line with the conclusion of recent research that cognitive skills learned at school increase wages and are direct determinants of productivity, irrespective of innate ability. There can also be argued that education in developing countries is nowadays more important than it used to be in the currently more advanced countries. This is true because of the tendency toward rapid technological development. Only a well-trained labour force can benefit from the opportunities of adopting modern technologies from abroad and adapting these to domestic production processes.

In recent theories the idea arises to see education as a necessary but not sufficient condition for development. Without investment in physical capital and the rise of institutions that provide positive incentives to productive efforts there will be no economic development. Bowman and Anderson contribute on this part by saying that literacy is a necessary condition for economic growth. According to them, economic development can only set in once the level of literacy among the adult male population has reached at least 40 per cent.


Also Sandberg states the importance of literacy and says that for European countries the degree of literacy in 1850 is the best predictor of national income in 1970. Countries as the currently affluent Sweden, Finland and Japan are good examples for this hypothesis, because in the 19th century they were quite poor but at the same time they had high levels of literacy. Sandberg also argues that there have been alternatives to education. As an example he emphasis Russia, that had an extremely low level of education during the 19th century, but compensated for this by using highly capital-intensive methods of production which reduced the need for skilled labour. And another interesting point of Sandberg is that educational investment precedes other types of investment.


Another theorist Mitch argues that the level of literacy is not really essential to agricultural and industrial development. As an example he emphasis the Industrial Revolution where it wasn’t very important for the working masses to be able to read or write.


The last theorists discussed are Pack and Paxson that contribute to this debate by saying that education will only have major positive impacts if improved education is complemented by inflows of new capital goods and technology which make use of the new skills acquired through education.


The participants in this debate look to have really different ideas on education, but we can give the following three areas of convergence:

  1. Because scientific and technological basis of economic development have become more prominent, education has become increasingly important

  2. Because of the difficulties that come with the adaptation of new technologies, the education in developing countries today is more important than in Western countries. In order to develop, developing countries have both the opportunity and the necessity to adopt technological innovations very rapidly in order to develop

  3. Only when investments in one type of capital are matched by investments in the other, will they have sustained positive effects on growth



There are many indicators that can be used to measure educational development. You can use indicators of educational enrolment, educational attainments, financial indicators, physical indicators and literacy rates. First, educational enrolment can be measured in the ‘net enrolment ratio’ defined as ‘the percentage of an age group enrolled in the education level appropriate for that age group’.


Although these indicators of educational enrolment are frequently used they have a couple of important shortcomings:

  • Over-reporting, means that enrolment data are inflated because schools have an interest in high enrolment figures in order to receive more subsidies

  • Enrolment versus completion, means that enrolment data do not show how many students actually finish a particular cycle of education

  • Enrolment data provide no information about the quality of education

  • The quality of data of international databases seems to be deteriorating over time


The use of educational attainments as an indicator provides us information about the average number of years of schooling completed by people in different age categories.


The use of financial indicators gives us an idea of the efforts of governments and societies to develop educational systems and the resources available for education. Also private expenditure on education takes place. Households are responsible for sizable proportions of educational expenditures. The use of physical indicators gives us an idea of the number of teachers, buildings etc. The use of literacy rates gives us a better view of the results of the educational process.



Comparison developed countries and developing countries

The state of education in developing countries was very poor after the World War II, because colonial authorise had never invested much in education. The dominant motives for providing information were religion and the education of native elites. In the case of religion, missionary work was important in primary education. In the case of native elites, these native elites had to fulfil subordinate positions in colonial administration. But developing countries started to give high priority to expanding in their educational systems after World War II.


When you look at the empirical information provided about the educational enrolment, (see tables 7.1 and 7.2, pages 230 and 231) you can see that enrolment in developing countries has increased very substantially since 1960 despite considerable population growth. The educational gap between developing and rich countries has been unmistakably narrowed. But there are differences between the different developing regions.


Latina America and East Asia are on course to achieving universal access to education whereas regions such as Sub Saharan Africa are slipping behind.


But enrolment data gives a too rosy picture of educational performance because of the large numbers of students that leave school prematurely without a degree. So when you look at the data of the people that completed education (see tables 7.3a and 7.3b, pages 232 and 233) you can see that completion data are far lower than the enrolment data.


Especially in countries such as India, Bangladesh, Pakistan and Egypt. But you also can see that younger generations are better schooled than older generations.


In table 7.4 (see page 234) you can see the years of schooling received by members of the labour force in developing countries. This number of years of schooling doubled in the period between 1960 and 1980 from 2.7 years to 5.5 years per person employed. Still there’s a large gap between affluent countries and developing countries, because employees in affluent countries have twelve years of schooling on average.


Tables 7.5 and 7.6 (see pages 235 and 236) contain information about the educational expenditures. The real expenditures per pupil in primary education in most countries show a modest upward trend in the long run. In developing countries the percentage of their GNP spent in education increased from 3 per cent in 1965 to 3.9 per cent in 1999-2000. In the same year rich countries invested 5.1 per cent of their GNP in education. Also have they learned from research on this topic, because by 1990 several countries were spending more per pupil in primary education than per pupil in secondary information. This is consistent with the finding that returns to primary education are higher than those to secondary education and tertiary education. But it’s differing from the Western development experiences where they first realised universal primary education. In developing countries the educational systems are characterised by increasing enrolment in secondary and higher education long before realisation of universal primary education.


But this empirical information only contains the formal education. There’s also something as non-formal education and informal education. Non-formal education contains all forms of organised education that are not included in the regular schooling system such as adult education, literacy projects, health education, education for family planning and so on. Proponents of non-formal education believe that it is more suited to practical everyday needs and requirements than formal education. Informal education contains the lifelong process of accumulation of knowledge and skills, through experiences in daily life.


There are also new opportunities for education created in the form of distance learning, because of the rapid advances in information and communication technologies. By using distance-learning techniques you can range dispersed students in rural areas which cannot adequately be served through traditional formal schooling institutions. In developing countries such as Indonesia, Mexico or South Africa hundreds of thousands of students are involved in distance-learning programmes. Another major opportunity lays in radio and television that can be used for new modes of education, teaching and dissemination of information.


The conclusion that derives from the previous information is that developing countries are engaged in a process of educational catch-up. They have succeeded in decreasing their dependence on foreign teachers and educators by training their own educational staff.


In the light of the unfavourable initial state of education after World War II, the educational performance of developing countries is quite impressive!



Shortcomings in the educational system

Shortcoming in the educational systems of developing countries became more and more visible after the mid-1970’s. Authorities in developing countries paid little attention to educational content in their enthusiasm for creating new educational facilities. The following of the most important deficiencies in educational systems can be recognized: see next page

  • Discrepancies between educational needs and financial resources. The demand for education continued to increase but the educational expenditures couldn’t keep up with it. This is especially a problem in South Asia and Sub-Saharan Africa where growth in numbers of pupils enrolled has outpaces growth of educational expenditures, sometimes leading to declining expenditures per student. This gap between the demand for education and the available resources is expected to widen even further, because of a drop in the dependency rates that ease the pressures on the schooling system. But increasing the provision of education is not only a question of more funding but also a question of increased effectiveness. In Sub-Saharan Africa there are relatively high unit costs compared to other regions and they could increase enrolment and improve education by increased effectiveness.

  • The low quality of education. In developing countries classes are very large, with class sizes sometimes even reaching extremes of 70 to 100 pupils. Teachers are underpaid and the training of teachers is also insufficient and their motivation is low. Teaching materials are of poor quality, if available at all. Sanitary conditions are frequently unspeakable. This can partly be explained by the responds of educational authorities on the budget squeezes by the government. They respond in increasing the size of classes etc. These cutbacks primarily affect primary education.

  • The lack of relevance. The educational systems set up in developing countries were merely copies of Western educational models. The content of education was Western-oriented and as a result of that little attention was paid to the indigenous history, culture and society. People learn to look down on their own culture at school. And as a result they become more alienated from their own social background as they become more successful in their educational career. So the challenge is to develop educational systems that are both relevant to the life situations of people in developing countries and provide meaningful entry into the modern international world of science and technology. This means more attention to agriculture, because the insufficient attention to agriculture is one of the most important shortcomings of education in developing countries. The majority of students in the least-developed countries will spend the rest of their lives in an agricultural or rural environment. There also has to come a more practical orientation of education, with more emphasis on vocational training, work experience and the already mentioned agricultural content. An opportunity to relate both the form and content of education to the immediate needs and problems of students is offered by non-formal education. Non-formal education has to be seen as a supplement and support for formal education.

  • The unequal access to education. There are great differences between urban and rural areas. The educational participation and the quality of education, in rural areas where schools are scarce, lag far behind those in urban areas. There are also great differences between male and female participation. In secondary and higher education female participation lags far behind that of males.

And in a study of the educational development in Spain there was found that regions where male-female differentials in education were smallest the growth of income per capita was rapidest. But in the past twenty years there’s an increase in female participation in all cycles of education.

  • The mismatch between education and the labour market is one of the most important points of criticism. Already mentioned was the almost non-existence of agricultural education. Also almost all developing countries have extensive academic unemployment. And many of the highly qualified doctors, experts and scientist from developing countries are moving to rich countries (the so-called ‘brain drain’).

This means that a large scale of scarce resources is wasted on investment in higher education which could be invested much more productively in primary education. As one of the most important recommendations applies that you have to give higher priority to primary education! The orientation of education is also still too much too the humanities and social sciences rather than to technical, scientific and agricultural disciplines. In these areas the services of expatriate experts are still often called upon.



The importance of literacy

One of the essential outcomes of the educational process is literacy. In pre-literate societies, families were the main vehicle of transmission of knowledge and skill to successive generations. As the task of transferring knowledge and skills shifts from families to formal educational institutions in ongoing processes of social differentiation, literacy becomes more and more important. You can distinguish the following reasons to strive for literacy:

  • Literacy can lead to social participation

  • Literacy can lead to increasing economic productivity

  • Literacy can lead to cultural education, the realisation of humanist goals and to personal awareness

Because of the major importance of literacy the United Nations organisation for education, science and culture started the Experimental World Literacy Programme (EWLP). One million students participated in the EWLP but on balance the programme turned out to be a complete failure. The following lessons can be learned from it:

  • Literacy programmes are most likely to be successful for people who need literacy in their daily life. The context of acquiring some other skill to which literacy is incidental is of great importance in effective learning

  • Literacy requires that reading materials continue to be available after completion of the literacy programmes

  • The teaching materials should be anticipate to the students environment and interests

  • Literacy has to be seen in integration with other subjects and not in isolation from other subjects. Literacy training should be linked with subjects of strong immediate interest and concert to particular learners


But if people can be motivated to participate in literacy programmes, impressive result can be achieved! When you look at the content of table 7.7 (see page 248) you can see that since 1946 the percentage of illiterates in the population aged 15 years and over has declined sharply in all countries and especially in Latin American countries.


The declines in illiteracy in developing countries have been striking. The decline in illiteracy in developing countries is much more rapid than previously in European development.


Political functions

Education has also political functions that are also of great importance. Education was expected to contribute to state formation and the creation of a national identity in developing countries. They hoped that it would contribute to a sense of national awareness and political integration. Education was regarded as a means to achieve political mobilisation and increased social consciousness. In practice the results are not unilateral. Under certain conditions it can contribute to a sense of national identity. But it can also have very divisive effects. As an example of this you can emphasise India, where education strengthened feelings of regional identification.



It also may undermine the loyalty of under-represented groups to national institutions. And unemployment among the educated in particular is frequently a politically destabilising factor.


Educational policy

In post-war developing countries educational policy was based on the following various educational ways of educational planning:

  • A planning based on the social demand for education. This planning was based on the numbers of student who enrolled in various kinds of education in the past. The over-expansion of secondary and higher education was to some extent due to planning on the basis of social demand

  • A planning on manpower is determined by the social need for employees with different kinds of education. In practice the results of manpower planning are very disappointing. It seems to be impossible to predict the demand for various categories of employees more than two or three years ahead. Changes in the educational system take years to be realised, so the situation may well have changed by the time new graduates come onto the labour market. Also the costs of education are ignored

  • A planning on the basis of cost-benefit analyses, so you can compare the returns on investment in education to the returns on investment in physical capital stock. But in practice the calculation of the costs and benefits is difficult as already mentioned in the enumeration of criticism of the human capital theory


This chapter ends with a list of the most important recommendations that will dominate the educational debate in the coming years:

  • Almost unanimously there’s argued for expansion and improvement of primary education in developing countries. The achievement of universal primary education is one of the key goals of international educational policy and has to be realised by 2015. Also growth of educational enrolment in secondary and higher education should be limited in order to prevent overschooling and academic unemployment.

  • The needs of the labour market should be a more centralized point in education

  • Subjects that are relevant to the rural population should get more attention in primary schools in rural areas

  • Technical subjects and the natural sciences should get more attention above the humanities and the social sciences

  • On the labour market educational certificates and diplomas should receive less emphasis results in overschooling

  • More attention has to be paid to the form and content of examinations

  • The teaching staff has to get better payments and additional training for quality improvement

  • Non-formal education has to be seen as a supplement and support for formal education and should be further developed in close relationship with formal primary education

  • There has to be a reduction in gender inequality. This has been adopted as one of the key targets of international educational policy for 2015


Chapter 8: Structural transformation



This chapter is about the structural transformation in the process of economic development.

We start with a brief discussion of capital accumulation and the connections between capital accumulation, structural change and industrialisation.


The term ‘capital’ has two different meanings. In its concrete sense the word capital refers to the physical sock of machines, implements, buildings and devices used in the process of production. In its financial meaning the word capital refers to a hoarded amount of financial means and securities. We are mainly interested in explaining growth and therefore we are primarily interested in the growth of physical stock of capital per person employed.


Capital accumulation is only possible if people are willing to refrain from present consumption in order to free resources for investment in future production (the so-called savings). In some countries the financial system of banks, financial institutions and money circulation is not well developed and therefore there are hardly any differences between saving and investing. So having well-functioning financial institutions and markets is of major importance for economic development.


The relationship between capital accumulation and industrialisation is primary that capital accumulation is used for investment in industrialisation. By example in the service sector they invest in building, computers and telecommunications equipment. Nevertheless, when you look at economic history it was the concentrated nature of factory production, which offered and still offers the greatest opportunities for capital accumulation and increases in the scale of production. In the Western capitalist economies the dramatic increase in labour productivity and income per capita is primarily the result of processes of capital accumulation and associated processes of technological change in manufacturing. Capital accumulation is a dynamic process, which not only consist of more capital goods, but also of incremental and radical changes in production techniques. You can conclude that the growth of capital stock it’s the prime explanation for the growth of per capita income in the advanced economies between 1820 and 1998.



The definitions

You can distinguish and define a couple of sectoral distinctions that are summarized below:

  1. The primary (includes the food production, mining etc.), secondary (includes manufacturing and transformation of primary goods etc.) and tertiary sectors (includes services, finance, transport etc.)

  2. Agriculture (includes agriculture, fishery etc.) versus industry (includes mining, manufacturing etc.). Agriculture is much more labour-intensive and industry is more capital-intensive

  3. The traditional sector (includes informal manufacturing, informal services etc.) versus the modern commercial sector (includes modern industry and commercial, commercial agriculture etc.). The modern sector compared to the tradition sector is characterized by a monetary economy, production for the market and higher levels of productivity and technological sophistication

  4. The rural sector (includes rural industry, rural informal sector etc.) versus the urban sector (includes urban industry, urban informal sector etc.).

In the urban sector the industrial activities are of more importance, whereas the agricultural sector is of more importance in the rural sector


And in this chapter the main focus is on the distinction between agriculture and manufacturing and the relationships between them in the course of economic development.



The term structural change is already mentioned in previous chapters as of major importance in economic development. It means that factors of production are transferred from the agricultural sector, to the industrial sector and more lately to the service sector. The underlying idea is that productivity per person is much higher in the industrial sector and the service sector than in the agricultural sector. Also of major importance are the economies of scale. Economies of scale means that you can produce more efficiently in large-scale mass production processes that you mostly see in industry, than in the decentralised small-scale production units that you mostly see in agriculture. As predicted by the theory of structural change; modern economies are now predominantly service economies. But developing countries can’t simply copy that earlier path of development in advanced countries. This is because of two differences:

  • The service sector have expanded earlier in developing countries, alongside the industrial sector, whereas in advanced countries it followed after the expansion of the industrial sector

  • The Western countries were the first to industrialise. Meanwhile the world has changed in a highly competitive world economy dominated by giant industrial corporations and powerful advanced economies. For developing countries as latecomers it’s hard to take against such competitors


The following arguments in favour of industrialisation can be mentioned:

  • The overall correlation between economic development and industrialisation. You can see that all of the advanced economies are more industrialised than developing countries. You can also see that the more successful developing countries are those which have been able to industrialise

  • As already mentioned above, in the industrial sector the productivity is higher than in the agricultural sector (the so-called ‘structural chance bonus’)

  • You can mention special opportunities in the industrial sector such as increases in the scale of production, the accumulation of capital and advanced in technology. There are also important spillover effects in the industrial sector to other sectors

  • The Engels law, which means that the lower the per capita income of a country, the larger the proportion of that income that will be spent on basic agricultural foodstuffs. Or vice versa, if per capita incomes increases, there will be a tendency towards a higher demand for industrial products

  • You can recognize strong linkages in industrialisation that are weaker in agriculture. When you invest in one branch of manufacturing this can have an overall positive effect on other branches of the economy


Open and closed models of the economy

There are important differences in economic development in an open model of the economy or in a closed model of the economy. In a closed economy there is no foreign trade. So if a country wants to invest then all savings need to be earned and mobilised within the boundaries of the domestic economy.

