Continued-Classical Theories of Development

3) International (External) Dependence Revolution:

This (third) approach of development appeared in the 1970s but went out of favor in the
80s and 90s then it re-surged in the early 21 st century by anti-globalization intellectuals.
This model explains that the underdevelopment is due to external dependency on
developed countries. Three major streams of thought contributed to this approach:
a) Neo-Colonialism: Although most developing countries got their
military independence and are no longer colonized, however there is a new form
of colonization that currently exists, where the world can be divided into the
center rich-developed countries and the periphery poor-developing
countries. This neo-colonization is due to the heavy dependence of developing
periphery countries on the developed center countries to supply them with
food, technology, financial aid, military support etc.

b) False Paradigms: This is related to foreign experts in international

organizations coming from developed countries who are supplying the
developing countries with wrong and false solutions to their underdevelopment
problems (unintentionally or intentionally), as they are not well informed and
bias. Such solutions do not benefit the economy and only benefits certain elite
groups both domestically and internationally.

c) Dualistic Development thesis: This is related to dualism in the

coexistence of superior elements rich countries or individuals with inferior
elements poor countries or individuals. This coexistence is chronic and not
transitional as the degrees of superiority and inferiority not only show no signs
of diminishing but in contrast tend to increase. This is mainly attributed to the
argument that the superior elements do little or nothing to pull the inferior ones.
In fact, they may even push inferior elements down thus contribute to develop
its underdevelopment.

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The external dependency model can explain the situation in the majority of the
developing countries. This model states that too much international intervention
(dependency) is the reason for underdevelopment. However the dependency varies from
one developing country to the other in terms of the type of dependence and the degree of
dependence. It suggested that the solution is to change this unfair world capitalist system.
The main criticism of the model is that it attributes all the blame of underdevelopment to
external factors.
4) Counterrevolution model:
The counterrevolution model was the theory that started to prevail in the 1980s and early
1990s. This model explains that the problem of underdevelopment results from poor
allocation of resources due to incorrect pricing policies and heavy state intervention.
Contrary to the claims of the external dependence approach, it is not dependency on the
rich countries but rather heavy state intervention and corruption, inefficiency and lack of
economic incentives that hinder the economies of developing countries.
According to this models the ultimate solution was promoting free market and laissez-
faire economy (decreasing government market regulation (price distortions in factor
price, product and financial market), privatizing public enterprises, promoting free trade
and allowing foreign investment from developed countries. Evidence is the success of
South Korea, Taiwan and Singapore.

The neoclassical counterrevolution model can be divided into three main approaches:
Free-Market Analysis: Market alone is efficient in directing consumers and
producers choices and accelerates growth, while any government intervention will
distort prices thus economic choices. Through free trade and investment
developing nations can freely import technology available in developed country.

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 Public-Choice Theory: goes to an extreme situation that governments cannot do
anything right. Politicians use government policies to maintain position and
power. Elite citizens use politicians to influence government policies to their own
interests. So Government intervention creates bureaucracy, corruption and
misusage of resources. Accordingly the best government is a small one minimal
government that is not so influential.

The market-friendly approach: is the most moderate approach on the

neoclassical counterrevolution model. This approach recognizes that developing
nations suffer imperfect product and factor markets, beside the market failure and
externality effect that makes the intervention of the government needed only ( in a
market-friendly intervention) to direct such issues.
Criticisms:
Invisible hand would not act to promote the general welfare but rather to lift up those
who are already well off while pushing the majority. Developing nations are much
different in their economic and political structure that free market cannot guarantee
success in all side. There are no perfect markets in real world and the situation in
developing nations does not guarantee that the invisible hand will be better than
government intervention. Information is limited, markets are fragmented and much of
the economies are primitive.

It needs to be noted that social behavior and values are not included in any model,
however they are extremely important.

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Recommended Further Readings: Traditional Neoclassical Growth Theory.
(not included in exams)

Solow neoclassical growth model: It is an extension to the Harrod Domar

formulation by adding a second factor labor and a third independent factor
technology.
The Production Function according to Solow: Y K ( AL)1
Y: gross domestic product
K: Capital
L: Labor
A: Level of technology
t: time
: the elasticity of output with respect to capital
This implies that output growth is due to one or more of the below factors:
- Increase in Labor whether quantity (population growth) or quality (education
level)
- Increase in Capital ( through saving and investment)
- Improvement in technology.