University of Bristol School for Policy Studies MSc in Development Administration and Planning

Code: M21X - Jos-Mara Tabern

Essay Title: Of the three approaches listed by Gilpin, which, in your opinion, holds out the greatest hope for the industrialisation of the LDCs?

Unit Title: International Political Economy

Lecturer: Vernon Hewitt

Autumn 1995

The future of the less developed countries is one of the most pressing issues of IPE in our era, and the resolution of this issue will profoundly affect the future of the planet1. The attempts been made for clasifying the policies pursued by different countries normally work with simple dichotomies including 'inward-looking versus 'outward-looking trade policies; 'distortionary versus 'non-distortionary policies towards the major markets of an economy; 'dependent versus 'non-dependent policies, particularly in relation with foreign investors; and 'capitalist versus 'socialist policies on industrial ownership2. Among the scholars concerned with these issues, R. Gilpin lists three approaches on economic developement, the Liberal and Classic Marxist perspectives and the Underdevelopment position. Both liberals and marxists suscribe to the dual economy theory of the world economy. In contrast, the underdevelopment perspective, wether in its structuralist or dependency version, regards the operation of the world economy as detrimental to the interests of the LDCs3. Thus the conceptions of development and underdevelopment held by the latter are as much political and social concepts as they are economic; these theorists desire not merely the growth of the economy, but also the transformation and development of the society in a particular social and political direction4. For Gilpin -a liberal himself who thereforre dismisses Marxismthe evaluation of these positions is difficult because the theories underlying them are imprecise and more in the nature of prescriptive than scientific statements, because the time span is insufficient to support judgement of either success or failure of the various strategies, and because these strategies have very different

objectives and definitions of economic development5.

The Orthodox and Underdevelopment perspectives on IPE are based on fundamentally different assumptions about the relationship between international political and economic linkages and about development6. Although there is a generally accepted liberal theory of international trade, money and investment, there is no comparable theory of economic developement, which 'only requires the removal of political and social obstacles' to the functioning and efectiveness of a market system7. Liberalism -the leading approach to development these daysmaintains that an interdependent world economy based on free trade, specialization, and an international division of labor facilitates domestic development; since the factors of production flow to those areas where they produce the highest rewards, a less developed economy with a surplus of labor and a deficit of savings can obtain infusions of foreign capital that accelerate growth8.

Nevertheless, a market is neither a natural nor spontaneous phenomenon but a complex political institution producing and distributing material and political resources9. The naive faith in the self-evident virtues of comparative advantage ignores the manner in which markets deliver different winners and losers and alter the political resources and preferences of actors over time10. After more than a decade of structural adjustment programs -the familiar mix of devaluations, deregulation, desubsidization, privatization, reduced welfare and infraestructure

budgets and state bureaucracies, etc- their impact has become apparent11. On the other hand, although dependency theory can show the flaws of the orthodoxy (demonstrating that underdevelopment is maintained in a vicious spiral by the very forces that the orthodoxy holds to be so essential for development), the policy advice it offers is also inadequate12 because these theorists have a theory of underdevelopment, but not one of development13. The essence of all underdevelopment theories is that the international capitalist economy operates systematically to underdevelop and distort the economies of the less developed countries; rather than progressing into higher stages of economic development, some of these countries have in fact actually increased their reliance on advanced economies for food, capital and technology14. According to the dependency theory, the solution to the problem of economic underdevelopment could be found in socialist -even violent- revolution and autonomous development rather than reform of the world market economy.

However what these alternatives are labelled is less important than the fact that they represent competing perspectives, and that authors working within one perspective often fail to confront directly the analyses and policy prescriptions of authors working within one another15. Gilpin shows a certain propensity to eclecticism, whilst criticising the Structuralist position to economic development, which is the one I consider holds the greatest hope for the industrialisation of the developing countries. Given the breadth of this subject, I will first describe the main

concepts of industrialisation. I will then focus on the elements of the Structuralist approach, to finally discuss its advantages and shortcomings concerning industrialisation processes.

1. Central Concepts

The Industry sector is often defined as covering four divisions of the United Nations International Standard Industrial Classification (ISIC): mining, manufacturing, construction and the public utilities, electricity, gas and water16. Industrialisation is normally interpreted as a process whereby the share of industry in general, and of manufacturing in particular, in total economic activity is increased17. Industry is central to the economies of modern societies and an indispensable motor of growth. It is essential to developing countries, to widen their development base and meet growing needs18. Industry and its products have an impact on the natural resource base of civilization through the entire cycle of raw materials exploration and extraction, transformation into products, energy consumption, waste generation,and the use and disposal of products by consumers19.