This means in the case of industrialisation that the initial resources for industrialisation can only be forthcoming from the agricultural sector. It’s a so-called ‘two sector model’, where the output of one sector has to be absorbed by another sector. And an important issue in this is the balance between the sectors in agriculture and industry. In an open economy there is foreign trade. Agricultural exports can earn revenues and foreign exchange, which are potentially available for reinvestment in the industrial sector. Because of this extra revenues and because gaps can be filled with imports there is less need to focus on the balance between sectors in an open economy. But still a transfer of resources from agriculture to industry has to take place during the initial stages of industrialisation. So the export profits from agricultural exports are reinvested in industry.


This open model can be used for an analysis of economic development in developing countries from the mid-19th century to 1929. In this period most of the developing countries started their modern economic development by exporting primary agricultural and mining products. The closed model can be used best for an understanding of industrialisation strategies in the period 1930-1985. In this period developing countries tried to reduce their dependence on international trade and primary exports, by replacing manufactured products imported from abroad by products manufactured at home.


A multiple discussed question is the one: is the agricultural sector a stagnant or a dynamic sector? The model of ‘economic development with unlimited supplies of labour’ of Arthur Lewis is a model in the view that the agricultural sector is stagnant and characterised by low productivity and low potential. As a consequence the industrial sector, the dynamic sector, should be developed as soon as possible. His model states that labour can very simply be withdrawn for agriculture with little or no loss of food production. This labour can be employed more productively in industry and the construction of infrastructure.


A more dynamic view, and a more empirically supported view, of agriculture emphasis that a productive and flourishing agriculture is a precondition for successful industrialisation. There has to be increases in productivity in the agricultural sector to produce a surplus over the subsistence needs of the agrarian population. Then this surplus is available for the process of industrialisation. This is shown in the history of the European industrialisation, where increases in agricultural productivity preceded industrialisation.


And what’s the role of the service sector in this process of structural change? According to Marxists the service sector is inherently unproductive. Services like hairdressers, restaurant, medical services and government services are inherently labour intensive. And therefore there is no way to increase productivity of these activities through automation or the use of capital. But more recent research provides a more positive picture. Also the service sector can make valuable contributions to the process of industrialisation. Services and manufacturing can be seen as reinforces of each other. Nowadays by example the financial system is seen as a vital factor in economic development. Also at early stages of development, the emergence of communication, transport, trade and financial services is one of the prerequisites for industrialisation. So Marxists maybe true for hairdressers etc. but not for mobile telecommunication, financial services or distance learning.


In developing countries the service sector expanded almost together with the industrial sector. But this increase in the service sector is mainly an expansion of employment in the government bureaucracies and the public sector. And there a good reasons to question the productive contribution of the government sector in developing countries.


The role of agriculture in the early stages of development

The role of agriculture in the early stages of development can be shown by distinguishing the following important contributions:

  • Agriculture as a source of food for a growing non-agricultural population. In developing countries the population is growing very rapidly and poor people tent to spend a large part of their additional income on food

  • Agriculture as a source of industrial labour. To create an urban industrial labour force, labour has to be withdrawn form the agricultural sector

  • Agriculture as a source of domestic savings. The agricultural sector provides the necessary savings for investment in industry and infrastructure

  • The agricultural sector as a market for industrial products. An increase in agricultural incomes will create a market for industrial products

  • Agricultural exports as a source of foreign currency. The most likely source of foreign exchange earnings are the agricultural exports and other primary exports. This foreign exchange earnings can be used to finance imports of the capital goods and intermediate goods required for industrialisation




You can distinguish the following contribution of manufacturing to the agricultural sector:

  • The industrial sector provides the agricultural population with consumer goods. By acquiring industrially products the rural population has the possibility to increase its production

  • The agricultural sector has an urgent need for industrial inputs. There are technical complementarities between the two sectors


The relationships between agriculture and industry can be seen in the following historical examples:

  • In England and Western Europe there was a productive agricultural sector that proved a sound basis for industrialisation

  • In Argentina, Australia, Canada and the USA the initial conditions in agriculture were extremely favourable. They were able to realise high labour productivity in an early stage by employing much capital per worker. The by the agricultural sector produced surpluses were exported, and the revenues were available to finance industrialisation

  • In Russia there were also relatively favourable initial conditions. But because of large landowners that made high profits, the output realised was less than it would have been if smaller farmers had been allowed to work the lands more intensively


A conclusion on this topic is that increases in output and productivity in the agricultural sector at the early stages of development creates favourable conditions for the development of industry.


Primary exports

One of the most important theories about the role of primary exports in development is the theory about ‘comparative advantage’, already mentioned in chapter C. How this theory works can be shown by table 8.3 on page 277.


When you look at ‘terms of trade of food and clothing without international trade’ you can see that using one day of labour, without trade, country A can produce either one unit of food or ½ unit of clothing. And country B can produces either one unit of food or ¾ unit of clothing. In this example, country A is more efficient in absolute terms than country B in the production of both goods (the required labour days for production of food and clothing are both lower). However in relative terms one gets less clothing per unit of food in country A (half a unit of clothing for one unit of food) than in country B (three-quarters of a unit of clothing for one unit of food). So country A should specialize in producing food and country B should specialize in producing clothing, because they are relatively more efficient in producing those commodities.


This means that with trade country A can produce one unit of food, which can be traded for three-quarters of a unit of clothing (see that this is more than the half a unit of clothing which one can get without trade). Country B can produce one unit of clothing, which can be traded for two units of food (again see that this is more than the one and one third units of food it would get without trade). The conclusion that arises from this theory is that specialisation and international trade is profitable for both countries. Also specialisation in production often gives economies of scale, which make production even cheaper.


The Heckscher-Ohlin-Samuelson theory emphasis that countries with surplus of labour and a scarcity of capital will produce labour-intensive products relatively cheaply and will have a comparative advantage in such products. Of course vice versa applies that countries with an abundance of capital and a shortage of labour will have a comparative advantage in capital-intensive products.


An argument against following comparative advantage in the long run is that in the long run it reinforces existing patterns of production and specialisation. By example, if developing countries have a comparative advantage in a limited number of primary products, these countries may for ever remain dependent on them. The possibility of importing industrials products relatively cheaply from abroad makes it difficult to build up a domestic industrial sector, so a developing country may never industrialise.


But in more positive versions the agricultural exports leads to an increase in per capita income, agricultural exports generate savings etc. And to protect the low-developed industry the government has to come up with import-substitutes. In this way developing countries have the possibility to achieve an industrial sector.


In the period 1870-1913 there was a growing demand for primary products in industrialised countries. This led to an explosive growth of exports of cash crops (cotton, coffee, tea, rubber etc.) from developing countries. The term ‘vent for surplus’ was used to characterise agricultural exports during this period. In the beginning peasant produce food crops for their own needs. But because of the new opportunities that arise from this growing demand, workers used surplus time and land to cultivate new crops without reducing their subsistence production of food crops. So unused factors of production are now employed for the first time. But not all countries benefited so much from these new opportunities. The factors that explain why some countries benefited so much more that others from the new export opportunities according to Arthur Lewis are the following:

  • Establishment of internal law and order

  • Availability of surplus land

  • Access to surplus land

  • Availability of water

  • Government policy


The most rapid expansion of exports was to be found in countries with abundant land and large-scale immigration, such as Malaysia and Brazil. Also countries with sufficient land and surplus labour, such as Thailand, Colombia and Ghana, showed rapid expansion of exports. In countries such as India and Java the slowest export growth could be observed, because of the scarcity of land. Also in countries where the government left monopolies in landownership unchallenged such as Venezuela and the Philippines there was slow export growth.


It seemed that there were quite favourable initial conditions for investment in industry and infrastructure, but why was the industrialisation so disappointing? Only a few countries such as Brazil and Colombia experienced some measure of industrialisation. The most important answer lies in the overwhelming profitability of agricultural exports, according to Lewis. Agricultural exports were such an easy alternative that the incentive to start the difficult process of industrialisation was not very great. Another reason was the power and influence of foreign trade houses and agricultural oligarchies that resisted attempts and industrialisation. A last reason according to Lewis is that it takes at least one generation to grow a class of domestic industrial entrepreneurs in a country without an industrial tradition. So basically it was the comparative advantage that locked developing countries into their specialisation in primary exports. Other authors mentioned the opposition of colonial authorities to industrialisation and the destructive impact of international competition on traditional handcraft industries. Instead of impeding industrialisation, governments could have protected domestic industries and could have invested more in infrastructure and education.


So to summarize the potential benefits of primary exports as an engine to growth you can mention the following:

  • Primary exports lead to improved utilisation of existing factors of production by using unused factors of production for the first time (so-called ‘vent for surpluses’) and by making more efficient use of available production factors (so-called ‘static comparative advantage’)

  • Primary exports have dynamic comparative advantages such as: increased supply of production factors, inflow of investment, growth of market size, increasing returns to scale and exposure to international competition

  • Primary exports are an import source of foreign exchange

  • Primary exports can have positive linkages with other sectors of the economy. There are forward and backward linkages, consumption linkages and fiscal linkages. In this case forward and backward linkages mean that primary exports provide a positive stimulus to the establishment of industries that process primary agricultural and mining products. In this case consumption linkages means that incomes earned in export production may be spent in the domestic economy. And in this case fiscal linkages means that taxes on mining and agricultural exports are an important source of government revenue


Pessimism on export

The effects of the Great depression (in the 1930’s) were that the developing countries that were most involved in the international economy through primary exports suffered most. This led to export pessimism along a lot of people. The main arguments of the export pessimists are the following:

  • Stagnation world demand for primary products, because when incomes rise, the share of food consumption in expenditure tends to decrease. And with regard to the non-food agricultural exports; technological progress dramatically reduces the amount of raw materials used per unit of output, so there’s less to export

  • Deteriorating terms of trade for developing country primary exports, means that prices of primary exports fall relative to prices of imported industrial products

  • Drain of mining profits to advanced economies, because most of the mining and oil extraction were foreign-owned

  • Instability of prices and export earnings owing to fluctuations in international trade takes place when developing countries export a limited range of primary products. Prices of primary products are also highly unstable

  • Weak and ineffective linkages in primary production, because mines and plantations are often isolated from the rest of the economy

  • Stagnating food production, because the production of cash crops is going to replace the production of food crops. Traditional food producers lose their land to capitalist export farmers. And as a result the local population will become more impoverished

  • Primary exports lead to overvalued exchange rates (so-called ‘Dutch disease effects’). The ‘Dutch disease effect’ is named after the economic impact of the discovery of enormous gas reserves in the Netherlands. This may lead to the appreciation of the exchange rate. And this higher exchange rates make exports more expensive and imports cheaper


So when you look at the net barter terms of trade (see table 8.4, page 291) you can in general conclude that in the long run there is a clear net downward tendency during the period 1950-2000. But there are countries that experienced long-run improvements in their barter terms of trade like India, China, Taiwan, Brazil and Morocco. In table 8.5 (page 292) the income terms of trade for a couple of countries can be seen. In the long-term this table shows a sharply increasing trend in the income terms of trade in the developing countries.


But the share of developing countries in world trade in primary products has decreased during the last decades. The share of developing countries in global primary exports fell from 63 per cent to 48 per cent. A major reason for this is the agricultural protectionism in the rich countries. Another reason for this tendency is that developing countries neglected their agricultural and mining sectors.


Developing countries could have maintained the volume of their exports if governments in developing countries had taxed export production less heavily and had invested more in infrastructure and improvement of production techniques in agriculture and mining.


So even though the barter terms of trade may be declining, gaining larger shares of primary export markets could contribute to foreign exchange revenues, which can play a role in overall economic development and structural change.




So present-day policy nowadays mainly focus on the following points:

  • Reducing domestic disincentives for export production

  • Increasing diversification of primary exports to reduce a dangerous dependence on one or two primary products

  • A reduction of agricultural protection in the advanced economies



Chapter 9: Industrial development



This chapter is about industrial development in developing countries since 1945. In the 19th century the industrial revolution started. It led to dramatic changes in the structure of the world economy and to an increasing labour productivity and economic welfare. Whit Great Britain as role model, the race for industrialisation had begun. The focus was on transfer of resources from agriculture to the industrial sector.


Large-scale industrialisation

Following in the footsteps of Marx, Lewis studied the process of capital accumulation in a closed two-sector model. According to Lewis, labour is the abundant factor in densely populated developing countries leading to low wage levels that in turn would lead to high profits and rapid rate of capital accumulation. Marginal productivity was close to zero. If the modern capitalist starts offering wages that exceed the wages in the traditional sector, cheap labour flowed to the modern sector what would lead to migration of people.

Because marginal production is close to zero, the migration of workers from agricultural sector to the modern sector would lead to an increase of productivity of those who left behind and won’t lead to a lower level of production.


Low labour wages lead to high profits for owners of capital. When profits are invested in capital goods industrial production would increase. Profits should then not fitter away on luxury consumption by elites. In figure 9.1 the Lewis model, Economic development with unlimited supplies of labour is summarized. If there is unlimited supply of labour and a shortage of capital, workers from agriculture sector could work to create infrastructure. The government could mobilise funds for investment in industry by taxing agricultural sector or order the central bank to print money. The model shows that resources can be transferred at very low cost. Further more, the subsistence levels of consumption in traditional agriculture determine wage levels in industry.


The Harrod-Domar model assumes that labour can not be substituted for capital and that capital is the scarce factor of production. The only thing that matters is the rate of investment in capital stock. Capital-output ratio: the ratio between capital and output. From the model follows that at least 12 per cent of national income should be invested or saved to reach a growth of per capita income of 2 per cent per year (capital-output ratio >3).

In a closed model of development the agriculture is the only possible source of saving. This savings are required to attain the target rates of growth. Capital is the scarce factor and therefore the main bottle neck in development.


In the closed model, income inequality increases because of the process of accumulation. The profits are for the entrepreneurs and capitalists in the modern sector who are able to save and invest the profits productively within the domestic economy. Poor people have to consume their incomes. According to Lewis inequality only starts to decline once labour becomes scarce and wages start increasing in later stages of development. The ‘inverted U-curve hypothesis’ of Kuznets implies the same. In later stages of economic development inequality would decrease.


This is due to demographic factors such as: increasing scarcity of labour, democratisation and the rise of trade unions and political lobby groups in the modern sector of the economy. This effect does vary from country to country. Inequality will contribute nothing to the economic development when profits fitter away in luxury consumption or are put in deposits in a Swiss Bank, this would only lead to more misery for the poor. Some studies show that countries grow more rapid when the income inequality is lower.


Now let’s turn to an open economy. The role of financial flows from abroad can be explained by the two-gap model of foreign finance. The first gap is the saving gap: it’s an indication of required inflow of foreign capital. It is the difference between saving needs by national plants and the savings that can actually be mobilised. Developing countries also have a shortage of foreign exchange for imports of industrial capital good and materials that are used as imports for industrial production. The second gap is trade gap. It’s the difference between the value of exports and imports. In the long run the need for foreign finance will decrease. A third gap could be added, the technology gap. Technical assistance is necessary to make use of the imported capital goods. A supply of technical assistance would lead to increased technological capabilities and a reduction in the technology gap.


There are three post-World War II industrialisation strategies (orthodox), large-investment, and government planning and import substitution. They are closely related. By balanced growth is meant activities that are necessary to industrialise would have to be undertaken simultaneously to reinforce each other.



1. Arguments in favour of large-scale industrialisation.

The assumption is that only a big investment push can lead to a per capita income growth that exceeds the growth of the population. Important arguments pro this statement are the complementarity arguments (Higgins, Myint).

  • Complementarities in demand: Many factories should start at the same time, then the wages paid to workers are sufficient and purchasing power will increase, only then there will be sufficient demand for all factories together.

  • Complementarities with infrastructure: Investments in infrastructure (large scale) are necessary for the production and exploitation of consumer goods.

  • Complementarities in production: this is explained by vertical linkages. Expansion of output of one industry creates demand for inputs from other industry (backward). And the other way around, its outputs are used as input for other industry (forward).


Big Push: large investments in modern sector, i.e. infrastructure, consumer goods industry etc. need to take place at the same time.


2. Arguments in favour of planning and intervention

The Soviet Union succeeded in achieving accelerated industrialisation by central planning and started to become a role model for other countries. Only the government could effectively coordinate all necessary activities of large-scale industrialisation. Many investments might be underexploited in the market. i.e. nobody would invest in infrastructure because it is not profitable in itself. Further more, there is a lack off active entrepreneurs. The required investments are so large, that only a government could mobilise sufficient resources. It follows that central government planning is necessary by investing in parastatal enterprises and by coordinating activities of private entrepreneurs through extensive regulations.


3. Arguments in favour of protection and import-substituting industrialisation

After WW II and colonial division, developing countries needed to become more self-reliant. They would then become less dependent on imports and international trade. Protection was seen as to be necessary. Effects of protection: domestic prices increase so profit for industry will too. It becomes more interesting for foreign companies to invest, because the market is protected. Nominal protection: tariffs on final products affect the prices of industrial outputs. Effective rate of protection: difference between input and output prices is usually much higher than the nominal rate of protection. Further more, the government could make use of overvalued exchange rates and subsidies to make intermediate inputs cheaper. Primary import substitution: replace imported consumer goods by domestically produced goods. Secondary: substitute imported intermediate and capital goods by domestically produced intermediates and capital goods. Infant industry argument: protection provides new firms time to expand the scale of their production and achieve economies of scale and become more efficient and productive through learning by doing. The chance the new enterprises will survive the international competition increases.


