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Summary Szirmai Socio-Economic Development

Global Development Studies (Rijksuniversiteit Groningen)

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Chapter 1: Diffusitn tf generalisatitns tn

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

 “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

 “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

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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


 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

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Tt measure grtwth and develtpment

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

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

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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.

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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

 Differences in colonial experiences; differences in the stage that countries have

been colonised and differences in the nature and intensity of the colonial

 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

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 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: Histtry tf ectntmy

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:

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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


 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

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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

 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:

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

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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

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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

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perspective says that without this breakthrough, there wouldn’t be a concept of


 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: Thetries tn ectntmic grtwth

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.

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 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

 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.

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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

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.

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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 apprtaches

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.

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 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

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.

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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

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

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

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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 apprtaches

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

 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

 Economic surpluses are transferred to abroad.

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 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.

3. Most investment in developing countries is in foreign hands and therefore the

investment behaviour is determined by foreign rather than by national interests.

4. 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

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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 inftrmatitn

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).

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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: Techntltgy
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.

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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

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.

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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

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

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 rtle tf techntltgical change in ectntmic thetries

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

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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.

Stme empirical inftrmatitn

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.

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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

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

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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.

Prttectitn tf intellectual prtperty 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.

Bittechntltgy and inftrmatitn and ctmmunicatitn techntltgy

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

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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: Ptpulatitn 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

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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

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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

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

Thetries abtut ptpulatitn grtwth

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

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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

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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

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

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 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!

Explanatitns tf high fertility in develtping ctuntries

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:

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 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

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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

 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

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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

Gtvernment ptlicies

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

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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


 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

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 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.

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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

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.

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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

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

 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

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

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

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comes in the place of infectious diseases, tend to increase, but these non-infectious
diseases can differ.

Thetries tn health and mtrbidity

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

 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

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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

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

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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 tf health tn ectntmic develtpment

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

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 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

 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

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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

 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

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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

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package of basic or essential interventions which should be available for


 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: Educatitn

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’

 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

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

 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.

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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

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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

 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

 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.

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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

 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:

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 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

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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.

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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

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’.

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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.

Ctmparistn develtped ctuntries and develtping ctuntries

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

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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

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

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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

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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!

Shtrtctmings in the educatitnal 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

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and they could increase enrolment and improve education by increased


 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

 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

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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 imptrtance tf 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

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(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


 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

Ptlitical functitns

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

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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.

Educatitnal ptlicy

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

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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

 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

 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 transftrmatitn

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


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

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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 definititns

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

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

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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’)

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 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 cltsed mtdels tf the ectntmy

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

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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

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

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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 rtle tf agriculture in the early stages tf develtpment

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

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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

 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

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 exptrts

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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

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.

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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

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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

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’)

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 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 tn exptrt

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

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 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

 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

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.

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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 develtpment

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

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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

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

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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.

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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

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

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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.

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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

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

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

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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

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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

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.

Gltbalisatitn, FDI and the rtle tf multinatitnal ctmpanies in develtpment.

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.

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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.

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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: Fttd prtductitn and

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

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

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most macro-economical studies is that for the next half-century the production of food
will be able to keep up with population growth.

Majtr tendencies in agricultural develtpment:

 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.

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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 prtductitn

Three sources of agricultural growth can be singled out:

 Expansitn tf 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.


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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.

 Intensificatitn tf land use and the Btserups thetry

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


7. multi-cropping with little animal food

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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

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

 Increasing the returns tf 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

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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

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: Mtdels tf agricultural develtpment

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

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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 revtlutitn

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.

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 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

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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

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


 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.

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 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 ctnsumptitn tf fttd and nutrititn

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

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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 develtpment

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

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

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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 Ectntmy

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

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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 Reftrm

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

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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.

Ntn-agricultural Develtpment

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: Ptlitics

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.

Natitn: 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.

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Ctuntry: 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.

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

Natitnalism 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.

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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 tn 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)

Eurtpe’s State ftrmatitn

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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

 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

 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 develtping ctuntries’ state ftrmatitn

 The influence of the West

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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

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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.

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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

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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

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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 gtvernmental rtle in ectntmic develtpment

 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

 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

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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:

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


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.

Interactitns between ptlitical and ectntmic develtpments

 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

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.

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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

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

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balances in the political system, making sure the judicial system is impartial, increasing
governmental accountability, using standardised rules are all ways to reduce it.

Ectntmic develtpment 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

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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 rtle tf religitn and culture in develtpment

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

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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.

Mtdern and Tradititnal Cultures

 Dichotomy between modern and traditional

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Social position achievement

mobility very mobile

Behaviour Rational thinking

goals future oriented, own actio

Family nuclear

Political system democracy

Civil society increasing role

Transactions and relationships (economy) anonymous and specialis

Relationship and interactions universalistic

Group relations affective

Orientation individualistic

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

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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.

Prtblems facing ectntmic develtpment

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

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.

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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

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


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

family situations or alone

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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

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 expansitn and its effects

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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


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 Micrt-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: Ectntmic shtcks

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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)

Ectntmic relatitns 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

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 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

Ptlitical relatitns 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,

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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.

Internatitnal Organisatitns and institutitns

1. Financial organisations

Imptrtant trganisatitns: 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

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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.

Imptrtant trganisatitns: 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:

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 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.

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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 Internatitnal Order


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

 Reducing protectionism for developed countries

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

 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


 Increasing amount of money available for development

 Debt relief for poorest countries

 More voting rights for developing countries in international financial institutions

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 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

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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.

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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 Ptlicies (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

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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.

2. 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

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

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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.

Mttivatitns ftr ftreign aid

1. Moral motives:


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 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

 Interdependence and mutual interests: through the interdependence of the global

society, all states need each other.

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

o Global environmental problems such as climate change, pollution etc need

collective action. Sustainable development must be done in collaboration with
each other.

o Avoiding international conflict

o 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.

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 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 histtry tf ftreign 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.

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Types and trigins tf 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)



a. OECD countries; coordinated by DAC

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

c. Formally centrally planned countries united in Council for Mutual Economic

Assistance, modest and mostly spent on countries such as Cuba, Vietnam and

d. 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


 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

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

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 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 tf 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.

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Gtals tf ftreign 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

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).

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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.

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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 tf aid- the trthtdtx 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:

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 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 tf 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

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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 tf aid- the Net-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

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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

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.

Hanctck’s Criticism tf prtjects

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 tf aid and reftrm ptssibilities

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

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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

 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;

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 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

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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

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


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

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10.Emergency aid is humanitarian, but should still meat its goals and its target

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

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

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