Most developing countries started at independence with virtually no modern industry19. In the literature on industrialisation in developing countries four major aspects of policy have received particular attention: The treatment of foreign trade, particularly the use of various forms of import taxes and trade restrictions to protect

domestic industry. The use of direct controls, such as investment licenses and price controls, to influence the allocation of resources both within industry and between industry and other sectors. The degree to which foreign investment by transnational firms is relied upon to provide foreign exchange and technology for new industrial projects. And the relative roles attributed to the public and private sectors in industrial programmes. Different intellectual perspectives have focused on different areas of policy with, for example, the Neoclassicals concentrating primarily on the first and the Radicals on the latter two20.

The problems and prospects for industrial development vary among the countries of the Third World, which differ greatly in size and resources. Some countries have been moderately successful in increasing the share of refined products in their exports. Yet most of these 'manufactured exports are processed further in the industrial country that imports them21. What is of particular interest is not simply the relative small number of developing countries that qualify as industrialised, but the fact that several appear to have regressed in these simple statistical terms22.

Employement is a more important indicator of structural change, since one of the main aims of a policy of structural transformation will be to shift employement from low to high productivity activities23. The substantial expansion of industrial and manufacturing output which has occured in many developing countries since 1960 is still inadequate to generate the jobs required to absorb a high proportion of the

new entrants to the labour force, let alone to offer work to large numbers of the under-employed. Structural change is accomplished when developing countries move from what is sometimes termed 'first-stage import-substitution which involves only the production of light consumer goods with relatively simple technologies, and no significant economies of scale, to the production of intermediates and consumer and producer durables. A diversified industrial structure which is capable of supplying a significant proportion of its own requirements of industrial outputs and capital goods is seen by many as a prerequisite of a self-sustaining programme for long-run growth. In this context structural change can be defined as a shift away from 'light, relatively labour-intensive industrial activities, towards 'heavy, more capital-intensive ones, and away from light consumer goods towards industrial intermediates, and durables both capital and consumer goods24.

2. Elements of Structuralism

In the words of Hirschman, the Structuralist approach starts from the proposition that certain special features of the economic structure of the underdeveloped countries make an important portion of orthodox analysis unapplicable and misleading25. The Structuralist approach possesses the following key characteristics: a belief that development is a process of major structural transformation with industry, and manufacturing in particular, having a major role; a scepticism regarding the role of the price mechanism as a means of allocating resources in

developing countries, due primarily to the assumed low price elasticities of both supply and demand; a belief in the importance of government planning as a means of achieving the structural shifts necessary for development; and an emphasis on the need to change the pattern of trade, to reduce the importance of primary exports, and to protect new industries in developing countries26. Structuralists have advocated several policies to deal with development: one is the creation of international organisations to promote the interests of LDCs; another is the enactement of international policies and regulations such as commodity stabilization programs; the most important course of action is the rapid industrialization to overcome the peripherys declining terms of trade and to absorb labor surplus. The 'import-substitution strategy is based on policies of economic protectionism, encouragement of foreign investment in manufacturing, and creation of common markets of the less developed economies themselves27. In policy terms, the link between actual policy and many of the criticisms is not necessarily direct since, for example, protection often arose from short-run responses to balance of payments difficulties rather from any long-run industrial policy28.

Structuralist analysis and the policies derived from it came under increasing criticism in the 1960s and 1970s; there were two broad lines of attack. One is associated with the Liberal school, who stress the importance of prices for resource allocation and the role of comparative advantage in planning trade possibilities, the other being the radical perspective, chiefly for its inability to analyze class formations in

developing countries and for its insufficient emphasis on the constraints to development posed by the external economic environment29. Structuralism argued evidence that a liberal capitalist world economy tends to preserve or actually increase inequalities between developed and less developed economies30. Dependency theorists argue that the import-substitution industrialization strategy of the structuralists failed to produce sustained economic growth in the LDCs because the traditional social and economic conditions of those countries remained intact to what Structuralists replied that 'dependistas' had not devised means to cut LDC's dependence on the developed countries on commodity exports, or the severe balance-of-payments problems, and the stimulation of the manufacturing multinationals from the advanced countries to expand into LDCs markets31.