The three strategies described above have in common: large scale, emphasis on capital as the scarce factor in development, priority of industry over agriculture, faith in government planning and regulation, and protection of the domestic market. There are some arguments against the orthodox industrialisation strategies.


Shortcomings of orthodox industrialisation strategies

A shortcoming of the Lewis model is that when too much labour is permanently withdrawn form the agricultural sector, the output does stagnate. According to Lewis labour can be withdrawn from the sector without any loss of food production (costless development). Total food output will decrease when somebody leaves the sector, unless people are start working harder. They will work harder if they could sell their surpluses at reasonable prices at the market and extra profits are invested in new industrial products. According the industrialisation ideology surpluses should be transferred to urban economy. When the traditional sector is too heavy exploited, they won’t produce surpluses voluntary. Further more, increase in labour in urban-industrial sector involves all sorts of additional costs i.e. cost for housing etc.

A second shortcoming is that the modern sector has proved to be unable to absorb the inflow of labour from the rural sector, which leads to i.e. urban unemployment. According to Lewis low wages and high investments would eventually absorb surplus labour; this is not what happens in most developing countries.


The focus of post-war strategies was on investments and savings. But is this really so important? Not all investments turned out to be effective and efficient. The capacity to absorb investment varies widely between countries. Variation is due to difference in efficiency of government, corruption, political stability etc. Critics also argue that there is a lack of sufficient productive investment opportunities.

Is large scale investment really so important? Isn’t it more important to select profitable investments? Myint summarizes critics on balances growth strategies:

  • Complementarities in demand: The efficiency of investment is at least as important as the scale of the investment.

  • Infrastructure: investments do not have to be necessary large scale. There is always some infrastructure present.

  • Big push: this strategy denied that resources are scarce, most of the time they need to choose between alternative options on the basis of costs and benefits. Also, the greater the scale, the greater the risk. It also puts very heavy demands on administrative capabilities of weak governments.


A shortcoming of import substitution is that it would lead to inefficiencies when the path of protections is followed too long. Import substitution:

  1. Promotes survival of inefficient firms.

  2. Reducing import dependence is seldom realised, because they need to import technology for building up their own capital goods industries.

  3. The size of the domestic market might be too small to achieve economies of scale.

  4. Domestic monopolies may come to exists, which leads to higher prices.

  5. Domestic distortions are result of tariffs and quotas, also higher prices for fewer goods.

  6. Corruption because rent seeking firms see possibilities for corruption because of regulations.

  7. It’s better for a country to focus on producing what it is best at instead of producing everything under one roof.


Urban industrial bias: favouring industry over agriculture and cities over countryside’s. Because of protection industries could obtain their capital goods too cheaply, so production become to capital intensive and this leads to insufficient employment. Inefficient factories suffered from idle capacity, and the sector remained dependent on imported intermediates, capital goods and technology. Factors that did have a stagnating effect on agricultural production are: the sector was highly neglected, overvalued exchange rates, heavy taxes on revenues and under developed credit facilities for rural sector. Stagnation of agriculture slowed down industrial development. Therefore a more healthy balance is necessary.


Alternatives to orthodox industrialisation strategies

Alternatives for the orthodox industrialisation strategies are: the strategy of unbalanced growth, the balanced growth path, promotion of small-scale enterprises, labour-intensive export strategies and deregulation, privatisation and liberalisation.


1. Unbalanced growth

According to Hirschman it is impossible to draw a list of conditions necessary for development and growth, because there are always alternative ways and the presence of factors does not necessarily result in growth. Entrepreneurship and economic initiative is crucial for development, but economic opportunities are necessary to motivate entrepreneurship. Investments in key sectors cause dynamic tensions, shortages and imbalances, which call for entrepreneurship and investments. Growth sets positive virtuous circles in motion. Hirschman distinguishes between forward and backward linkages in economic activities. The strength and importance of a linkage is important. i.e. infrastructure may facilitate growth of an industry. It is an important one, but not a strong one. A country with no industry can only start with producing consumer goods industries delivering to final demand. This leads to two different industries: transforming domestic products into consumer products or transforming imported semi-manufactured goods in to final consumer goods (enclave-import). Modern authors focus more on spill over between sectors.

The theory of Hirschman focuses more on entrepreneurship and private initiative. The government role is to identify key sectors for investment and the maintenance of imbalances, so there is a shift to a market approach.


2. Balanced growth path

This theory is discussed in chapter 8. This approached states that there is a need for a balance between evolving broad sectors of economy, an emphasizing the need for the agricultural sector. This is still very much a closed economy approach.


3. Medium ands small-scale enterprises and the urban informal sector

To adapt better to conditions in developing countries, smaller enterprises and appropriate small-scale technologies are promoted. The large-scale manufacturing sector in today’s developing countries is unable to provide a flow of labour from agriculture with sufficient paid employment. The small-scale initiatives could play an important role in developing domestic technological capabilities. Todaro argues that the attractiveness of a job in the moderns sector is great. People will come to the city and are willing to wait a long time for a job.

Lewis gives explanations for the urban unemployment. The first reason is the gap between urban and rural income levels. The second is increasing levels of education, which is responsible for higher expectations. Finally, government expenditures i.e. healthcare are concentrated in urban areas.


People have to make some money to survive, that’s way in developing countries there is a large informal sector. The firms are non-registered and have no formal ownership rights, legal status or protection. Government policy could decrease the informal sector by provide cheaper credit, management know-how, upgrading of skills etc. According to Soto the sector is very vibrant but under capitalized.


The government could encourage the small-scale sector by reducing discrimination between large- and small-scale. Cooperation between firms should be encouraged, so scale would increase. Obstacles facing informal sector activities should be reduced, i.e. lack of legal protection should be reduced.


4. Export-oriented industrialisation

This strategy promotes a more open model of economy. A country should specialise in those products in which it has a comparative advantage. These products then could be exported. Labour is the abundant factor in developing countries. East Asian economies were the first that were export-oriented, today many countries turned to this strategy. Export-oriented policies make more firms take an international focus. The government could devaluate exchange rates, protection should be reduced and imports should be liberalised so that the entrepreneurs have more incentives and efficiency could increase. They can also support exporting companies. Successful countries en cities in export orientation are South Korea, Taiwan, Singapore and Honkong.


Two crucial turning points are: in the first place the shift towards export substitution. Primary product exports are replaced by labour-intensive manufactured goods. The second is the commercialisation point. Cheap unskilled labour becomes scarce, so economy must upgrade otherwise it will lose its momentum.


To be outward orientated a country should be open towards FDI by transnational operations. The book states that import substitution in the beginning is necessary for learning.


Countries with export orientation are no longer dependent on the size of their domestic market. They also make better use of their abundant labour resources. Critics on export orientation: they attract footloose industries, exploitative labour relations, lack of domestic sourcing, environmental damage and political repression. Further more, the question is whether the world market is large enough to allow other countries to follow the Asian countries. Despite critics, export orientated countries experienced substantially higher growth of industrial production. The choice between import substitution or export orientation depends to some extent on the size of the country.


Globalisation, FDI and the role of multinational companies in development.

If the share of services in advanced economies increases, developing countries export more manufactured goods to the advanced economies. Because of technological change transportation and communication costs decreased and the trend became globalisation of production. Competition between countries is more based on design, R&D, with outsourcing production, than based on the products. The raise of global production goes together with an increase in FDI. The FDI is absorbed by a limited number of countries. China, Brazil, Singapore and Thailand, and Mexico absorbed the most FDI. Most FDI took the form of mergers and acquisitions instead of Greenfield investments.


Product life cycle theory: new products are produced in advanced countries. When product becomes in a maturity stage, production will shift to developing countries.


Whit emergence of global production chains the nature of comparative advantage changes. Competition is more on production chains than on products. There is no save niche for developing countries. The extend to which developing countries could profit from transnational companies depends on domestic capabilities, i.e. quality of management and production capabilities etc. Advantages of FDI for developing countries are (advantages are highly concentrated in a small number of countries): increased competition, acquisition of technology and know-how, stimulus to local entrepreneurship and domestic supply and access to global markets, sales channels and brand names. Disadvantages might be: decreased domestic competition and reduced linkages because transnational source their activities abroad, and stifling domestic entrepreneurship.

According a report of UNCTAD, openness to FDI increases efficiency, manufacturing growth and economic development in developing countries.


Liberalisation vs. intervention

As stated before, regulation and planning created distorted economies characterised by massive inefficiencies. Washington Consensus: a policy package oriented to macro-economic stability, privatisation, elimination of intervention, cuts in government expenditures, increased openness to FDI and reductions of tariffs and quota. This proofed to be successful for the Asian Tigers. The changes are backed by powerful institutions like the World Bank and IMF.


Counter arguments neoliberal market orientation:

  • Neoliberals misrepresented how extensive intervention and protection was in the Asian NICS.

  • Protection of infant industry should actively promote acquisition of technological capabilities and technology learning.

  • For Sub-Saharan countries market reforms would fail. Governments would fail to invest enough in infrastructure i.e. Liberalisation proofed to end in market decline.

  • The Asian crisis strengthened the critics further.


So, there is some disagreement about national and international policies needed to allow developing countries to profit from globalisation. Still the importance of an outward orientation and participation in world trade should be emphasised.


Outcomes of the different strategies

After WW II developing countries increased their savings and investments. A substantial part went in to the manufacturing industry. Still, the results of industrialisation policies differ substantially between countries and between regions. In all regions growth increased till the oil crisis in 1973, after that growth slowed down.


At a conference of UNIDO in Lima 1975, they came to an agreement about global targets for industrialisation in developing countries. By 2000, the share of developing countries in total of the world production of manufactured goods should be at least 25 per cent. Nowadays an increasing part of developing countries’ exports consists of manufactures, but the progress has been concentrated in a relatively small number of countries (Brazil, Mexico, Argentina, China, India, South Korea, Taiwan, Singapore, Hong Kong, and Turkey).

Latin American industrial economies experienced great difficulties; this is due to the debt crisis and the continuation of import substitution. India suffered from considerable inefficiencies and low capacity utilisation. In Sub Saharan Africa, there was rapid growth of manufacturing output in the sixties. This was due to Import substitution, foreign private investment and low levels of regulatory control. Once protection was abolished, it turned out that many of the former state-run enterprises were so inefficient that they were simply not viable. Nowadays, Sub-Saharan Africa is in danger of becoming marginalised in today’s global world.


We can conclude that there is a need for more balanced policies which do not neglect other sectors of the economy and which pay more attention to the capacity of a society to absorb industrial investment and new technologies. There should be a balance between liberalisation and the role of governments.


Chapter 10: Food production and agriculture

Since the eighteenth century debate has taken place between Malthusians and anti-Malthusians. The first believe that the world’s population growth will be too large for food production to sustain and that not enough food and resources exist to support the population.

Optimists on the other hand believe that technological advances will be able to sustain the high population growth. This debate takes place on many levels but the conclusion of most macro-economical studies is that for the next half-century the production of food will be able to keep up with population growth.


Major tendencies in agricultural development:

  • The growth rate of agricultural productions and food productions have been more rapid in developing countries than developed countries since 1979-1981

  • Per capita production of food in developing countries has shone a gradual increase. This is contrary Malthusian beliefs.

  • Densely populated large countries (India, China) show an increase of per capita food production and are now self-sufficient in food.

  • Africa, Eastern Europe and former Soviet Union (SU) are the only areas where the population growth has not been followed by a sufficient food production increases.


Whilst food production is growing, since 1986 the production of cereals is declining. Cereals are 90% of the human demand for food, so a decline in its productions signals a shift towards other produce. In the developed world the number has actually dropped, while production is increasing in the developing world. Many claim that food production will drop because of the expansion of the production in export or cash crops. These crops use up the most fertile land, investments, labour and modern imports, therefore an expansion in cash crops can lead to a possible decrease in food production. In a dynamic agricultural system this isn’t the case; both food and non-food production can increase at the same time. There is no evidence that technologically the growth of food production cannot be sustained at a higher level than population growth, especially because the growth of population is slowing down(population is still growing yet not as quickly).



Even though most experts agree on this, there has also been criticism on the standardised methods of data collection, used by FAO. Anthropologist Polly Hill feels they have a number of shortcomings which lead to a wide margin of error in data and therefore qualitative statements should be preferred over quantitative data. In West-Africa and South India males are questioned about their productions, while it is usually the females who work on the land. Also people have many small plots of land, and harvest crops per amount needed or ready; both signalling that it is difficult to give exact production data. Also the people taking the surveys don’t have proper training, supervision and enough payment.

Recent studies support Hills view that agricultural growth in Sub-Saharan Africa isn’t that bad, as shown in systematic analysis of case studies. According to Szirmai these criticisms should be taken seriously because it underlines how small changes can largely influence data. But at the same time its conclusions are wrong. Szirmai believes that qualitative statements are too difficult to check in trueness, are based on too little data or case studies.

Statistical series are in his view a hypothesis that can be worked with at this moment based on most recent knowledge. They are ready to be replaced by a new and improved version at any time, and may never be considered conclusive statements.


Expanding agricultural production

Three sources of agricultural growth can be singled out:


  • Expansion of cultivated areas

Between 1961 and 2000 areas cultivated have increased by 11.2%, with South America leading with 69.7%. Since 1990 these rates have stabilized. But there is still a lot of land ready to be cultivated, currently only 56,5% of all potential agricultural land is being cultivated outside the humid tropics, and counting the tropics only 47.5% according to studies by Ravelle. Especially in South America, Asia and Africa ample land exists. These amounts are determined by several factors: climate (it must not be too cold), water presence and soil conditions. Especially water is often not available, as only 30% of land fit for agriculture has access to enough water. Also a lot of land is only fit for agriculture after huge investments have been made to prepare it for this. A different study shows even higher percentages, probably due to different measuring factors and that this FAO study measures arable land, and therefore capable of producing crops. This study also named Latin America and Africa as the regions with the largest amount of land that can be cultivated.


One must remember that cultivating land for agriculture means it cannot be used as pastures for animals, forestry, urban development, roads. A lot of this land is rainforests, of which the disappearance also has potentially negative effects. Biodiversity can decrease and lead to evolutionary threat. Because CO2 is stored in all the plants in the rainforest, decrease of this storage can lead to the greenhouse effect and global warming. But even though these negative effects are possible still 21% of growth in the next 30 years is set to be realised through the expansion of cultivated areas.



Deforestation occurs because of logging, collection of fuel wood and the expansion of agricultural land. 20% of the world’s original forests have been lost since the beginning of agriculture. Especially in tropical countries forests are disappearing at rapid rates. Deforestation is explained by the FAO as complete disappearance of closed or open forests, after which the land is used for different things. Biologists also use this term when the quality of forests decreases when it is also used for other purposes (but not necessarily completely disappears.) Rates of deforestation are not globally recognised as many argue the original forest cover and the current. Presently forests are said to decrease at 0.02% which will lead to a 12% reduction of our forests in 20 years.


  • Intensification of land use and the Boserups theory

Before the nineteenth century when population increased and further land cultivation wasn’t possible people would intensify their use of the land. Ester Boserup criticized Malthus’ ideas that growth of food production was limited by nature. She distinguishes six major vegetable food systems. When population increases, land must be used more frequently and can be left to fallow less. So human technology must replace what usually occurs during the fallowing period, namely preventing soil fertility exhaustion, prevention hillside erosion, controlling weed growth and limiting the spread of plant diseases and pests. Shifting to more intensive ways of using land means an increasing demand for labour, leading to more people working on the land or people working longer hours. Also when people need more land, less land is left over for cattle and game. These animals actually are not very productive because more energy in calories could be produced on the land, than the animals themselves produce. Boserup has systemised seven systems of food supply, that combine animal husbandry and intensification of agriculture ranked on density of population.

  1. hunting gathering systems

  2. (nomadic) pastoralism

  3. forest-fallow

  4. bush-fallow

  5. short-fallow with domestic animals

  6. annual harvesting with intensive animal husbandry (characterised by crop rotation)

  7. multi-cropping with little animal food


Between the 9th and 14th century a system of rotating between 3 courses of crops existed. After the industrialisation started the link between population density and systems of food supply became weaker. During the 19th century machinery and industrially produced chemicals were introduced in farming. Specialisation also took place. Currently in Africa and Asia individual ownership is taking the place of communal ownership. This reflects the enclosure movement of England of a few centuries ago.


Boserup in short

  1. Hard work is needed for intensification

  2. Humans have for centuries changed the world, thus rendering the natural environment not as “natural” as it once was

  3. A great input of labour is required for intensification to take place in agriculture

  4. In busy agricultural periods there are sometimes shortages of labour, thereby criticizing the idea of “disguised unemployment”

  5. Intensification had led to agricultural growth and new inputs can lead to further intensification

  6. The process of agricultural intensification often doesn’t start in countries receiving food aid and therefore this is a powerful disincentive for production

  7. When low population density exists this can be a setback for development as a certain density is required to support infrastructural investment.

  8. Over time every plot of land has produced increasing numbers of harvests per year and according to the FAO there is still enough possibility for further intensification.





  • Increasing the returns of harvest per hectare

Increased returns can be attributed to several factors, including mechanisation (which will lead to closer planting or more efficiency), irrigation, fertilization (chemical and organic), pest control (chemical or scientific) and developing new seeds with higher productivity.


