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 Development economic first appeared as distinct

area of research in 1940’s & 50’s, concurrently with

decolonisation of Asia, Middle East and Africa.

 The main object of the research was to uncover the

causes of the underdevelopment.

 As a result of this pursuit, two distinct approaches


◦ Modernisation: invented neoliberal economics with roots

in the classical and neoclassical economic school of
◦ Dependency school of though embedded in Marxist
interpretation economic underdevelopment at the hands
of the exploitative nature of capitalist economic system.

 To Marx, the survival and growth of capitalism was very
much dependent on the exploitation of human, natural
material resources of Third World.

 It was in the context, the European imperialism in the

shape of economic and political occupation of the Asian
and African and Middle Eastern countries took place
subjecting these countries to unequal exchange.

 According to dependency school of thought that the

problem of underdevelopment can not be eliminated
until unless the global structures of capitalism are not

 For that developing countries have to forge unity and

mount pressure on the industrialised courtiers to get rid
of the unequal relationship.

 However, the neoliberal policies of the capitalism draws
inspiration from the classical political economy of 18th
and 19th century represented by Adam Smith (1723-
1790), Thomas Robert Malthus (1766-1834), David
Ricardo (1772-1832) and John Stuart Mill (1806-1873).

 Adam Smith (1723-1790):

◦ He underlined the critical role of the market mechanism.
◦ The major thrust of his argument was that there may be
producers who will try to sell inferior goods at high prices, but if
the producers are competing hey will all eventually be forced to
deliver proper goods at reasonable prices.

 According to central argument of Adam Smith, when

market expanded as a result of population growth and
territorial expansion of British Empire then demand
would increase and production would grow as a result of

 At the same time specialisation would also increase as a result
of the competition.

 Specialisation, for number of reasons, would lead to higher

productivity per working hour.

 The major condition for this was an increased accumulation of

wealth which had to come form rich, especially industrialist
and their profits for productive investment in new industries.

 As a result, the newly emerging industrial sector would serve

as a base of aggregate growth.

 To Smith accumulation and investment of profits were the mist

important determinant of economic growth have played
important role in the debated ever since.

 David Ricardo: he was the first one to elaborate on the Adam
Smith’s political economy, especially on Land-rent, distribution
and the theory of comparative advantage.

 In addition to capital, Ricardo found two other sources of

growth, that is, technical innovation and international trade.

 Ricardo further argued that continued population growth and

the corresponding increase in the demand for food would
result in the conclusion of all land for agricultural production,
even the marginal land with low productivity.

 Hence, the utilization of poor and poorest land would cause the
land value/rent to go up, mainly due to the farmers
competition for the better and more profitable land.

 According to David Ricardo, this process would result in
a redistribution of national income to the benefit of
landed aristocracy and to the detriment of industrialists.

 Simultaneously marginal cost of agriculture production

would then rise with increase in the cultivation of
marginal land.

 Food prices would then rise, leading to stronger pressure
on wages which would in return, eat into the profits of
industrialists from outside.

 Final result would be the squeezing of the industrial

profits to zero whereby the whole foundation of growth
would disappear.

 According to Ricardo, only technical innovation
and international trade could prevent this sad

 The theory of comparative advantage was

elaborated in continuation above argument.

 According to which each country should

concentrate its production in areas where it had
comparative advantage in relation to other
country with respect o the productivity of its

 In accordance with this basic thesis, Ricardo suggested
that non-industrialised countries such as Portugal should
refrain form trying to build up industries and instead
concentrate on production of, for instance, wine.
Industrialised countries like England on the other hand
should produce and exchange products such as textile
and clothing for Portuguese.

 Malthus:
◦ According to his theories, population increase faster than
resources. So countries should concentrate their efforts on
population control in order to achieve the target of growth.

◦ In case no attempt is made on the part of the countries, then

nature would intervene in the form of natural calamities in order
to maintain balance between population and resources.

 Karl Marx (1818-1883), he took holistic view of the
development. He was interested in the totality of
the society.