The position of scholars like Nurske, Myrdal and Singer became closely identified with the work of ECLA, under the leadership of Raul Prebisch. Their structuralist theory focused on those features of the world economy that they alleged restricted the development prospects of the less developed economies and particularly on the deteriorating terms of trade for LDC commodity exports. They believed that reform of the international economy and a development strategy based on importsubstitution would be a solution to these problems. Therefore,the less developed economies should industrialize rapidly and produce for themselves products formerly imported from the more advanced economies32. Orthodox assumptions on constraints to development include lack of human resources, political fragility, ill-

suited institutions, dualistic and underdeveloped economies, insufficient basic infraestructures, a climate and a geography hostile to development, and rapid population growth. Orthodox theorists advocate export-led development programs entailing reduction of public expenditures, reduction of state economic activity, liberalization of trade, promotion of exports, and promotion of foreign investment33.

Concerning foreign trade, since traditional primary exports were seen as incapable of stimulating the domestic economy, local production of new industrial goods for the home market was an obvious alternative34. Prebischs case for industrialisation is predicated upon a basic distinction between the rich countries of the centre and the backward countries of the periphery. Two key points of asymmetry between the two groups are stressed: First, productivity growth in the centre is taken in higher wages, whilst in the periphery in the traditional export sector it leads to lower employement with a consistent downward pressure on wage rates. Second, the income elasticity of demand for the peripheries imports is seen as exceeding substantially that for its exports. So Prebisch points out that it is rational to shift resources into new industrial activity even if this activity is high cost by international standards, provided that the losses sustained through the excess of domestic production costs over the costs of comparable imports, are less than the income losses, which would result from falling export prices as a result of the expansion of traditional exports35. It is clear that he did not advocate total autarky, and that the potential gains from trade were not overlooked36. The case for industrialisation as a

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means of saving foreign exchange remains valid, although arguments on the need to give priority to capital goods production because of its effect on the rate of investment (Mahanalobis and Feldmans 'heavy industry fundamentalism) now appear dubious37.

Central to the Structuralist position is the view that externalities (effects created by individual producers and consumers that are felt elsewhere in the economy) are more significant in industry than in other sectors38 for where they exist the net benefits to the economy as a whole can differ significantly from the benefits accruing to private producers. In general, developing-country industrial production is diversifying and moving into more capital-intensive areas such as metal products, chemicals, machinery, and equipment. The existence of externalities provides much of the rationale for appraising investments from a broad economic perspective, and for planning and co-ordinating investment activities39.

This element makes room for an increasing concern related to industrialisation, environmental protection: heavy industries -traditionally the most polluting- have been growing in relation to light industries40. The expected growth in basic industries foreshadows rapid increases in pollution and resource degradation. LDCs do not have the resources to industrialize now and repair the damage later41. Structuralism includes these costs in its assumptions.

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Also central is the question of linkages (production relationships in an inter-industry framework), be it backward (from a particular industry to its suppliers) or forward (to its users) linkages, reflecting production interdependence and maturity. Finally, the infant-industry case for protection from imports is the proposition that new activities can only be mastered effectively over a period of time and that new industries will, after this learning period, fall to international competitive levels and the entire economy will gain from their protection42.

3. Conclusion

The gap between rich and poor countries is widening -not shrinking- and there is little prospect, given present trends and institutional arangements, that this process will be reversed43. After the fall of the Soviet block, the real range of choice for economic development in the 1990s is likely limited to some combination of capitalist forms: international and/or national; large and/or small scale; and formal and/or informal44. Whilst several Dependency authors have raised highly important points on the limits to industrialisation in the periphery, particularly on the role of transnationals and their relations with the state and local capital, however, the view that capitalist industrialisation in the periphery will inevitably be blocked seems untenable. On the other hand, beyond the general agreement on the primacy of internal factors, liberal development theories differ profoundly among themselves

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on the appropriate strategy for a less developed economy45. Liberal economists contrast the amazing economic success of the export-led growth Asian NICs with the failure of the import-substitution strategy of most Latin American countries46. In fact, Asian NICs have received great infusions of capital and technology from the advanced countries47. The future success of NICs and the ability of other countries to emulate their export-led strategy will depend upon the global rate of economic growth, the openess of the advanced eco-nomies, and the changing character of industrial technology48. NICs did implement import-substitution strategies at one stage or another on their path to industrialisation, until they shifted to their current export-led strategy. The specific reasons for the failure of an import-substitution strategy in Latin America and other LDCs include the following: the relatively small size of national markets led to uneconomic plants, excessive protectionalism weakened incentives to improve quality of production, and the need to import industrial technology and capital goods caused massive balance-of-payments and debt problems49.