Irrigation makes it possible for farmers to harvest more frequently per year and use land that otherwise wouldn’t be suitable for growing crops. Irrigation systems vary from traditional to very modern and in all regions, expect China, the intensification has taken place in irrigation use. Currently about 50% of developing countries have a form of irrigation in areas where it is possible. Because of these increases concerns exist whether the world’s fresh water supply will be large enough for agriculture and human consumption. An effect of the more intense use of land is that the quality of the land decreases. When one tries to increase the returns of land through fertilisation and irrigation soil degradation can take place. This can lead to desertification and soil degradation.

Desertification can occur through the doings of humans (increased density, wood collection for fuel) and climate conditions and makes land less fertile and able to produce sufficient harvests. It doesn’t necessarily make the land into a desert but it does become dry and semi-arid. Soil degradation can be seen as a part of this, but is not restricted to dry lands.

It means land is less fertile and has less organic matter, so can produce less returns. It’s quality drops enormously. This process can occur because of pollution, deforestation and overuse of fertiliser. A lot of agricultural land is affected by these problems but luckily the process can be reversed, even though this can be very costly.


Hayami and Ruttan: Models of agricultural development

Five models of development are signalled out by these scientists:

  1. The resource exploitation model; production is increased through expansion of cultivated areas. As the “vent for surplus” model shows farmers use uncultivated land where possible because of the increasing demand for primary goods. These uncultivated lands are limited. This model is too strict in the difference between cultivated and non-cultivated land.

  2. The conservation model; this models believes that all that is taken out of the earth in production must be put back in it, so it will remain fertile. Otherwise future production will be limited. This is not as dynamic as the Boserup model.

  3. The urban-industrial impact model; Schultz was the founder of this theory stating that in urban areas productivity, production growth and agricultural income are highest because products can be sold easier and expansion is stimulated. Hayami and Rutton have more faith in the spread of urbanization than in extremely large cities. This so-called decentralisation will lead to an intensification of linkages between agriculture and industry.

  4. The diffusion model; this model looks at the different levels of technological advance and production between different countries and within regions. It believes that regions that are advanced can help the developing regions through education on the technologies that have helped them develop. The negative side of this model is that it believes technologically advanced farming to work best at every circumstance, while the condition in tropical countries are often very different and local farmers often know best what works on there land, instead of experts from afar. Technology isn’t adapted to local conditions but to model farms.

  5. High pay-off input model; this model is also based on Schultz and is a combination of the above models (except the first). Highest returns on investments will take place when investments are in the field of agriculture, not industry. He believes that farmers act rationally and do the best that is possible given the circumstances. He believes that technological advances must be adapted to local circumstances and that the government should help with education and subsidies to use the new advancements. This can be through research centres, industrial activities that are geared towards agriculture and agricultural education.



Hayami and Rutton criticize the fact that Schultz’ model doesn’t pay enough attention to the process of institutional change and the direction of technological development. This development is influenced by among other the scarcity of the factors of production. Research institutions listen to the problems of farmers in a region and adapt those processes to these situations. But if the research system is inflexible, the induced technological development will be less influenced by the relative scarcity of production factors and what the producers need. Technological development is then not adapted to the region where it is, this process is similar to imbalanced growth.





The Green revolution

This so called “revolution” is based on technological advances in cereals which can possibly result in harvests with a higher yield. All the characteristics of this system come together in the fact that the are all intertwined and mutually beneficial, the system works best when all are present:

  • Plants are adapted to where they grow.

  • New systems and institutions are set up to support the revolution, such as delivery for seeds, credit institutions for loans.

  • Pesticides, fertilisers are industrial products, not natural.

  • Try to use as little land as possible, but are more focused on the possibilities of technological advances. Therefore many investments are made in these systems, such as for irrigation.

  • Effectively organised system

The system was successful after the 1960’s but with the success came criticism. The criticisms were based on several fields. First of all that the seeds didn’t produce as good a yield outside the test fields, they were only produced for ideal circumstances and very vulnerable to diseases and the weather. Secondly, these seeds led to a loss of genetic diversity. This diversity is very important as it secures the survival of plant types during calamities. As a third factor it was also claimed that the new harvests were less nutritious than the old ones. And finally the use of these seeds had negatives effects on the environment because the topsoil became eroded, water polluted and people had health problems because of the pesticides. In response to these criticisms several solutions were formed like gene banks, biological pest control, new agricultural research centres and developing plants that were more resistant to diseases so less pesticides would be necessary. But the most important criticism was on the political economic field; they state that the Green Revolution have led to impoverishment of the people living in rural areas, landlessness and increased inequality of people living in rural areas. They believed this was the case because:

  • The green revolution encouraged the position of large farms. Because they have better access to resources, better financial reserves and good contact they have a better possibility to benefit from the process than small farms. Large farmers often have so much economic power; they can use capital intense forms of farming, and less labour. They don’t rely on traditional sharecropping arrangements.

  • Small farms don’t have the financial possibility to purchase outputs, because the costs are increasing. They also cannot stay adrift after a bad harvest, because they tend to live from harvest to harvest. They are more dependent on agricultural monopolies because they are the ones that distribute new seeds.

  • In developing countries they will try to produce more cash crops and less food for own use. The production of food is often moved to bad plots of land, leading to more work for the woman working on this land. The cash crops are produced for exports, also leading to a shortage of food in the region.


What can be learned for these criticisms is that technological changes can only take place if power relationships, class structure and institutions are also considered. Otherwise dualism and inequality can occur. But the people in the 70’s and 80’s who said that the revolution was yet another way for the rich to become richer at the expanse of the poor were also not correct.

Anthropologists often idealise the traditional agricultural system, and only base their argumentation on case studies. Technological change is absolutely necessary while populations are growing. Growth of agricultural production may lead to lower prices for food.

So even if the production for own use decreases, this doesn’t matter because prices are dropping. The result of these debates is that there is more emphasis on the ecological consequences of new technologies. Farming systems approach is trying to adapt ecological, social and technological factors into an approach that fits today’s requirements and uses traditional technologies. But at the same time when technological innovation takes place, organisations with more capital can take this risk easier than those with less. Institutions should be set up to support those who need it, where labour is abundant; labour-intensive technological advances should be sought. The institutional and political aspects of technological change should be taken into better regard.


Biotechnology and Genetically Modified crops

In Genetically Modified (GM) crops the genes are split and seeds are given desirable characterise, often from other plants. It makes farmers in developing countries more dependent because the crops are not reproductive, but new seeds have to be bought every year. The US is much more liberal with the use of GM crops, while the EU and Japan are more restrictive, causing developing countries to also be restrictive because they are scared their trade-relations will otherwise be hurt.

Current criticisms of GM crops are:

  • Spreading of new allergens are a threat to health of consumers.

  • Research focuses only on GM, and not enough on alternatives that are more environmentally friendly.

  • Bio-safety is at risk because unforeseen gene-leakage can risk unintended consequences.

  • Intellectual property rights have reduced the spread of innovation, now farmers have become more dependent on the monopolies of seed-producers.

  • Environmental problems such as erosion, polluted water and degradation of soil.

  • Lower genetic diversity means large evolutionary risks.


Arguments in favour of GM crops:

  • More efficient because it can focus on the characteristics that one needs and the seeds need less fertiliser because they are more efficient in absorbing nutrients.

  • Better resistant to diseases and pests, so less chemicals and labour are needed, so crops are cheaper, more abundant, healthier and lead to less pollution.

  • Yields per harvest are increased, so larger populations can be fed.

Agricultural production has increased, as has been explained in the chapter above. The three most important factors were the expansion of cultivated area, higher frequency of cropping and higher yields per crop. This used to also be the intensification of land use by using more labour on the land. In many developing regions this is still possible, though in some parts of Asia labour intensification is not enough anymore. Biotechnological innovation will prove to increase yields in the future. So the fear of the Malthusians is proven wrong here. Still many problems exist and research is needed on how to adapt the advances to the different situations that exist in the different regions.


The consumption of food and nutrition

The well-known scholar Amartya Sen writes in his study “Poverty and Famines” that peoples entitlements to food played a large factor in the occurrence of famine (death due to shortage of food) and malnutrition (insufficient diet for healthy and productive life for long periods of time) besides productivity and availability of food. Entitlements can be based upon earned wealth (this can buy food), the land one owns (because it can produce harvest) and one’s labour (a family can produce for its own needs).

The problem with famines in a country is often that when production falls a bit, (food) prices inflate massively because people are scared what will happen and then hoard food and speculate. If the people were able to buy food at the higher prices or the government could distribute food they had in stock, deflation would then take place and the famine could be avoided.


In densely populated areas with good infrastructure malnutrition is often a sign of civil wars, government policy failure and social disruption. These areas are normally able to import food, but circumstances make it impossible. In sparsely populated areas the infrastructure is lacking so food cannot be distributed. So crop failure and bad distribution can easily lead to malnutrition here. In the prevention of famine openness of societies also play a large role.


When one looks at the statistics during the 1990’s in 27 of the 95 countries which had data the availability of food decreased. Most of these countries were in Sub-Saharan Africa. But in many large developing countries such as Brazil, China and India advances have taken place. Still even though enough food is available in a country, this doesn’t mean that this is fairly distributed. In many countries food is unfairly distributed between regions, classes, gender and age. People that are under-nourished also face lower productivity because they have less energy to be productive. The number of undernourished is declining, since 1969 it has fallen from 36% to 17%. These rates are declining, but at a less strong pace than was set by the World Food Summit in 1996. Most people suffering from under nourishment live in South Asia, East and Southeast Asia and Sub-Saharan Africa. The larger countries of India, China and Indonesia show what the positive effects are when developing countries take control of agriculture. New inputs, investment in infrastructure, institutional change and better incentive made it possible in these densely populated areas for agricultural yield to increase. For these positive effects to take place, action should be taken in three fields:


  • Production; farmers should be stimulated to increase productivity, infrastructure should be upheld and modernized and investments should be made.

  • International relations; to reduce dumping developed countries should end agricultural subsidies on exports to developing countries and protection of its own agricultural sector.

  • Consumption; the aforementioned entitlements should be stimulated and diversified. National governments should also intervene when inflation occurs to prevent malnutrition, but shouldn’t provide permanent intervention as this disturbs market forces.

Rural development

Rural development goes farther than agricultural. It requires a multidisciplinary approach as it is focused on economic changes and transformations in wider rural societies. It also sees that economic activities are more than just agriculture but can include trade and handcrafts.

The non-agricultural activities are becoming more important as public services and industry are being introduced in rural areas. Even though urbanization is rapid, the rural populations are also still growing, albeit slowly. But rural societies are also changing. They are less isolated because of modern factors such as internet, trade and increased mobility. Commercial production has also taken a large role in rural society. The growing population density and commercialisation of agriculture have large effects on traditional ways of farming, property rights and communal rights to land use. The large population demands a larger production.


Long: “Rural developments are the processes by which rural populations of the Third World are drawn into wider national and international economy and with the accompanying social transformations and local-level responses”.


Three leading perspectives exist on rural development:

  • Modernisation Theories: when a society goes from traditional to modern this is influenced through economic and technological advances, and leads to specialisation and differentiation. It makes societies more focused on smaller units, instead of larger communities. But problem with the theory is that is sees no difference for societies and fails to incorporate individual ingenuity and creativity.

  • Incorporation Theories: state that traditional rural societies change because of the influence of capitalist market relations. These neo-Marxist theories are mostly negative about this process as the traditional survival structures fail to work in the new system and disrupt traditional social relations. This theory is also very general and idealises pre-capitalist structures. It also doesn’t recognise that change can take place in a positive manner and that rural development isn’t a simple process.

  • Tranactionalist and decision-making theories: looks at the way individuals react to change and challenges and survive in critical conditions. Feels that the previous perspectives view population as helpless and unable to have influence on their lives, while they do.


Peasant Economy

Peasants produce for their own substance, and their economic impact were first studied by Chayanov. Yields on this type of farm are often higher because they produce until they have enough to support the entire family. Research has shown that the returns on land are higher on smaller farms, which is an argument in favour of land-redistribution. Peasant farmers often have communal access based on membership to a village community. These communities are closely linked, but there are also ties outside the community through kinship, markets and a powerful outsider who often takes part of the agricultural surpluses. It can be seen as a transition phase from isolated self-sufficient communities to a market economy. Other characteristics are family labour, internal social position differences and the family is both the unit of production and consumption.


Anthropologist Penny Hill believes that economists fail to look at the specific aspects and characterisations of the regions and economies they study and analyse. This is also true about the so-called pheasant economies. Not enough attention is focused on the differences between male and female, and the economic implications hereof. Her approach stimulates to see the variety in rural communities.


Land Reform

Land reform can exist of different types of measures, depending on the kind of land-tenure relationship in a country. It can include redistribution of land, better defining of land rights through cadastral reforms, improving the status of sharecropping, cultivating new land, (de)collectivation. In many developing countries the ownership and access to land is distributed very unequal, which worsens over time. Most researchers believe that redistribution of land leads to equality in income distribution, reduction of poverty, increased productivity and agricultural development.

  1. Sub-Saharan Africa: tradition of common rights to land. During colonization land was registered under individual ownership (cadastral land reform) which was at the advantage of the colonizers and plantation owners.

  2. Latin America: extremely unequal distribution of land with very large land estates with a low output because labour wasn’t utilized and tiny ones for most peasants that weren’t self-sufficient.

  3. Southeast and South Asia; private ownership of land, small farmers usually renting it. The legal position of the tenants was something that had to be improved.

For land distribution to succeed land shouldn’t only be redistributed but the whole institutional system had to change. Otherwise they would have more land but not be able to buy or use new inputs. So access to credit, schooling, new inputs and water must all be part of the process. The past years must emphasis has been placed on the expansion of credit facilities for small farmers (Grameen Bank of Bangladesh).



Countries with centralised planning systems have shown that collectivisation of agriculture leads to a system without an incentive to work because the link between effort and reward is missing. In China after 1960 decentralisation took place, this process also took place in Eastern Europe and the former SU after 1989.


Non-agricultural Development

Rural communities have seen non-agricultural activities for a long time. This comes in two types; off-farm employment (activities of someone in farming outside their own household within agricultural field) and non-farm employment (outside agriculture). After WO2 some changes took place. These were based on technological advances, growing importance of non-agricultural work also as the primary means of support, new lines such as vehicle maintenance and growing of employment in the rural areas.


The integrated rural development policy focuses on all the existing activities in rural areas. Some are in favour of a non-sectoral approach by the government but it can be very difficult to not drown in the immense bureaucratic system that is then required.


Chapter 11: Politics



Political processes have an important impact on the development of states. In this chapter we will first discuss the interactions between economic development and the formation of states. It has become increasing more difficult to be a strong government in a developing country while the governments have become less well-equipped to handle all the problems and tasks they face. We will also look into the characteristics of state formation and political development on themselves.


What is the state?

Choirot: state is a social system with a set of rules enforced by a permanent administrative body (the apparatus of a government). This body is the highest source of authority in the wider social system. It claims the right to make collective decisions and enforce them.


Nation: set of people who feel they have so much in common that they should have their own state. The elements that bind them can be religion, culture, language, common descent or shared historical experiences. They are politically conscious ethnic group whose subjective feeling of sharing something leads to a claim to statehood.


Country: well-defined geographical territory which is effectively controlled by a state apparatus. Only when there is effective control will a country be recognized on the international diplomatic field.


Nation-State: people who believe they are a nation who live in a state

Nationalism has existed for a long time, but before the 19th century politics in Europe were mostly dominated by royal and noble elites, patron client relation played an important role. Only after the 19th century did nationalism come to include defining characteristics like the use of modern communication, organising large masses and mass movements taking place based on nationalist ideologies.



There are different types of nations:

  • Nations with own states

  • Multinational nations, several national groups live together one a nation

  • Multi-ethnic states: various ethnic groups living together in a state, but no one claims their own state


Choirot believes that the difference in the so-called core and peripheral societies have a major role in understanding state formation processes. In the core societies states, nation, society and geographical boundaries tend to coincide. These nation-states have a high degree of political autonomy in national decision making, strong cultural integration and associated feelings of cultural self-confidence, which sometimes even makes the countries feel superior. The peripheral countries states and nations are not often intertwined in one country. Numerous states contain many ethnicities or nationalities in them and country boarders can cut through boarders of ethic groups, having an ethnic group living in several countries. People feel more relations or bonds to their tribe or clan than the government of their country. Internally there is cultural heterogeneity and externally these countries are challenged by the west and penetration of the Western cultural influences.


In recent years the nation-state has seemed to become less strong than it was. In many Western countries ethnic minorities have identified less with the dominant nation culture, weakening cultural integration. Also after the fall of the Soviet Union, and Yugoslavia these countries broke into smaller states. In these new states ethnic groups struggled for ascendancy or wanted to claim autonomy.


Keyfitz believes that the formation of smaller, ethnically homogenous states is a continuation of the global process of decolonisation and breaking down of empires. The borders of many states were not intentional and many nations (like the Kurds and Tamils) weren’t advanced enough in their nation building process to receive a state when they were first formed. This idea is dangerous because it doesn’t recognize that many regions are ethnically mixed. If it leads to policy it can lead to incredibly tiny nations as each ethnic group deserves its own state and more violent conflicts. Finally it can serve as an acceptance of ethnic cleansing. Today many separatist movements are taking place in many developing countries. The outcome will be seen.



Marx and Weber on the state

Within Marxist views the struggle between classes is the most important factor in societies. He believes that the ruling class influences the working of the state apparatus, and was the first to see the state as a non-neutral or partial institution. The state wasn’t above all the classes, ready to promote social welfare for all; the interests of the state were determined by the dominant groups in the economic sphere. Marx believes that Governments in a way are a separate class. But after the socialist revolution took place it would lead to the end of class differences and the state would no longer be necessary.