 His focus was on how and why various forms of

society emerged, changed and disappeared and
replaced by new one.

 He classified the society into communes, the old

classless society, tribal society, feudal society,
capitalist society and industrial society. And
according to his formation of the society, society
after capitalist society it would return to stateless

 He divided society into

 super structure State

 Structure Political Parties

 Base Masses/Workers

 To him, the most important source of growth were
valorisation of and accumulation compulsion which
individual capitalist are subject to.

 To achieve profits, capitalist must exploit labour by

paying the workers the less than the equivalent of
the value they produce.

 In valorisation compulsion, the capitalist (Individual

factory owner) has continuously accumulated
capital in order to survive in competition with other,
that is expand his capital apparatus through the
pilling up of the surplus value generated by workers
and through merging with other companies (capital

 The process embodies, natural tendency on the
part of the capitalist to invest in technical
innovation in order to marginalise workers and
finally this would lead to joblessness and its growth.

 As a corollary of this, it would generate tension and

overthrow of capitalists and establish socialism and
later communism.

 Joseph Schumpeter:
 According his theory growth as the gradual
extension of capitalist apparatus and increasing

 He asserted that development could occur only
when technical innovation introduced new
production techniques, new products or new means
of organising production.

 His innovators were entrepreneurs.

 Schumpeter broke ranks with classical conception

of capitalist savings and accumulation as being the
most important source of growth.

 He believed that growth was driven by technical

innovation, in association with the entrepreneurs
mobilization of credit in economic system.

 John Maynard Keynes: in his book on the General Theory
of Employment, Interest and Money did not focus on
growth and conditions in the colonies but rather
discussed relationship between state and market.

 To Keynes employment was key to growth. Therefore, he

strongly focused in the dual role of state and market.

 According his arguments that market imperfection could

be overcome by state intervention.

 Further to support the state, he envisioned the

institutional control of international trade and finance.

 It was in this context that the IMF and World Bank were
formed in 1944 with the objective to help the development
process in Europe and bring financial stability by controlling
exchange control and providing liquidity to the members
states facing problem of balance of payment.

 By the time there was clear difference in stand of three

main schools of thought

 Neoclassical economist saw the economic development in

terms of the utility maximisation on the part of the
consumer, profit maximisation on the part of the producer
and the central role of the market as determining factor.

 Development saw the economic development in terms of
the redistribution of the growth and more so in terms of the
social development of the society.

 The Neo-Marxist economist approached the economic

development in terms of the multidisciplinary enterprise
and argue that there exist heterogeneous structures of the
economy around the world with different modes of

 Modernisation theorist saw the economic development as a

process of the transformation of the society from
traditionalism to modernitsm.

 They are mainly concerned with how traditional values,
attitudes, practices and traditional structures break down
and replaced with more modern one.

 What condition promotes and impedes such transformation

was the main focus of the modernisation theorist.

Capital Accumulation and Balanced Growth

Rosenstein Rodan and Nurkse.

 He was polish born economics. According his theory of the

development that only massive industrialisation way forward to
growth and progress for back ward areas for Eastern Europe and
rest of the world.

 He further expanded his argument into the theory of ‘Big
Push’, according to which the backward areas were
characterised by low income and little buying power.

 Further they were characterised by high employment and

under employment in agriculture.

 To break out of this mould, it is necessary to industrialize.

 However, private companies can not do this alone, partly

due to the lack of the incentives to invest as long as market
for their products remained small.

 To him , for example, one of the major impediment to the
growth is the cost being incurred on the training of workers.

 According to him barriers to growth could be overcome

with the state intervention and investment in education of
the workforce and planning and organising of large scale
investment in industrial sector.
 Rosenstein Rodan compared big push with aeroplane which
needs critical ground speed before becoming airborne.

 A similar condition applied to the growth process.

Launching country into the self-sustaining growth requires
critical mass of simultaneous investment and other

 He further developed many of Rodan’s points.

 He asserted that the economically backward countries were

caught in vicious circle of poverty.

 The reason for this situation is that the demand in backward

society is low as a consequence of the very low income.

