DRAFT ESSAY How does Hirschmans approach to understanding development possibilities by looking at linkages stand up to the criticisms levelled

against the early development economics?

This paper aims to view some of the main criticisms levelled against theories of development economics, and alongside evaluate Hirschmans linkages approach in the light of these criticisms. Development economics as a separate stream arose after the successful reconstruction of war torn European states in the 1950s. It gave economists the hope that other underdeveloped regions of the world too could be developed. However, the large body of literature which came forth was not able to satisfy anyone; both in terms of the underlying theoretical assumptions as well as the lack of any positive results in the real world. With the growth rates of real GDP per capita falling from 3.9% in 1965 to 2.5% in 1973 for developing countries and from 2.1% to 0.4% for Sub-Saharan Africa (WDR, 1991, p.3). Expectations of reductions in world poverty and inequality levels had not been lived up to in fact since 1960...national incomes have continued to diverge (Jackman 1982; Sheehey 1996; Jones 1997) (Firebaugh, 1999, p.1601) The earliest works took growth and development to be synonymous with GDP/income growth (Harrod-Domar, 1946; Solow, 1956). However, the trend changed with the introduction of newer approaches such as the Basic Needs Approach(1972) which focuses on basic private and public human needs such as food, education, health, safe drinking water (Galtung, 1979). The lack of homogeneity between the works produced by development economists created even further difficulties as no one conclusion could be reached about the right set of policies which could send an underdeveloped country on a developmental path. Some of the main criticisms levelled against early development economics will be discussed below. One Size Fits All One of the most fundamental assumptions that development economists made in the early days was taking the 3rd World as one unit; countries with same developmental problems and needs. It was due to this misconception that economists such as Rostow (1960) came up with a model of economic development which predicted five-stages of growth for all countries, without realizing that different underdeveloped countries were at varying levels of growth and experiencing different socio-political conditions. Prescribing a generalized formula would not be the solution especially when reality is dynamic and continuous; it is
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difficult to differentiate when one stage ends and the next one begins. Hirschmans (1981) linkages approach has not succumbed to the same problem. He has taken into account the different conditions of every country to very micro levels such as the staple which is being produced in relation to other conditions prevalent in the country; the governments role and stance, the history of the country, the industrial policy and other factors which make each country unique. Income-Focus Another area that has been a target of criticism is the focus of the earlier models and theories on the income side of the economy alone (Harrod-Domar, 1946; Solow, 1956; Galenson-Leibenstein, 1955; Baldwin, 1956). Excessive importance was attached to GDP growth rates without much importance being given to other crucial factors that underpin development in any society such as health, education, equality; these were later incorporated into the Basic Needs framework. However, Hirschman (1981) does not allude to this in his paper which takes into account the linkages that are created due to production and consumption processes; income increase is only a part of the consumption linkage(p.65). Similarly, when he talks about the role of government in creating fiscal linkages, income increase is not the end but it is a means by which governments can generate tax revenue and direct this as investment into developmental projects. One drawback of this approach is that Hirschman does not specifically clarify what he would classify as developmental projects which could leave policy makers in ambiguity. Trade International trade and the benefits it could generate has been the topic of debate for a long time. Many (Smith, 1776; Ricardo, 1817; Hecksher-Ohlin, 1919/1933; Samuelson, 1949) feel that trade between countries would generate benefits for all partied involved. As Hirschman (1981, p.60) has noted, Paul Samuelson(1949), even went to the extent that under certain assumptions international trade could not only be mutually beneficial but could also lead to equalization of incomes across the world. The Prebisch-Singer (1950) hypothesis on the other hand is critical of the role that international trade plays and points towards a worsening of the terms of trade between the developed and the underdeveloped countries where the latter produce primary commodities and import manufactures from the developed world. Proponents of the NIEO, based on the trends shown by history, also assert that if trade is to be beneficial then not only should the terms of trade between the developed and the underdeveloped countries improve but the poor countries should aim to increase trade amongst themselves and have greater control over their resources (Galtung, 1978-9, p455). Hirschman (1981), via linkages, looks at the role that staples play in the world trade, but his focus is more at the national level and the impact of the production of a certain staple on the economy, society and politics of that region. He has a more micro approach towards the issue and not a macro one. However, at a macro level, Hirschman (1982) has also highlighted the possibility of polarization effect due to international trade between countries unless the policies adopted by governments are able to tackle the forces that lead to such a polarization (p.383). This could possibly be done via taxation of foreign firms to create fiscal-linkages (Harrison, 1981).
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Industrialization The first and most emphasized aspect of the early development economics is that of industrialization. It was believed that the only way forward was through industrialization and a movement away from the agriculture sector. Different policy measures were adopted by different countries; the Latin American adopting the ISI and the East Asian economies, initially following an ISI strategy by protecting their infant industries and later, the Export Promotion strategies. They met with different results. Industrial policies were implemented without looking at the inflationary pressures created by them in most economies. Hirschmans linkages theory would agree that industries are important only when they complement the existing production structures; agriculture and otherwise, via forward and backward production linkages. Here the role of the government is to direct investment to the setting up of such industries and to create fiscal-linkages, redirecting investment towards development projects to stabilizing fluctuations in the prices of staple commodities by creating marketing boards and managing the exchange rates (1981, p82).