Weber on the other hand believed that the political sphere is not only dominated by economic power. He believed that the state would become very important within the processes of bureaucratisation and rationalism. This would organise the processes for large number of people. Decisions are made on the basis of formal rules and precedents, rather than on the basis of whatever the rules want to happen. This process is reflected in the bureaucratic system we see in developed countries today. Weber also saw state formation as a prerequisite for economic development. Also pacification in a large territory must take place before markets and trade can expand, investment can increase and economic growth to occur.


Political centralisation, uniformity of regulation at the national level and the development of government bureaucracy that functions well all increase the predictability, which is a prerequisite for rational calculations of costs and benefits in a market economy. Legal protection of individual ownership rights by central rules, sanctioned by a central apparatus of violence, contributes to entrepreneurship and investment in capital goods and technological innovation. In the long term these lead to an increase in collective welfare (North and Thomas)


Europe’s State formation

After the fall of the Roman Empire a highly decentralized feudal system emerged in Europe. Feudal systems were self-sufficient, and every person had a person above them who protected them. Several classes existed; the landed nobility and clergy, the serfs who worked the land, the sovereign and his court and the rising classes of traders, financiers, artisans and urban citizens. From the 12th century onwards centralisation was winning ground which lead to changes in the social class structures.

The courts become more dependent on the bourgeoisie because of the financial support they gave. While the struggle for the monopoly of taxes and violence took place absolutist states emerged. The influence of the landed nobility decreased from the late Middle Ages and the influence of the commercial classes rose. Once a central authority had been established that had a monopoly over taxes and violence a process of democratisation of power took place where the absolute power of the crown diminished. The private and public finances of the crown also were split, now having personal money for the crown and the money of the state.

From the mid-18th century nationalist movements and ideologies arose. People started to feel connected with their nation or state, and less with their village.



  • Centralisation didn’t emerge from one single court, but from various.

  • Centralisation never lead to one centralised Europe, but parallel processes took place.

  • The European states that emerged were strong and effectively centralised, compared with loose political entities such as the Chinese empire.

  • The rising commercial and bourgeois groups were relatively without ties to the state.

  • The patterns of state formation differed between the European countries .

So for economic development to take place, a state must be formed and a state can only be formed when there is pacification, centralisation, the development of a monopoly of violence and tax money and effective governmental institutions.


The developing countries’ state formation

  • The influence of the West

When we look at the requirements for a state as formulated above, one can conclude easily that not a lot of these do exist. State formation in the developing world was often stimulated by colonialism. Before this time borders didn’t exist, they were simply drawn up or determined by diplomatic negotiations (which is evident by looking at borders in Africa, they are very straight, as if marked by a ruler, and natural boundaries have nu influence). The institutions of the modern state were imposed by these colonial powers, within these states numerous ethnic groups exist that do not identify with the national institutions. Ethnic tensions were further stimulated by the divide and rule policies of the colonial regimes.


Latin America

In these regions the politics were at first dominated by the descendents of white colonialists and immigrants. The descendents of slaves and indigenous Indians didn’t play a role in the political process and are still underrepresented in politics. Most territorial borders in Latin America are not in question and modern state formation took place at an earlier age in Latin America than in other regions


Africa and the Middle East

These regions experienced more problems because of the colonialism. Borders are not geographically determined and don’t reflect ethnic groups, in 1900 the “Scramble for Africa” was completed, and at the beginning of 1900 only 2 countries remained independent. Many people believe that the fact that Africa didn’t have centralized states before colonialism also plays an import role in the current problems. These ideas are actually untrue as many states with centralised rule existed. But because the written word didn’t exist central book-keeping and administrative governments didn’t emerge, which are important in strong states. The states that existed didn’t have a major influence on everyday life as people lived nomadic and agricultural lifestyles in small, tight-knit clans.


Apart from kingdoms, empires and tribal confederations most Africans lived in acephalous political units, with loyalty to this small unit and not to something as distance as a nation. In the colonial days the bureaucracies were very small, and were very distant from the small local communities. After decolonization heterogeneous societies were suddenly forced to become independent national states. Many colonialist things were struggled against, but strangely enough never the African colonial borders. During state formation in Europe one of the definitions of nations was that they had a local language, which usually became the official language of the new state. In Africa each clan had its own language, with thousands of languages existing. So here the language of the former colonial power often became the new official language. (With a few exceptions such as Indonesia). The pursuit of national independence after colonialism was very much influenced by Western ideas on nationalism and the nation state.






  • Political instability


The people in the former colonies had become united through their struggle against colonialism, but now that had ended so did their unity which led to political instability. Therefore central authorities tried to prevent expressions of ethnic, tribal, religious, cultural and linguistic individuality as it might lead to intensification of political conflict and the rise of new nationalist separatist movements. Further instability can be contributed to the accumulation function and legitimizing function of the state. The use of state power in support of capital accumulation by entrepenual classes on the one hand and the maintenance of social harmony and legitimacy by means of redistributive and welfare-oriented government expenditures on the other hand. This means that the government shouldn’t take measures that will alienate large groups but in doing so economic growth can be hampered.



Even after decolonisation external powers still have a lot of influence in the developing world. Economic interference is often based on the conditions that IO’s impose on loans or trade blocs. Political interference also existed. The Cold War led to splitting of countries into the two blocs. Countries were often recruited on ethnic base in pursuit of geopolitical objectives. Regional powers also tried to widen their sphere of influence. Their interventions in international political conflicts in other countries often heightened the conflict, political leaders of ethnic groups also tried to get external support for their struggles which often led to even greater internal conflict. When external parties stepped in internal conflicts these often became longer, more gruesome and less manageable. Many examples exist, like the Zaire, Vietnam and the Kurdish struggle for independence.


At the end of the Cold War it was believed that the thaw in East-West relations would lead to fewer conflicts in the developing world. This hasn’t occurred and looking back one can say that the East-West conflict was also stabilising in a way because after it the regional conflicts, and internal ethic, cultural and religious tensions actually increased, though this doesn’t go for all countries. But the end of the Cold War also led to a new opportunity for democratisation in Africa and Asia. More and more global conflicts have a religious base in the Islam. Conflicts have also become more internal.


Two trends can be emphasized. Strengthening of centrifugal forces and a strong resurgence of nationalist, cultural contradictions and separatist movements have been stimulated by the weakening of the East-West tensions since 1989.

Regional powers have also become less dependent on the superpowers. Paradoxically the reduction of East West tensions has also contributed to processes of pacification in regions and countries where superpowers had backed different countries, parties or factions in their attempts to expand their spheres of influence. It is too soon to say where these trends will lead.


  • Military influence on politics

The military has played a very prominent role, especially in the 1970s and 1980s. Even if the military didn’t have direct power they often played an important role behind the scenes. In 1982 about 30 developing countries had a military regime (16 Africa, 8 Latin America), 26 countries had a 1 party system (14 in Africa). 18 countries had a system of personal rule (9 Middle East 8 Africa). It is hard to research but the role and the power of the military has probably decreased in the last years.


The role of the military has been important due to a number of factors.

  1. Because developing countries have a low degree of institutional complexity and weakly developed political institutions the military can easier be involved in politics. The military can easily intervene as there is little stability and no one is very pleased with their position.

  2. The characteristics of military institutions also play a role. They have control over violence, they are as a group often more modern and better organised (higher levels of education, access to modern technologies, better bureaucracies.) the military often sees themselves as the ultimate safe keeper of national interests.


When the military takes over power this often takes place as a coup d’etat. Often once a country has experienced one coup d’etat, these continue to follow each other as the military turns out the have the same problems as the government they ousted.


  • One party systems

In a one party system the party tries to represent all the ideas and beliefs in an entire country, so integrates oppositions parties, youth movements, trade unions, employer’s associations, women’s movements etc all in one party. Many communist countries still have one part systems. In these systems the military is subordinate to the primacy of politics, even when political functions are taken by military personnel. The party organisation penetrates all parts of society. In Africa after independence one party states rose quickly. First Western-style parliamentary institutions were introduced, but in a short while after this a charismatic leader took often power, often someone who played an important role in the struggle for independence. Internal instability, legacy of colonial rule and the search for an “African” system all played a role in the popularity of this system in Africa after decolonization. It is difficult to let transaction take place from the one party state, as no elections take place for democratic transitions.


  • Revival of Democracy?

Since the 1980s civilian governments and multi-party states have been restored, because the other regime types couldn’t cope with the challenges of the developing societies. This debate was fuelled by Samuel Huntington, who believed that democratization took place in waves. The first 1900-1926, the second 1943-1962 and the third from 1974-1990s.


In Sub-Saharan Africa before 1989 only 9 countries in had multi-party elections, but in 1994 all 47 countries were no longer one party states and national elections overturned previous leadership. Democratisation was fuelled by combination of internal protests and increased international pressure by donor states after the Cold War. The authoritarian political regimes in Africa were so called neo-patrimonial regimes with a strongly personalistic nature. These rules use state revenues to maintain their personal power in such a manner that in due course the potential for economic development is undermined. The new regimes are often very much alike to the old regimes in sub-Saharan Africa, because the neo-patrimonial characteristics do not suddenly disappear. Multi-party elections are often not free, unfair and corrupt and the military are often an important force behind the scenes. And in the end the dominant parties of the post-war period find it very difficult to give up power.


  • Growth of the public sector

Because the social infrastructure of education, agricultural extension and medical care and with the increasing role of the government in the economy in the post-war period. Government employment grew a lot, which was a new type of political patronage. Since the 1990’s government expenditure has gone down.


  • Rent seeking and soft states

Soft state means that government doesn’t have the effective instruments to translate policy intentions into actual policy, and to impose binding obligations on its citizens because political institutions lack legitimacy and the state apparatus has undeveloped administrative capabilities. Because the government isn’t strong powerful groups can influence policy to be in their own interests. For example the rich in Latin America and Asia don’t pay income taxes because there is no effective system if taxation, while the poor actually pay more because it is easy to implement taxes over agriculture. Because the tax system is so underdeveloped governments are always in risk of a fiscal crisis.

People in soft states feel hardly any loyalty towards their governments, so the government had a hard time mobilising the masses for community development and other collective goals. Soft states also have a lot of regulations in the economic sphere, with often every rule leading to a new one being implemented. But because not every situation can be controlled with rules, officials still have enough room for their own interpretation. This room leads to arbitrary decisions and corruption. Corruption has a number of other causes in soft states, such as extensive intervention in the economy, civil servants with low pay, no tradition of impartial public service. Corruption is normal in most developing countries and it severely reduces the effectiveness of governments and destroys the faith of civilians in the political system. As long as corruption is predictable it can be seen as a type of informal tax, but once it becomes unpredictable it is dangerous for the economy.


The governmental role in economic development

  • Japan; the government has played a large role in economic development since 1868. The rapid economic and industrial development is an example of industrialisation and modernisation imposed from above. The government took the initiative in large-scale investments in industry, which were sold of to the private sector once they started to function. Growth of extremely large, modern industrial conglomerates of zaibatsu that remained closely connected to the government. Companies tied their employees with lifetime employment. Foreign investment was impeded but through education and inviting foreign scientists technologically Japan was very advanced.

Agricultural growth and participation in international trade were also stimulated. Since the 1990’s the economy has completed its “catch-up” process and been somewhat stagnate.

  • China; saw an even larger governmental role in economic development and industrialisation because after the communist revolution of 1949 all industrial enterprises were brought under public ownership, the land of large landowners was redistributed, and Five Year plans were introduced, stating all production goals for companies. China also paid a lot of attention to agriculture, more than for example the Soviet Union. Agriculture wasn’t successful until liberalization took place, and it was less collectivist. Since mid 1980’s the role of the state is diminishing, though still very strong. New market oriented companies are arising, foreign investment is stimulated and the economy is opened up.

  • Brazil; strong policy of import-substitution industrialization. Originally a domestic market for industrial consumer goods existed, and political power was in hands of agricultural oligopolies. After 1930s a strong policy of import-substitution industrialization was introduced to protect Brazil from foreign competition because the export prices of primary goods had fallen. The government often acted as an investor, but the economy was also open to joint ventures with foreign investors. For a long time the economy grew because of the emphasis on industry but after 1980s the effect of prolonged protection of the domestic industry became evident; inefficient, inflexible and not able to complete internationally. During the 90’s privatization took place, but Brazil remains vulnerable to external shocks.


  • South Korea; here the state also played a large role and for a while import substitutions were in place. But the government also supported export-oriented activities since the 1960’s. Industries that didn’t work well weren’t supported by the government but were forced to restructure. Policy was in place to make products competitive on the international market. The Asian crisis hit Korea hard, showing faults in the banking system and governmental intervention, but Korea has since recovered.


  • India; developed via the Indian socialism model, which emphasised traditional crafts but also heavy industry which was planned according to Five Year plans. They wanted to prevent monopolies and domination of the market by foreign and large domestic companies. But the large companies benefited the most of government policy because of corruption and their contact within bureaucracy. India tried industrial planning, but this turned out to be too inflexible and lead to stagnation. Powerful interest groups had too much influence on the governmental policy. Therefore money wasn’t spent effectively and their wasn’t enough money for investments. The caste system also had a lot of impact on the unequal system. Since the mid-1980s the role of the government in economy has been reduced and market incentives have strengthened. In the 1990s liberalisation and international trend accelerated, and India started to focus on new sectors such as telecommunication and software.




This leads to a number of conclusions:

  1. The role of the state in economic processes must be reduced in developing countries

  2. Government should have more effective apparatuses, less intervention and corruption and a better administrative system.

  3. End protecting inefficient industries

  4. State has a large role in education, infrastructure, health care etc.


Interactions between political and economic developments

  • Instability as source of economic stagnation

Kuznets believes that there must be a certain degree of political stability in a country for entrepreneurs to feel safe enough in an environment to set up companies and invest. So in the long run political instability will cause economic stagnation. Annual growth is said to be 1% lower in instable countries. Ethnic diversity is also said to have negative effects on growth and development according to a study by Easterly and Levine. Rent seeking and difficulties agreeing on public goods and public policies. But they do not find negative relations between ethnic diversity and political instability.


  • Economic development and political stability

For economic development to take place in a country there must be political stability, but on the other hand for political stability there must also be economic development. Increased productivity and economic growth are necessary for an effective government, and an effective government can mediate in conflicts between social groups. Stagnation will lead to protests, and protests often lead to choosing sides and oppression by the government.

When economic development is taking place, there can also be a period of political instability, as at first income inequality increases and some groups will be a part of the growth, and new distribution of production factors and others are left behind. Two groups will lead to unrest according to Terhal; first the mobile but unsatisfied group, their economic position improved but they are still dissatisfied, and second the stagnating immobile group which consists of the poor who remain in a economic stagnant state. Terhal believes the government can lower tensions by helping the economically rising groups and improving their access to political power and social status. The poor can be helped at the same time by political democratisation.

In the literature no consensus is reached on whether political instability is the highest during rapid growth or stagnation, but it seems that continued stagnation leads to the greatest unrest because it will lead to an outpouring of cooped-up frustrations, which can be exploited by extremist political and religious groups.


  • Democracy and development

Three perspectives can be identified in the debate on economic growth and democratic regimes.

  1. There is a degree of tension between democratic institutions and the necessities of economic development in the developing world. Long term economic growth is only possible when the political system isn’t influenced by the population’s short term goals.

  2. Democratisation is not the main goal; first one should strive towards economic development, after this democratisation will take place.

  3. In the past democratisation, civilian freedoms and economic growth have been interdependent, and reinforce one another.

Studies on these perspectives contradict each other. Halliwell distinguishes himself by looking at the direct and indirect effects of democratization on growth. Indirect effects of democracy like schooling and investment are positive, while the direct effect on growth is negative. These two factors combined together leads to a very small positive effect of growth. But in the end the best conclusion is that there is no meaningful relationship between the two. What is forgotten in this debate is that democratisation and social and human rights are objectives of development. In the end democratisation will not improve growth but growth isn’t incompatible with a democracy.


  • Effects of corruption on economic development

A democratic system is not a requirement for economic good governance, as the conditions for this are not necessarily democratic. Corruption can limit growth, so should be limited. Corruptions acts as a tax on investment, reduces rate of investment and the growth, reduces rates of return on capital. Corruption has the most effect on small companies. Also corruption makes talented people waste their talent on rent-seeking behaviour. But corrupt societies can still experience fast growth, this depends on how the money in corruption is spent (if it is reinvested the effect is less negative). It is difficult to limit corruption as it is hidden in all parts of society, but it can be done. Checks and balances in the political system, making sure the judicial system is impartial, increasing governmental accountability, using standardised rules are all ways to reduce it.

Economic development in Sub-Saharan Africa

A lot of literature is focused on how the African state itself limits economic development. This describes how the African predatory state extracts wealth from its citizens at the expense of society, which undercuts the dynamics of development. The African political system came into place because of the little loyalties tribes have to the centralised government, the small bureaucracies of the colonial rule which after decolonialism led to personal networks and commercialisation of the administration. Many governmental officials exploited their positions for financial returns. The only exception to this was militant socialist states like Angola and Tanzania.


Personal rule:

  1. Strong man: country has one strong ruler; all important positions in the government are filled by people who have personal ties with him, often from the same tribe or clan.

  2. Patron-client relations: entire system is filled with these ties, from top to bottom. Maintain and strengthen position by doing favours like giving jobs, loans, or funding which the private sector must match.