 When demand is low and market limited then there will not be
much incentive to make private investment.

 Therefore, capital formation and accumulation remain at very low.

 As a result no productivity improvement occurs and income
therefore remain low.

 on the supply side, the low incomes result in a small capacity to

save which, in turn, is reflected in lack of capital and low
productivity. The final outcome is reproduction of mass poverty.

 Nurkse added to this that whole problem with attaining the

necessary savings and capital investment was compounded by
rich people’s tendency to copy, in their own consumption, the
consumption standards and patterns of industrially advanced
countries. This propensity on the part of the rich finally leads to
reduction in the saving rate.

 To break out of this these poverty circles, according to
Nurkse, the creation of strong incentives to invest along
with increased mobilisation of investible funds.

 This requires significant expansion of the market through

simultaneous massive and balanced capital investments in
a number of industrial sectors.

 This further depends on the active involvement of state.

Demand side
low level of
capital formation

Little incentive to low productivity level


limited market

Supply side

Low income

Small capacity low

to save Productivity

Lack of capital

Unbalance growth and income distribution.
Hirschman and Kuznets
 Unlike Rosenstein Rodan and Nurkse, Hirschman rejected the
notion that growth process could be initiated with balanced capital
investment in several sectors.

 He claimed that there was a need to maintain and accelerate

imbalances and disequilibria in backward economies.

 According to them there were other barriers to growth than

limited market and the lack of capital investment.

 According to them the major impediment to growth is lack of

entrepreneur class and management.

 According to them if the country were ready to apply the
doctrine of balanced growth hen it would be

 Instead of spending resources thinly over several sector

and manage badly, developing countries should invest in
selected sectors which had many forward and backward

 Again they suggest redistribution in favour of rich as they

have tendency to save and invest and they could be major
source of growth. After which there will be trickle down to
the poor in such way that in the end everybody would be
better off.
 Simon Kuznets had the same views that growth would
initially produce inequality but later inequality would be 26
Modernisation and stages of growth
Lewis and Rostow.
 They considered development as modernisation process.

 Developing courtiers have abundant labour force but due to the

low income their saving rate is low.

 They considered the existence of entrepreneur class necessary for

the transition to modernisation.

 Lewis divided economy into the capitalist and subsistence sector.

 The capitalist sector employs wage earners, used reproducible

capital and paid capitalists for the use of capital.

 Subsistence sector was characterised by being based primarily on family
labour, by not using reproducible capital and by low labour productivity.

 It was in the subsistence sector that the abundant labour reserves were
fond not necessarily in the shape of many unemployed but rather in the
shape of many underemployed.

 These underemployed could be transferred to the capitalist sector with

out bringing about a decline in the subsistence sector’s total production,
and a wage which was determined by the average in the subsistence

 The central problem in the in the theory of economic development was

therefore to investigate under which circumstances it would possible to
increase the rate of saving and investment in a backward and stagnant

 Lewis’s answer to this central problem was that the poor in
the subsistence sector and workers in the capitalist sector
could not produce increased savings, because they were
simply too poor to save a significant proportion of their

 The rich in the subsistence sector could either, because

they were mostly landowners, who used their rents and
other income unproductively to existing assets rather than
to create new ones.

 Therefore capitalists, the other components of the such in

the basic model, had to produce the necessary increase in
the saving rate.

 Rostow like Lewis, differentiated between the traditional
sector and modern capitalist sector.

 Further, he agreed with Lewis that a crucial precondition for

lifting an economy out of low income stagnation and into
precondition for lifting an economy out of low income
stagnation and into sustained growth was significant
increase in the share of saving and investment in national

 But Rostow was more interested in describing the whole

process through which society develops in different stages.

 Rostow divided the development process in the following five stages:
◦ Traditional Society.
◦ The establishment of the precondition for take off.
◦ Take off stage.
◦ The drive to maturity
◦ The epic of high mass consumption.

 Counter Revolution (John Toye)

 Washington Consensus – the era of Neoliberalism consisting of:

 Liberalisation
 Privatisation
 Deregulation.