Technology Technology has been an important variable in explaining growth in output and increasing per capita income of countries. Previous models took technology into account via different means; either exogenously given (Solow Model) or endogenized into the models by taking into account human capital. But the type of technology, according to Hirschman (1981), should be one that does not require a big jump for the sectors adopting it. Technological improvement was unanimously taken as a positive but, unlike earlier models, Hirschman asserts that if the technological jump is very large then it will not be beneficial for certain types of industries and the operators will take a long time to adjust to it, which would, in turn, reduce their productivity.

Backward linkage-based policies such as ISI have largely been abandoned. These policies were often part of a larger package that included a reliance on central planning, quotas and exchange controls, overvalued exchange rates, and wage rigidity, a mix that led to stagnation and macroeconomic crises. Yet many policies based on forward linkages remain quite popular.(Hausmann et al, 2007, p.5) Krugman(1995), however, feels that Hirschmans linkages approach did not add anything new to the ongoing debate in development economics, in effect Rosenstein-Rodan was already talking about linkages, and Fleming very explicitly had both forward and backward linkages in his discussion (Krugman, 1995, p27). Similarly it was felt that the prominent role for linkages was despite the lack of clear theoretical foundations and that without any clear definition of a market failure, Hirschmans linkages are are of no particular economic significance(Hausmann et al, 2007, p.5). Moreover, international trade leads to specialization in comparative advantage products obtaining the inputs from trade, implying a fall in costs due to trade which make the linkages less important. This

view is consistent with evidence that vertical specialization has grown significantly over the past 20 years.(Hausmann et al, 2007, p.5) In fact the effectiveness of Hirschman lay in his methodology and the policy advice it generated. Hirschman is concerned with the path of development and generalizes from facts and experiences. Unlike traditional development economists, who do not generalize from the facts of experience; rather, they attempt to construct models based on assumptions about how economic agents would behave if they acted rationally in their self-interest and this rationality is bounded by the competitive equilibrium model of economic theory(Wilber & Francis, 1986, p.192). His analysis does not depend only on the market organization but extends to non-market linkages.. which can handle ways of coordinating human activity well in excess of those of the market (Frank, 1960, p437).

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REFERNCES:

Firebaugh, Glenn,(1999), Empirics of World Income Inequality, The American Journal

of Sociology, Vol. 104, No. 6 , The University of Chicago Press. Accessed: 09/11/2010 Stable URL: http://www.jstor.org/stable/2990982
Galtung, Johan, The New International Economic Order and the Basic Needs Approach, Alternatives, 4:4 (1979:Mar.) p.455-476

Hausmann, R., Klinger B., Lawrence R.(2007). Examining Beneficiation, Center for International Development, Harvard University.
Hirschman, Albert O. (1981) The Rise and Decline of Development Economics, Essays in Trespassing, Cambridge University Press, Chapter 1, pp. 1-24 Hirschman, Albert O. (1981) A Generalized Linkage Approach to Development with special reference to staples, Essays in Trespassing, Cambridge University Press, Chapter 4, pp. 59-97 Krugman, P. (1995) The rise and fall of development economics, in Krugman, P., Development, geography and economic theory, Cambridge, MIT Press, pp.1-29 Lal, Deepak (1985), The misconceptions of development economics, Finance and Development, June 1985 p. 10-13

Wilbur C., Francis S.,(1986). The Methodological Basis of Hirschmans Development Economics: Pattern Model vs General Laws, World Development. Vol. 14, No. 2, pp. 181-194,