  3. Military that is personally loyal to political ruler:


The entire governmental and economic state work very badly through these characteristics. Because money is always needed to maintain patronage heavy taxes are in force on imports, exports and primary products. Wealthy people evade taxes. But the problems are not only political, bad soil, the international economic system, rapid population growth and many other factors contribute.



  • Limited role of the public sector, and reducing its size

  • More effective government

  • Regain governmental legitimacy, through democratic elections


Chapter 12: Culture



What is culture?

Development cannot be seen as a purely economic thing, many factors are of large importance. Culture plays an important role in development and can be divided into two different types. High culture is the type we enjoy in everyday life (music, literature, poetry, art) The scientific or anthropological way to view culture is to view the components of the lifestyle a society has, looking at attitudes, identity, value, religion, traditions, notions of what is good and bad. It is not material but looks into values and so called mental maps that are shared within a society. There is not one culture per society, but there can be various groups with subcultures.


There are different ideas about the role of culture on development.

  1. Structuralist approach (Marx): culture is determined by economic interests and power relations and therefore is influenced by these.

  2. Materialist approach: economic performance is based on culture because it influences behaviour, economic activity and development.


The perceptions one has about everything in the world are also influenced by culture. But cultures also chance when social conditions change. Szirmai give the example of J. Boeke who described the idea that many foreign countries have people who are lazy and do not seem motivated to work or give themselves better economic opportunities. But what is actually true is that culture is a long-term adaptation of people in a society because peasants didn’t have any economic opportunities in colonial and pre-colonial societies. When these opportunities become better, people develop a new mentality. But this is a very slow moving process, as evolution is always slow. But how important is the role of culture in economic development. Structuralists as Jeffrey Sachs say that location, climate, resources and geography play a bigger role in the long run than cultural differences. And many have explained the position of Third World countries because of colonialism, exploitation, terms of trade or war, but this doesn’t explain why some countries fail and other succeed.




The role of religion and culture in development

Max Weber looked into why capitalist economic development proceeded in the West but not in other countries. He looked into the role that religion played in this, and saw that what was missing in other countries was the Western “rentibility”. This is the systematic and rational planning that leads to a secure income or profits in the future. All successful countries in the 16th and 17th century were protestant Calvinistic countries.


He believed Protestants had a number of characteristics that were based on their faith:

  1. Can have a job and a religious calling in your life, not one or the other

  2. Protestantism stimulated literacy, as the Bible was translated and printed

  3. Rationalism and bureaucracy

  4. Predestination made men fearful and wanting to become successful

  5. Sobriety and discipline were very important


Some criticised Weber that many Protestants were of Catholic heritage. Also they said that many groups that were successful in migration were not Protestant, like Indians in East Africa and the Chinese in Southeast Asia.


But these groups were probably successful because in their own country it was hard to become economically successful, so they wanted to make it abroad. The economic success of Japan in the past decades has lead to study of the Confucian values as leading to success.


So even though Protestantism didn’t automatically mean economic development, Weber’s ideas have shown that puritan work ethic, innovation, emphasis on savings and sobriety are important in economic success.



Institutions: standardised patterns of social interaction for the solution of core problems people face in social file. Complex set of ideas, norms, rules and socially sanctioned, standardised patterns of behaviour with regard to key questions of social life.

Economically efficient institutions should stimulate people to act in a way that helps national welfare and economic development. But what is economically efficient or not differs in time and place. Different conditions require different types of institutions. But culture does have an effect on the way institutions are formed, so through this, culture has an impact on economic development.


Modern and Traditional Cultures

  • Dichotomy between modern and traditional





Social position




very mobile



Rational thinking



future oriented, own action influences this





Political system


authoritarian rule

Civil society

increasing role

no role

Transactions and relationships (economy)

anonymous and specialised

personal ties

Relationship and interactions



Group relations


affective neutrality





Traditional cultures and mentality can be changed through education, information, schooling and seminars. Modernity enfolds the confidence in possibilities of technological change in solving problems, goal-orientated, positiveness towards innovation. But attitudes are very difficult to change.





  • New approach

Modernisation is now seen are naive, dated and trying to force the rest of the world to become more like the West. It paid to little attention to differences is patterns of economic development in different periods in history. It also has an unrealistic view of how educations can change mentalities. And if we focus too much on the differences between traditional and modern views we tend to forget the negative effects of the Western expansions.


Geertz has concluded after studies in India that different types of cultures can generate economical development, if the factors are favourable, and the unfavourable are suppressed. This should be utilized and remembered.



Problems facing economic development

It s debatable if economic development is hindered by the cultures that exist. If it is, the world must agree what the goals of development are and that cultures can be measured against a clear “ideal” culture. But one can only judge a culture by its own values. Some characteristics of a culture simply stimulate economic development and others hinder this.


Caste system; in Hindu societies this system leads to people doing jobs and interacting with certain groups not according to capability but according to birthplace. Even though the system is legally forbidden in India it still plays a large social role. It has also influenced the countries economical development in a negative way because it has made Indians distrust the market and pay heavy taxes. But the government also played a role in the slow growth due to their bad policies.


Work ethic; in Africa physical work is often seen as a women’s job. Preparedness to work hard (work ethos) is more frequent around Asia than Africa; some believe that this is a cultural adaptation. In Asia the population density was high, so people had to work harder on the land to produce enough. In Africa less effort was needed to sustain the population.


African cultures social obligations; Group loyalty and ethnicity are more important than self-interest. Therefore economic behaviour is measured by how positive it is for the group. The large social network is important for economic growth (networks maintained through social interaction, reputation built, status achieved) but also hinders it (an individual cannot bring itself to a higher economic level and save because the entire extended family will live off this income). If economic efficiency and large social groups go together is a difficult question to answer.


Gender discrimination; can range from lower salaries for women to excluding them from the workforce. This type of discrimination doesn’t benefit economic growth because groups are excluded from benefiting their full economic potential.


Trust in market relationships; trust is very important in market relations, as without it will be very difficult for transactions to stay in place (because no company wants to be ripped off!) in societies where personal relations are very important, people will not want anonymous transactions, but will turn to family ties or clientalism. In cultures of poverty often trust is completely lacking.


Ethnic minorities in economic development; Minorities often fulfil a role in societies that other groups do not (Jews in banking and finance, Indians and Pakistanis in commerce in East Africa). Often the groups were excluded a long time ago, but succeeded to develop themselves. First, maybe migration frees them from the cultural expectancies from their old country. Second, only the most dynamic and daring people migrate. Third (Schumpeter) the marginality of these people lets them be innovative and entrepreneurs.

Cultural differences between North and Latin America; the country of origins of colonists plays a large role. In North America mostly North Western Europeans came, who were Protestant and entrepreneur. South America had mostly Catholics from the Iberian Peninsula, with feudal type systems of absolute leadership and Machiavellian power politics. Hartz has argues that these characteristics were magnified in the new country, while the checks and constraints that were in place in the old countries didn’t exist in the new.


Soviet remains; communism was followed by absolutism, after which the soviet markets collapsed. People are still very much focused on the state and not on entrepreneurship.


Asian values and Confucianism; East and Southeast Asia saw enormous economic growth during the 20th century, with Japan as a prime example. Japan was able to receive modern Western technology while keeping the vital elements of Japanese society. After Japan many other countries saw economic growth, including Korea, Taiwan, and in a second wave countries like Thailand and Malaysia. These countries were all influenced by China and the Confucianism elements in these countries played a significant role in development. Hofstede identifies five cultural elements that play a significant role:

  1. Power distance; whether people accept that hierarchy exists and power is distributed unequally

  2. Uncertainty avoidance; if people feel comfortable culturally with unstructured situations

  3. Individualism vs. collectivism; whether people are used to working in groups or family situations or alone

  4. Masculinity vs. feminism; distribution of roles along gender based lines, masculine work equalling physical and feminine the emotional

  5. Long term vs. short term orientation; persistence, thrift and a sense of shame vs. importance of personal stability, respect for tradition and always wanting to save face


Personal bonding is extremely important in Asian work relations, competition can be very high and strong group ties and strong individualism goes hand in hand. Capital flows through clan-like networks. It is said that the east-Asian culture has very good characteristics to catch up on growth when they are behind, but not for maintaining this position. Rule of law must be strengthened, decisions should be made more impartionally, conglomerates should become less powerful and banks and other financial institutions should become less powerful.

What is important to remember is that cultural values have different effects in different circumstances. Cultures are complex, can contradict themselves and, most important, in some situations some parts of a culture are important to have and some are not.


Putnam’s Civic culture

Putnam researched the importance of civic culture: “many theorists have associated the civic community with small, close knit pre-modern societies, quite unlike our modern world- the civic community is the world we have lost. In its place arise large modern agglomerations, technologically advanced but dehumanizing, which induce civic passivity and self-seeking individualism. Modernity it is said is the enemy of civility. Quite the contrary, our study suggests. The least civic areas of Italy are precisely the traditional southern villages.

Life in much of traditional Italy is marked by hierarchy and exploitation, not by share and share alike. The most civic regions of Italy…include some of the most modern towns and cities of the peninsula.


What we need to know is that institutional reforms will not work without a civic foundation, and these take a long time to develop. So though it takes a lot of times, policies of cultural change should try to promote civic culture and participation.


Western expansion and its effects

The west infiltrated in the rest of the world through missionaries, traders and soldiers. The effect was double; the technological advances of the west were admired as models of success and modernity. But they were also rejected as oppressive and dominating. In the 20th century because of the rise of mass communication media and transportation advances more and more indigenous cultures came under Western influence. This was felt in the accelerated change rate, the break-up of traditional units, impact of Western culture, and rapid loss of the authentic cultures.

People reacted in four ways:

  1. Traditional opposition movements; wanted to restore the former situation

  2. Messianistic movements; tried to combine elements of traditional culture with Christianity

  3. Modern nationalistic movements; played a large role in the independence struggle of the colonies. Drew on Western values such as equality, democracy and human rights and wanted these for themselves.

  4. Marxist and socialist movement; emerged at the same time as the nationalist movements. Combined Western sociological ideas with traditional.


Now nationalism and Marxism have lost their place, the rise of political Islam has seemed to fill the place these have left behind. They are a radical alternative and provide opposition for Western culture and dominance. Islamic countries are in some place trying to form institutions that work in a modern society but also respect religious beliefs.


Culture at a Micro-level

Culture can also be seen from this level that looks at the cultural constraints within which projects have to function. Kottak believes that innovations and projects should be consistent with the culture, practices and institutions they are formed in. Anthropologists look too much at the cultural aspects and how to factor these into projects. But they do not see, that as history evolves, society destructs and rebuilds itself. This is necessary for development to take place.





Chapter 13: Economic shocks



Four important stages in the development of international economic relationships, all stages end with a major system shock.

  • liberalization of world trade (1944-1973)

  • rise and eclipse of the policy goal of NIEO (1960-1982)

  • debt crisis and structural adjustment (1982-1997)

  • revival of debate on globalism and liberalism (since 1997)


System shocks

  1. oil crisis (1973)

  2. debt crisis (1982)

  3. Asian crisis (1997)


Economic relations since 1945

The post-war economy was characterized by:

  • Rapid growth of the volume of international trade (but not by developing countries); Since 1950 and 1973 rapid growth of trade, liberalisation of trade, developed countries strictly protected agriculture and developing countries protected industry. Oil shocks in 1973 and 1979 slowed down growth, after 1985 growth again increased.

  • Ending colonial labour division; at first the developing world only exported primary products, this has shifted towards industrial goods in the twelve major developing countries, Africa hasn’t been a part of this development.

  • International trade mostly by developed countries; only after 1970 did the East-Asian share start to increase, but Latin America’s and Africa’s share declined even more. Part of the increase of the developing world is due to increased trade between the developing world.

  • Financial flows from rich to poor countries; until 1982 large inflow of capital in the developing world, until the 1990’s outflow, and after that inflow resumed until the Asian debt crisis. There was also a very large shift from loans to foreign direct investment.

  • Liberalisation of international trade and capital flows; after the WO2 freedom in trade of goods, services and movement of capital existed. After 1990 capital flows were liberalised. Labour and people were still restricted in their mobility.

  • Emergence of global production chains; after the war production chains became more fragmented, with countries specialising in those markets that they have the resources for or specialization in.

  • Trends in income per capita; from 1950-1973 national incomes and income per capita increased in both rich and poor countries. Between 1973 and 1982 it decreased, and after 1982 there was an increase again, though not to the levels of before 1973. The 1980s is seen as the lost decade for Africa. Asia experienced rapid growth from 1990 until the economic shock of 1997. Latin America experienced an economic stagnation after the debt crisis, which has since changed to an unstable recovery.

  • Growing financial instability; many countries are very vulnerable to major financial crisis’s, which has a big impact on the growth and development in the developing world.



Political relations since 1945


After WO2 many countries of the developing world experienced decolonisation. This often was accompanied by large struggles because European settlers resisted independence and the former colonial powers couldn’t transfer power to the political groups they wanted. Emmer believed decolonisation took place because of increasing international pressure, increasing resistance in the colonies and decreasing willingness to rule from the colonizing countries. Both the Soviet Union and the US stimulated the end of colonialism after WO2, but the US later shifted this position out of fear of communism. People expected economic development to take place after decolonisation, as it was thought that the colonial rule had led to economic and social un-development. At first neo-colonial relations were blamed when this didn’t happen, but after the 1980s the quality of domestic economic policies was increasingly blamed.


Interdependence and the emergence of international institutions

After WO2 the number of international organisations and treaties increased. They were meant to lead to pursue common objectives and improve international coordination, with only the EU operating on a supranational level. Increased interdependence of people, societies and states and poorly developed capability for international political coordination. International mobility and communication has increased. But if you look at the increased interdependence the capability of international institutions to fulfil a coordinating role and a regulating role has not been up to speed. Since WO2 the US has been the dominant World Power, but has not achieved a level of pacification.


Decolonisation has also led to a proliferation of independent states in a non-pacified world. Before 1991 most international conflicts had an East-West basis. Another important factor was the emergence and decline of the group of non-aligned developing countries as a coherent political force (Bandung conference 1955). But since the 1970s the different interests of the developing countries had lead to the formation of smaller different blocs, instead of one big bloc.


The peak in the number of global armed conflicts was in 1985 and seems to have since gone down since. But international relations are still not pacified, and the nature of conflict has also changed as non-state groups and terrorist attacks have become more prominent in a type of warfare that is asymmetric.



Legal order

Initiatives have been made towards the founding of an international political and legal order. An example is the International Criminal Court in The Hague. A difficulty in an international legal order is that it depends entirely on the voluntary agreements between states, and cannot be forced. States also can found international organisations and institutions, and can decide whether or not this is on a supranational level. States can also decide to submit their disputes to international arbitration, which can lead to international common law forming. But this is only on a voluntary level. A problem that faces international institutions is that they have no means of implementing their decisions or to make countries abide by these decisions. One type of progress that has been made is the founding of international legal institutions where war crimes and crimes against humanity are tried.


International Organisations and institutions


1. Financial organisations

Important organisations: General Agreement on Trades and Tariffs (GATT), World Trade Organisation (WTO) International Monetary Fund (IMF) and specific development banks


Much debate exists between groups in favour of a more liberal economic order, with free trade (influenced by affluent countries) and a new more just international order with some type of international regulation (influenced by the UN). New policies were made that tried to improve access to the markets of developed countries for the developing world. While in the late 1980’s developing countries started to see the benefits of taking part in a world market, the developed countries yet again became more protectionist.

After WO2 at the Bretton Woods system was introduced. Within this system the currencies were tied to the price of gold and the US$ and the IMF would stabilize when necessary. The World Bank was first set up to fund economic reconstruction of war damages but soon shifted its attention towards investments in infrastructure in developing countries.



  • Governments can only impose tariffs on imports and must refrain from any other interference in international trade.

  • Under specific conditions trade barriers and quantitative restrictions are permitted.

  • Reductions in tariffs must be reciprocal.

  • Trade advantages to one nation must be granted to all other countries (non-discrimination and the most-favoured nation clause)


Initially GATT was meant to be a temporary organisation, but in 1955 it became semi-permanent. Negotiations took place in 8 rounds, which led to large reductions in import tariffs which were later largely off-set by non-tariff barriers and restrictive quality and environmental requirements. Developing countries are hurt due to the extremely protectionist measures on agricultural, growth in trade in the developing world was further advanced by dropping costs in communication and transport. In 1995 the WTO was set up. Developing countries argue that they are unfairly forced to open their economies whilst developed countries are stilled allowed a degree of protectionism.

2. United Nations (UN)

Formed in 1945 to safeguard international peace and security.

Important organisations: Food and Agriculture Organisation (FAO), United Nations Industrial Development Organisation (UNIDO), United Nations Conference on Trade and Development (UNCTAD), United Nations Development Programme (UNDP), all development organisations of the UN fall under the Economic and Social Council, but are in practice largely independent.


Principle organs:

  • General Assembly; each state has one vote

  • Security Council, 5 permanent members with veto rights and 10 that rotate.

  • Economic and Social Council; as mentions above coordinates work of many specialised organisations, 54 members.


All countries have one vote in the General Assembly, and therefore developing countries have a lot of leverage.


But because the developed countries contribute more financially, this also gives them leverage. In 1964 the developing countries formed the new international economic order (NIEO) wherein the position of these countries should be strengthened and access to the markets of the developed world should improve. The rise of oil prices in 1973 by the OPEC cartel helped the NIEO in their quest. But the NIEO eventually lost its place in international relations after the debt crisis in 1982.

The IMF shifted its tasks from stabilizing in case of BOP problems towards the economic problems of the developing countries.