Since their attainement of independence, most of the African countries have followed the export-led development strategy presented by the Western powers and the international financial institutions. The results have been disastrous. The African economies have not only not developed, but in most cases they have stagnated and in many cases they are actually in decline50. The domestic and international configurations of power and the interests of powerful groups and states are

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important determinants of economic development. Lenin -the real father of dependency theory- argued that the final contradiction which would bring down capitalism was not class strugle within the developed world, but betwen de developed North and the 'global proletariat in the underdeveloped world51. The classes that have emerged in the underdeveloped countries have neither been able to accumulate the capital required for social transformation, nor been willing to spearhead social change, for fear of losing their power and way of life52. Whereas LDCs ruling classes share interests and communications, the proletariats were divided into national jurisdictions with minimal transnational contact53. Promoting the orthodox paradigm also served Western interests because accepting the paradigm meant accepting the current international division of labor54.

Traditional forms of national sovereignity raise particular problems in managing the 'global commons and their shared ecosystems55. In my opinion, Structuralism is the approach to industrialisation which adresses most of the issues related to the political and economic aspects of industrialisation, including the environmental ones, even though it participates of the widespread disillusionement with much of the effects of industrialisation in developing countries despite the relatively impressive performance discussed above. All nations will have a role to play in changing trends, and in righting an international economic system that increases rather than decreases inequality56.

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ENDNOTES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. Gilpin, R. (1987), p.263 Weiss, J. (1988), p.27 Gilpin, R. (1987), p.265 Ibid, p.287 Ibid, p.291 Ofuatey-Kodjoe, W. (1991), p.186 Gilpin, R. (1987), p.266 Ibid. Higgot, R. (1994), p.531 Ibid, p.532 Shaw, T. and Inegbedion, E.J. (1994), p.398 Ofuatey-Kodjoe, W. (1991), p.186 Ibid, p.187 Gilpin, R. (1987), p.273 Weiss, J. (1988), p.xv Ibid. Ibid, p.4 WCED (1987), p.206 Ibid, p.208 Weiss, J. (1988), p.26 WCED (1987), p.214 Weiss, J. (1988), p.21 Ibid, p.6 Ibid, p.9 Ibid, p.82 Ibid, p.83 Gilpin, R. (1987), p.277 Weiss, J. (1988), p.85 Ibid, p.84 Gilpin, R. (1987), p.274 Ibid, p.281 Ibid, p.274 Ofuatey-Kodjoe, W. (1991), p.185 Weiss, J. (1988), p.86 Ibid, p.89 Ibid, p.86 Ibid, p.94 Ibid, p.95 Ibid, p.97 WCED (1987), p.208 Ibid, p.215
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42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.

Weiss, J. (1988), p.103 WCED (1987), p.2 Shaw, T. and Inegbedion, E.J. (1994), p.400 Gilpin, R. (1987), p.268 Ibid, p.267 Ibid, p.268 Ibid, p.303 Ibid, p.292 Ofuatey-Kodjoe, W. (1991), p.175 Fukuyama, F. (1992), p.99 Ofuatey-Kodjoe, W. (1991), p.173 Shaw, T. and Inegbedion, E.J. (1994), p.395 Ofuatey-Kodjoe, W. (1991), p.174 WCED (1987), p.18 Ibid, p.22

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BIBLIOGRAPY 1. Gilpin, R. (1987) The Political Economy of International Relations. Princeton University Press. Princeton, N.J. 2.Shaw, T. and Inegbedion, E.J. (1994) in Stubbs, R. and Underhill, G. (eds). Political Economy and the Changing Global Order. Macmillan. Houndmills. 3. Ofuatey-Kodjoe, W.(1991) in Murphy, C. and Tooze, R. (eds). The New International Political Economy. Lynne Rienner Publishers. Boulder, Co.

Future. Oxford University Press. Oxford, 1987.

4. World Commission on Environment and Development (1987) Our Common

5. Murphy, C. and Tooze, R. (eds). The New International Political Economy. Lynne Rienner Publishers. Boulder, Co.

Changing Global Order. Macmillan. Houndmills.

6. Higgot, R. (1994) in Stubbs, R. and Underhill, G. (eds). Political Economy and the

7. Fukuyama, F. (1992) The End of History and the Last Man. The Free Press. New York. 8. Weiss, J. (1988) Industry in Developing Countries: Theory, Policy and Evidence. Routledge. London.

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