Debt and Asian crisis

The period after mid 1980 was dominated by the Washington consensus: pursuit of macro-economic stability by controlling inflation, reducing fiscal deficits, opening economies to the rest of the world, liberalisation of the domestic product and factor market through SAP’s.
After the 1980’s developing countries were increasingly forced to initiate structural adjustment policies in order to obtain international financial help. It was tried to improve their Balance of Payment, reducing the role of the government, stimulating countries to become more export-oriented and deregulating economy. Strangely enough the developed world was becoming increasingly more protectionist with many rules benefiting them. Dumping happened, ruining developing countries markets and free trade was not required in causes such as “danger of serious injury to domestic economy. Trade blocs also heightened the protectionist level. The GATT round in Uruguay for the first time included agriculture in its packet of tariff reductions.


After 1990 much debate existed on the future of the worlds financial institutions. Reports like the Meltzer report were in favour replacing institutions such as the World Bank and IMF by private financial institutions. But there was also a lot of debate and criticism of the liberal Washington consensus. This was stimulated by the Asian crisis and the financial instability of the global economy. People proposed a new international economic order. Protest and anti-globalism increased. There was also an increasingly important role for the environment, sparking conferences and treaties because of climate change and greenhouse emissions.


New International Order

  • NIEO

After the 1960s there was increasing dissatisfaction with the principles of free trade and the liberal international economic order, especially focused on the developing world. Based on the theories of List it was said that rich countries benefited more from these circumstances than the developing countries. It should be reconstructed so that the masses in de developing world could profit from free trade and let them rely less on development aid. Poverty was still abundant, international income equality had grown and multinational firms drained the developing countries of their resources whilst not contributing towards economic growth. These are all criticisms of the liberal international order since the 1960s. As an alternative the aforementioned NIEO was launched. Their main points were:

  • Commodity agreements for primary exports of developing countries to improve terms of trade for developing countries and stabilise primary export prices and revenues

  • Reducing protectionism for developed countries

  • Producer cartels so developing countries can increase the prices of their primary exports

  • Nationalisation of foreign enterprises

  • Increased shares in world transport for developing countries

  • Developing countries retain right for protectionism

  • Code of conduct for multinational enterprises so they contribute more in domestic economies

  • Increasing amount of money available for development

  • Debt relief for poorest countries

  • More voting rights for developing countries in international financial institutions

  • Increase trade flows south-south

  • Independent sources of funding for IO’s so they become less dependent on developed countries


But, as said before, as none of the treaties were ever implemented the NIEO never came into practise.


  • Lomé agreements

These agreements, starting in 1975, between the EC and former colonies (ACP countries) were meant to implement some of the NIEO objectives. The results have been disappointing, stabilisation funds didn’t work as planned and market shares of the Lomé countries actually dropped. The preferential treatment of the ACO countries in the EU market is currently being phased out.


  • Criticism

There was criticism about a number of things. It was said that the proposals were too pessimistic about export. Though the terms of trade of the developing countries haven’t improved no system can be discovered, these always seem to vary. It was very unsuccessful that countries were for too long inward looking and used interventionist import-substitution. Outward looking Asia proved this with their economic success. We also have learned that it is hardly ever successful to unnaturally hold price levels for certain goods above their market price. Prices in the end will collapse. The Lomé agreements show that preferential treatment also doesn’t help. A final point is that the increasing heterogeneity of the developing countries increased the downfall of the NIEO.




Debt crisis

In 1982 Mexico was the first developing country that suspended debt payments because they didn’t have enough foreign exchange. Other countries followed suit. The debt crisis endangered the stability of the global financial system and threatened the economic development of the poor countries. Debt isn’t always a problem, as long as it is invested. If this isn’t the cause, such as money is used for consumption or debt-repayments, debt will continually increase without being used for economic investments. The debt cycle shows how increasingly countries are more troubled.


  • Origins

Many factors contributed to the debt crises, economic growth had slowed down, oil prices were up, inflation increased. Developing countries, mostly in Latin America, anticipated recovery so deficits on the current account of the BOP were financed by short term loans from the private banking sector. When oil prices again increased the real interest rates suddenly increased immensely and to pay back debts, new loans had to be taken out at higher costs.

It turned out that the initial loans had not been invested well and the failure of the Latin American countries to meet debt-service payments triggered a global debt crisis.


  • Quantitative analyses

The volume of debt has increased enormously in the developing countries. In 1970 it was 61 billion dollars, 1970 561 billion and in 2002 it was 2,384 billion. After 1982 private companies didn’t want to take on any more loans so their share decreased. The role of foreign direct investment increased on the other hand.


  • Approach

As mentioned above the debt crisis lead to a decrease in the flow of private loans into developing countries. This lead to economic stagnation as the countries didn’t have any money for investments. At first international effort was mainly on preventing the entire global economic system to collapse, after this attention went towards the economies of the developing countries. The IMF and World Bank both implemented measures to reduce BOP and governmental deficits (stabilization), and improve the economies dynamisms’ and flexibility. Therefore cutbacks were made in the developing countries imports, which lead to a less positive slowdown in industrial production. Incomes in Sub-Saharan Africa and Latin America fell sharply and this lead to the current negative economic situation in these continents. Scientists don’t agree on what path to follow now; debt relief or moral hazard. Some like Singer and Griffin argue that debt crisis was very much due to external factors and because it hinders all attempts to revive economic growth, debt relief is necessary. Buiter and Srinivasan argue this view and state that de crisis was caused by economic mismanagement and profligate economic policies that shouldn’t be rewarded. This was especially the case in Latin America, where debt relief is more like a sponsoring of American banks. They emphasize the importance of SAP and letting financial institutions go bankrupt in order for inefficient economic institutions to be filtered out. Many plans for debt relief have been made, of which three will now be discussed.


Baker plan (1985)

Moderately successful American system. Economic revival to resume net inflow of financial resources. Private institutions were stimulated to grant new loans. Debt reduction was not the case.


Brady plan (1989)

Voluntary debt reductions which varied per country. Debt was reduced in several ways, hoping it would lead to domestic SAP’s being more successful, as not all money went towards debt repayment. Creditors benefited because in the future the chance was higher that debt would be repaid. It can had some influence in the net total resource flows (these were now positive, even in Africa) but still only 2.4% of total long term debt was dropped.


Heavily indebted poor countries (1996)

After 1995 the debt situation worsened again. This policy argued that even with all policies taken the severely indebted countries would never be able to reduce debt to a normal level. This system evaluated debt reduction policies at every level and then decided what the next level would be, so debt policies in countries were rewarded.


Current debate is focused on whether loans should be replaced by grants, as argued in the Meltzer report.



Structural Adjustment Policies (SAP)

  1. What do they do?


  • Opening economies to international competition

  • Stable incentives for private enterprise, liberalisation of the economy and reinforcement of market mechanisms

  • Structural adjustment in production structure aimed at a more efficient allocation of productions factors, greater flexibility and sustained growth

  • Improvement of external balance between in and exports. Done by reductions in expenditures, depreciation of overvalued exchange rates and shifts in expenditures to domestically produced goods and services.

  • Rationalisation of the public sector and cuts in expenditure of the government.



Intervening in the economies of developing countries was a structuralist program. These theories believe that the conditions for a good working of the market mechanism is absent in the developing world. Neo-liberalists attacked the programmes of structuralism with their own SAP.


  • Structural adjustment policy; try to improve the supply side of economy long term so production increases. Reduce the role of the state and in the long run liberalize economy. Measures are in trade policy, public sector, capital market, agricultural, industrial and energy policy.

  • Economic stabilization policy; aimed to restore external balance on BOP and reduce short term inflation. Restrict imports and promote exports. Influence the demand side of the economy. Devaluation of overvalued exchange rates. Reduction of budget deficits, financing governmental debt on capital market instead of through monetary policy. Increasing interest rates, food prices and those of public services. Also controlling wages.




  1. Effectiveness

Since 1979 more than 150 countries have received loans according to SAP’s. in short term the policies are fairly successful, but in the long term a lot of debate exists. These debates are focused on if the social consequences are acceptable and whether the economic recovery can be contributed to the structural adjustment. Factors contributing to the success if SAP’s are the implementation (are the measures agreed upon actually implemented), credibility of governmental policy (is the government credible to entrepreneurs that they will carry out the unpopular measures) and sequencing of adjustment measures (policies must be carried out in correct order).


Social consequences

The programmes according to some leads to further impoverishment and insufficient investment in human expenditures. Cutbacks in governmental expenditures at the expense of health-care and education. Ending food and energy subsidies for the poor. These are all negative effects but counterarguments state that the poor never had access to these thing anyway. It is best not to look at the social consequences because they clearly are negative on the short term. It is better to research if in the long term the economy benefits the adjustment policies.

The effects of SAP’s are debated. In Africa the results haven’t been positive as the economic stagnation hasn’t been reversed. Governmental investment has actually seemed to drop, which is not a positive factor. But one should also remember that there are extremely poor countries in Africa and middle-income countries. The middle-income countries have benefited by becoming less inward-looking. In the most poor countries the expenditure cutbacks have been at the expense of investments that are needed in agriculture.

When price liberalisation is combined with more investment in rural infrastructure and agricultural services it has lead to very positive results in some countries.

In Latin America the results are also mixed, though export has grown, technological capabilities have declined.


Many critics feel that development can only take place when international trade is globalized. But the current world order actually harms the developing regions according to some critics:

  1. Growth and stability is harmed by complete capital accumulation because it leads to immense financial instability. These can lead to financial crisis’s. International capital flows should therefore be regulated.

  2. The developing countries do not benefit as much as the developed countries by the liberalisation of international trade. Infant industries of developing countries may no longer be protected, while these will never be able to develop and compete globally without a phase where they can mature without the international competition. And the developed countries still protect their own agriculture and practice dumping.

  3. The international financial organisations are too rigid and dogmatic in their policies of stabilisation and rapid market reforms. They don’t look enough at the cases themselves and too much at the overall measures. Some countries require a different approach.


Chapter 14: Aid



This chapter focuses on whether socio-economic development benefits form aid, and to what extent and under which circumstances this is the case. Economic aid was first researched in 1950s and 1960s under Rostow, Chenery and Strout. Their conclusions were that under certain conditions foreign aid may lead or support an advance of growth and development, but it cannot remodel processes of stagnation into dynamic processes of development.


Motivations for foreign aid

1. Moral motives:

  • Humanitarian; we have a moral obligation to help because of the immense problems facing the developing world.

  • Egalitarian; because of the huge difference between rich and poor development aid will equalize this.

  • International solidarity; solidarity is not only a national requirement, but also international. We are all part of the global society.

  • Undoing the wrongs of the past; the West exploited the undeveloped world for centuries, which led to underdevelopment. So development aid is a type of repayment.

  • Interdependence and mutual interests: through the interdependence of the global society, all states need each other.

    • Economic interdependence, all states need input of the other for a well working global economic society

    • Global environmental problems such as climate change, pollution etc need collective action. Sustainable development must be done in collaboration with each other.

    • Avoiding international conflict

    • If the economic conditions in the world become more balanced, immigration flows (which are viewed as threatening) will level out.

  • Commercial motives: it can increase exports markets. This motive can vary from self-interest to genuine belief economic development and growing export markets are harmonious.

  • Political and strategic motives; development aid can strengthen ties between countries, try to keep countries out of spheres that are perceived as dangerous (communism, radical Islam)


Riddell’s analysis

  • The standards of living in the world differ very much and the donors accept that the problems in the developing world signal a moral cause for action.

  • Problems can be revealed and solved by direct action.

  • Assistance on financial and technological fields helps solve development problems as can aid.

  • Strong moral obligation to give money to defined categories and groups in a country. This is so strong that internally some things requiring funds should be given up so more money is available for aid.

  • Foreign aid helps development based on experience from the past.


Inequality is just when it is the result of work by individuals. Only when it is the result of wrongdoing or unjust acquisition can compensation in the present take place. Also governments can only be responsible for their own citizens, not for those of other countries. And finally, even if one is in favour of development aid, this shouldn’t be given by a government to another government but should take place at a different level.


The history of foreign aid

Development aid started after WOII. First the US provided Marshall Plans to rebuild Europe and in 1949 President Truman presented his Point Four program, opening the benefits of science and industry to developing countries. In the 1950s the World Bank and UN also started development programmes. Many of the developmental ties were between former colonial powers and their former colonies. The US often used aid to contain communism and the influence of the Cuban Revolution. In 1960 the Development Assistance Committee (DAC) was formed by the OECD countries to institutionalize development aid, as efforts were recorded and coordinated. The US aid dropped, but more and more other countries started to provide aid.

In the 1980s the international economic climate made countries change their economies so they could better handle external shocks. Project aid therefore shifted to programme aid, such as Structural adjustment programmes (SAP) and conditionality. Conditionality meant that aid was supplied to countries that implemented reforms that the donor countries wanted. When the Cold War ended, development aid changed because strategic reasons for aid were no longer necessary. Now aid becomes a way to stimulate policy reform, democratic reforms, human rights and good governance. In the 1990’s SAP and conditionality shifted towards selectivity. Selectivity meant that the allocation of aid and debt relief was more and more guided towards assessment of policy reforms that developing countries had already implemented in the past. Also strategies to reduce poverty became very important.


Types and origins of aid

Official Development Assistance (ODA): financial flows to developing countries provided by official agencies with the objective of promoting the economic development and welfare of developing countries and with the grant element of at least 25 percent. (Definition by Development Assistance Committee of OECD)



    1. OECD countries; coordinated by DAC

    2. Arab oil-producing countries; varies with oil revenues.

    3. Formally centrally planned countries united in Council for Mutual Economic Assistance, modest and mostly spent on countries such as Cuba, Vietnam and Mongolia.

    4. NGO’s. quite substantial


The DAC has a number of requirements for aid. It can only have developmental objective (the US puts its military budget under aid, but this doesn’t count). The flow include both outright grants and in soft loans with a grant element of at least 25%. Loans without the grant element, such as export credit, are not past of official development assistance. But aid is not always financial. DAC records both bilateral aid (directly between countries) and multilateral aid (through International Organisations). Governments often choose bilateral aid because they can use their own conditions and aid is adjusted to the government’s policies.




  • Project aid; specific set of activities with a known duration and goal

  • Programme aid; monetary support in the form of grants or concessional loans in support of economic policy programmes. BOP support, budget support or debt relief.

  • Food aid; from surpluses of other country during national disasters, famine and when food production is too low for demands.

  • Technological cooperation; to stimulate the knowledge level, skills and expertise in a country. Experts give expertise, education, institution building or development. (so if a engineer is sent to a country, fully paid, it falls in this category)


Analysis of quantitative data

The value of the total aid flows doubled between 1960 and 1990. The US decreased a lot, but the number of countries donating increased as did the amount they donated. In the 70s, as oil prices rose, so did the aid from these countries. Most aid goes to countries with a low income. Only Latin America has seen an increased influx of aid, Africa rose since the 70s but has dropped the past years. Since 1991 the former soviet states has seen an increasing amount of aid. The countries that receive the most money, based on population number are Sub-Saharan Africa (extreme poverty and deep economic problems) and North Africa and Middle East ( strategic importance of the region). Asia is underrepresented. Only the Nordic countries and the Netherlands meet the 0.7% of GDP that was agreed upon in 1960. All DAC countries say a drop from 0.33% in 1990/1991 to 0.22 in 200/2001.


In Africa and the Least Developed Countries (LDC) development aid is a substantial part of the inflow of financial resources, as these countries cannot attract mush private investment because of their narrow markets and lack of dynamism. Only a few developing countries see private capital flows, and they are very volatile. In 19 of 29 researched developing countries the share of foreign aid in GDP was below 1%, in 4 1-1,5%. In Latin America this share is marginal, in Asia it has declined but in Africa the figure is between 10-30% of GDP.



Another problem of aid is that it is often tied. Money is sent with the restriction that it can only be spent on things in the donor country. Often the products that have to be bought are more expensive than the world market price, are not the best type or they are not compatible with the systems existing in the country. 45-55 % of aid is said to be tied. Also aid can be tied in a different way, first aid can be provided for sectors in which the country has the most expertise (the Dutch and dredging). Second experts can be sent, whose salaries have to be paid by the developing country (this has recently been changing) Still the value of aid is said to diminish by 25% due to ties.


Aid flows are important to international economic relations, even though they are such a small part of national income. In Latin America and Asia this is limited but in Sub-Saharan Africa it represents a considerable part of GDP.


Goals of foreign aid

The goals of aid vary between self-sustain growth, reducing poverty, improving the position of women or children or environmental sustainability of economic development. A few will be looked into here at a greater detail.


  • Aid as a source of investment, capital accumulation and growth

People thought for a long times that developing countries were in a vicious cycle of poverty.

Low income→ low saving →low investment → no growth of income in future so no development of industrial sector→ low income

Capital was seen as the scarce factor in development, large scale investment programmes in industry and infrastructure would help countries break this vicious cycle. An influx of capital and aid could contribute to more investment, but without the fall in domestic consumption, because the aid would come from abroad. First of all there would be finance for cpaital goods and industrial inputs, second there would be technological aid to promote the skills and knowledge in the developing country. Development aid has to provide some of the capital flows the developing country is missing. Distrust of markets dominated development strategies and therefore formed a justification for governmental intervention and financial aid flow from government to government.


Two-gap model by Chenery and Stout

The transformation of economic structures require a large inflow of external monetary resources in a short period of time. Therefore in developing countries, who cannot do this themselves, foreign aid is needed. Economic growth requires large investments in indutry and infrastructure. Two gaps were distinguished. .


Savings gap: the inflow of foreign aid can compensate for the gap in domestic savings. If domestic savings do decline, the inflow of development aid will result in an increase in domestic consumption, but the goal of investment and growth will not be reached. (Cheney later adopted the model that part of the inflow could be consumed).


Foreign exchange gap: a new industrial sector and infrastructure require a lot of new equipment and material, which can only be bought with foreign exchange.


This model looks very much at the capital and investment that development needs, and not as much at efficiency or effectiveness. Gap analysis is currently seen as someone dated because it is based on an unrealistic production function. (only focused on capital). But even the World Bank still assume some type of financial gap as they call for more real aid flow to reach the MDG.


  • Poverty reduction through aid and growth

For a long time it was thought that economic development would lead to eradication of poverty automatically. But it couldn’t be helped that for a short period inequality would increase because first savings had to increase, Because the poorer people didn’t have the financial room to save money, they would feel the economic impact. But it was thought that as growth took place, its economic effect would trickle down so the whole population would enjoy this. Also they thought income distributions equalized at later stages of development. This “trickle down theory was very much criticized during the 1960s and 1970s. economic growth didn’t trickle down, because power structures prevented this and it only lead to more inequality. Because of these criticisms new ideas, which were very idealistic, were made on how poverty could be reduced. Production factors should be redistributed among poor people. Redistribution and growth should complement each other and development aid should focus on reducing poverty and inequality. That would lead to growth for all, Unfortunately these ideas didn’t have an empirical base. Growth is the key to the reduction of poverty. But growth can be accelerated by health, education and nutritional reforms. A more equal income distribution would also help growth eradicate poverty.


A way countries try to stimulate this is by only giving aid when the developing country forms a programme on how to reduce poverty.



Technological help

Donor assistance on technological fields used to be:

  1. sending money (capital transfers): stimulates investment and makes it possible to invest in capital goods

  2. sending expertise (technical assistance): knowledge

In reality both are necessary for growth to occur. Now technical assistance has evolved into investment in human capital, sp not only sending Western experts, but stimulating knowledge through education has also become a part of this. An extra benefit is that people who are educated can also try to apply this knowledge to the specific circumstances of their countries. This was also emphasized by Schiltz who stimulated “non-conventional” inputs into agriculture, like education and research. This could lead to breakthroughs in productivity when technology was adapted to local circumstances. Investment in human capital easily leads to investment in institution building which both can have very high returns.


Policy reforms

Policy must take place at several levels for it to work, because even if policy works at one level, if a different level doesn’t also stimulate growth or development. Because many developing countries had ineffective macro-economic policies development suffered. This can be policies such as protecting the domestic industries too much and overvaluing exchange rates which lead developing countries to not being able to compete on the international market and provides them with non-viable industries. Also the agricultural sector and macro-economic instability counteracted development aid. Development could take place when countries export, when macro-economic policy is sober and exchange rates are depreciated.


Development aid has three different functions within policy dialogue:

  • Developing countries must pursue better policies for the traditional objectives of development projects to be realised.

  • Policy reform can be stimulated by conditionality on aid.

  • Programme aid can help reverse the negative effect of S.A. policies


Neo-liberals see conditionality as too insufficient because countries can promise all types of reforms, receive money, and then not stimulate the reforms any more. They stimulate selectivity where aid and debt relief is only provided to countries that have already implemented the reforms. But another group believes that the growth of developing countries is threatened by the dogmatic imposition of free-market reforms of international institutions. They believe that these institutions need reform, not the policies of the developing world. So in this sphere, the debate continues.


Effectiveness of aid- the orthodox view

Aid is said to build potential and the institutional structure of a country, in order to promote the self-reliance of that country. Which leads to the problem of aid; does it help to become more economically dynamic and raise the social welfare level, or does it make countries more dependent on the Developed countries that give them funds, and therefore makes it impossible for them to become developed by themselves?


Three positions exist, of which the first two are, in basis, quite alike because they both see aid leading to everlasting dependence:

  • Radical Left wing; aid means an even larger infiltration of the capitalist economic sphere in the rest of the world, leading to even more dependence and underdevelopment. 1970s

  • Neo-liberal; economic growth and development are hindered by development aid because it limits the dynamic market relations and lets governments intervene in a inefficient way, while they should let the market forces take action. 1980-1990s.

  • Orthodox; this is the mainstream view with governments of developed and developing countries, IO’s, aid-workers and until recently the public. Aid is a type or moral need and will solve the socio-economic problems of the developing world. Aid will provide resources that the countries otherwise wouldn’t get and aid stimulates concealed resources in the developing countries top be used. But debate exists what type (programme or project) of aid works best. But also the criticism is increasing of aid, and its inefficiency, ineffectiveness and outright waste. Also the self-interest of the developed world is mentioned as is the lack of coordination and the neo-colonist nature and the lack of adaptation to the local culture and way of working.

Another perspective is that aid will only work when a country has an effective economy and government policy, therefore a shift has taken place to conditionality and selectivity. But the fact if aid is necessary is not questioned in this perspective, only the way it should be given.



Effectiveness of aid- the Radical Left Wing view

This theory flourished during the 1970’s. The radical left wing view sees Western economic and political expansion having lead to poverty and social disintegration in the developing countries. So foreign aid, is yet another way to get these countries into the Western influence sphere and helps the West exploit the developing world. A number of theorists have different views on this:


Lappé: aid doesn’t reach the people for who it is intended because it is given from governments to other government. Because of corrupt governments and people only wanted to help themselves or their friends, money never reaches the poor. Also to implement good development projects cooperation is needed true influential figures at national, regional and local levels. And their interests are not best served by developing the poorest people. Aid only reinforces the positions of those already in power. This is supported is a thought of empirical studies. Western donors use aid as an instrument of export policy. For a long time countries that tried to follow a different policy than donor countries wanted didn’t receive any donations anymore. Food aid also isn’t a good thing because it doesn’t stimulate agricultural growth in the developing countries and makes it unprofitable because of the dumping prices.


Mende: domestic mobilisation of resources for investment must take place. Development aid only maintains the status quo, so the countries don’t mobilise themselves.


Griffin: against orthodox theories because he sees a negative correlation between inflow of development aid and the volume of domestic saving. When countries receive aid, domestic saving goes down, so the chances of economic growth also decrease. He believes helps corrupt and undemocratic regimes.

The developing countries would benefit more from better access for their exports to the international market, stronger governments and mobilizing domestic savings, according to Griffin.

In the past few years criticism has increased that the structure of the worlds economic order is weighted against the developing countries. They believe that the international institutions force developing countries to open up their markets and economies to unfair competition by the developed world. But at the same times these international institutions do condone agricultural protectionism by the US, EU and Japan.



Effectiveness of aid- the Neo-liberalist view

The was the mail criticism in the 1990 because centralised planning and the communist bloc had ended. The neo-liberalist are against intervention in the market because it discourages individual entrepreneurship and efficient allocation of resources. The main theorist was Bauer: “aid promotes the delusion that a society can progress from indigence to prosperity without the intermediate stage of economic effort and achievement. He believes that all countries that experienced economic growth did this without foreign aid. His main ideas are:

  1. Developing countries have no shortage of savings, they are not able to absorb investment. Because aid is free it increases chances of waste, inefficient use and projects that do not stimulate economic growth. (moral hazard) Portions of aid are wasted because they are spent on consumption, up keeping patron-client relationships and investments in projects that will never create revenues.

  2. Development aid doesn’t help to reduce poverty, governments receive the money, and for these governments helping the poor isn’t a high priority. He believes foreign aid means taxes on the poor of the wealthy countries leading to money for the rich of the developing countries. Money should be channelled though NGO’s because they aren’t dependent of governmental institutions in the developing countries.

  3. Governments of countries that violate human rights also receive foreign aid, and their position is often strengthened through this.

  4. Foreign aid reinforces the position of governments that pursue anti-market policies that may harm economic development. Agriculture isn’t stimulated, intervene too much in markets and are hostile towards entrepreneurs and foreign investors. Any governments also use aid to hold power and privilege themselves.

  5. And most importantly: it stimulates the politicisation of the whole society in developing countries. Development aid leads resources to be channelled to the government. People use all their resources to obtain this money as subsidies (for their own benefit). Political instability is the effect because not all ethnic groups benefit as much.


The difference between the neo-liberal and left wing approaches is that the see the market differently. The first believe that the world is better off through the market economy and the second see the capitalist market as an exploiting factor. The problem with both approaches is the same, if you do not buy into their beliefs about the market, you cannot fully underline the approach.



Hancock’s Criticism of projects

Graham Hancock wrote “Lords of poverty” which showed the times when development aid went incredibly wrong. He gives examples of nuclear plants being built on geographical fault lines, electric blankets being sent to Africa and medicines supplies being given that had been expired for fifteen years.

E to underlines that aid hardly every reach the poor and that regimes that were corrupt and totally inefficient that still received aid (Mobutu in Zaire, Papa Doc in Haiti). Hancock too believes that development aid serves the donor countries, businesses and IO’s.


Effectiveness of aid and reform possibilities

Since the 1980’s the international community has been listening to the criticism of aid, and thousands of reports have been issued about the effectiveness and success of many projects. All the studies give criticism of development aid, but final conclusions were always positive.

Past expectations have often been unrealistic, aid cannot create economic growth, it can only under favourable circumstances contribute to acceleration of economic development. Development aid can be reformed and we should learn from successes as well as failures.


  • Project evaluation; formal evaluations see that 2/3 of projects are successful in a way, though qualitative assessments by participants are often less positive. But the moral feelings that critics have do not always lead to comprehensive arguments. As has been stated before, for development to take place creative destruction must occur. Cost effectiveness of projects is difficult to analyse because projects operate in circumstances where the value of money varies. In the long run effects of projects are hard to determine because they have unforeseen benefits, that can be good even if the projects initial goals weren’t reached.

  • Fungibility; development aid doesn’t finance the projects it was apparently paying for but actually finances marginal investments or consumption using the finds released from high-end projects that would have been carried out even if this aid wasn’t received. This thesis is rejected because the number of projects in developing countries varies and a developing country never has enough money to fund all its planned high-end projects. Capital markets exist but aren’t perfect; maybe there are big projects but often private funding isn’t enough.

  • Reasons for project failure; lack of coordination, bad project designs, not looking at the maintenance, bad feedback and not learning from mistakes of the past. Often there is bad communication between the donors and the developing countries doesn’t have coordination capabilities. Also the objectives of the project often conflict. Another problem is that donor organisations are pressured to spend their budgets before the budgetary period runs out, which leads to waste and inefficiency. Focus also lies too much on new projects and nod enough on the continuation and upkeep of old projects. And sufficient feedback and learning from past mistakes.

  • Examples of success;

  • Agricultural growth in Asia and Latin America has exceeded that of the population through investments in research, education, irrigation and land improvements. Infrastructure has also been a success.

  • Education, stimulated through World Bank Projects

  • Family planning and health-care policy


Though the way food aid takes has received a lot of criticism, it as in some cases been a success. Food aid should not be given as food, but in cash so food can be bought locally. Project aid has often been very disappointing, with rural development programmes failing and small-scale projects failing to be lifted to a national level. Regionally projects have not been very successful in Africa, but the projects in South and Southeast Asia have been more successful.


  1. Development as a process of trial and error; though many projects weren’t successful one mustn’t forget that may projects in the West have failed as well. Socio-economic development and aid policy is process of “trial and error” where things are learned by trying them. Failures and disappointments are all a part of learning what works

  2. Macro economic effect of development aid; looks towards the relationships between the amount of aid a country gets and its growth in savings, investment and economy. Research differs in its conclusions about whether or not aid contributes to growth.

  3. Debate about selectivity; recently findings are more positive.

There are two groups, the first focuses on interactions between aid and effective policies, the second criticize the assumption of the first group and is more positive of the contributions that aid alone brings.

  • No significant overall relationship between aid flows and growth. Aid is very effective if provided to countries with good macro-economic policies, effective institutions and good governance.

  • The second group believes that the evidence of the first group is not strong enough. They also say there is a link between development aid and growth and they believe that aid has diminishing returns. So aid is only effective in a certain volume of the national income, if more is given it becomes negative. These critics also see the importance of policy reforms, but they criticize the empirical basis of the first groups studies of this.

  • Both critics and advocates of aid are right and wrong. In most developing countries financial flows other than aid are most important. But it is also very difficult to determine what the net effects of aid are, as its difficult to isolate from the entire economy. Aid can accelerate growth, but not produce it. It can help alleviate poverty but this should be part of a series of measures adapted to country and period.




  1. Aid has a big moral background but these moral factors only seem important when aid actually contributes to development and solving the problems of developing countries.

  2. Mistakes can be made in urgent projects, so waste of money in projects isn’t an argument against aid.

  3. Aid can both benefit the donor country and the receiving country, but should stop when the interests of the donor conflict with the effectiveness of the aid.

  4. As long as aid contributes to the dynamic country of a developing country it doesn’t matter if aid doesn’t reach the poor.

  5. If aid is an obstacle to development or stimulates policy failure it should be discontinued.

  6. Goods shouldn’t be donated if this means that the production of these goods in a country is negatively effected by this

  7. Aid has diminishing returns. When a country sees that human talent is only focused on aid flows, aid can become an obstacle to socio-economic development and should be decreased.

  8. Aid flows cannot suddenly be stopped, aid should be used to encourage reform, even if this is becoming less dependent on aid flows.

  9. NGO aid flows can take place even if government to government flow are discontinued.

  10. Emergency aid is humanitarian, but should still meat its goals and its target groups.

  11. Aid flows have made a positive contribution to development in several countries but aid relations between countries leave much to be desired. (flow back because of tying) improving effectiveness of aid is more important than increasing volumes.

  12. Developmental aid can never be a decisive factor in economic growth and development. It can only be achieved through efforts of individuals and their governments.



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Summary of Development Economics by Ray

Summary of Development Economics by Ray

Summary on Development Economics (Ray) written in 2012-2013.

Chapter A: Introduction to development

Development Economics is concerned with the economic transformation of the developing countries. The most widely used measurement to determine whether a country can be considered as being developing is the world development Report income per capita. If this is below 9.000 dollar per year the country is a low- or middle-income country, and therefore developing. Above this threshold a country is a high-income country. However, there are several complications with using this estimate, and consequently other measurements will be discussed. Development economics does not only describe the situation of the developing countries, it does also point out ways to close the gap with the developed countries (or at least improve the gap).  
It is possible to evaluate the situation of developing countries in two different ways. The first one is from a global context, and concentrates on the environmental differences between developed and developing countries. Part of the current situation can be explained this way. However, a different view is the internal and individual one of each developing country. This way, differences between developing countries can be explained and there may be individual solutions to improve the country’s situation. This analytical perspective will focus on aspects such as: market failure and government intervention. The inequality throughout the world will be described using the historical process, the implications due to market failure, the implications on other aspects and policies and there is a role for new theories and models. New empirical research offers new data, which might show that ‘established’ theories and models do not apply, or definitely need to be adjusted.  
Some economics argue that development economics is just a bundle micro-, macro- and international economics, built around specific fields such as: labour market economics, (public) finance, international trade, monetary policies etc. Obviously this is in some sense true. However, the developing countries have a complete different framework to begin with analyzing the specific fields of economics. This is the main reason why development economics is a separate subject.  
Among the most important objectives / goals of countries, economic development might be the most crucial. This ‘development’ can be quite vague, so we will need some further investigation in what a country is really aiming at and how we can measure the realized development. One way to measure if a country is developed is to analyze the physical quality of the inhabitants’ life. Do they have proper food, health, housing and clothing? Moreover, we can also add aspects such as: political freedom, technology level, environmental issues and employment level. One widely used measurement of wealth is gross domestic product (GDP) and considering this, the growth in GDP reflects the economic development of a country. However, it is clear that GDP is not a complete measurement, the way income is divided among the inhabitants as well as aspects as clean water, health services and the ability the read and write are very important. We can better view GDP as a yardstick of economic development rather than an exact definition of development. There is a correlation between GDP and social aspects as mentioned above: when additional income is used to increase a nation’s welfare on the most needing aspects it clearly raises a country’s development. When additional income is distributed to a very small group of wealthy
people, the development of the country might be significantly smaller. This results in two different ways to analyze development economics: the first is the level of average income levels and how they can be increased, and the second way focuses on the way the income is distributed among the inhabitants.  
Income Measurement

A low per capita income level is the most important sign of economic underdevelopment. To be able to compare this throughout all countries across the world, the local income level (measured in the local currency) is converted to one specific currency, which is usually the U.S. dollar. This amount is than divided by the country’s population. The world development report collects these numbers, which are
now easy to compare. One of the most eye-catching results is that of total world output (24 trillion U.S. dollars) 20% comes from low- and middle income countries. However, of the world’s population 85% lives in these countries. Another result which can be drawn from these numbers is that the richest per capita country is 400 times richer than the poorest one (respectively: Switzerland and Tanzania).  
Without any doubt, these results prove the unfair distribution of the world’s income. As the total picture is quite clear, some problems arise with measuring. One of these is the reported level of income: in developing countries the tax collection system is not as waterproof as it is in developed countries. This way the level of income may be underestimated. A second aspect which biases the level of income of developing countries is the problem of non-traded goods. The exchange rate can be expressed as
a price measured in the commodity prices relative to that of the foreign countries. The exchange rate is rather only determined by the prices of traded goods. These are, due to international trade relatively more expensive than non-traded goods. When the domestic data is than converted to U.S. dollars,Read more