MAHARASHTRA NATIONAL LAW UNIVERSITY MUMBAI

ECONOMICS-VI

SIXTH SEMESTER

‘Critical Analysis of the Development and Development gap in

Underdeveloped Economies:’

Submitted to- Prof. Rohit Jadhav

Submitted by- Ayaskanta Parida

Enr. No.-2017012

1|Page
Contents
INTRODUCTION.....................................................................................................................................3
A LOOK AT THE HISTORY..................................................................................................................5
1. Peripheral Capitalism:..................................................................................................................5
2. Adoption of Western Economic and Political Systems...............................................................6
3. The Creation of Underdevelopment:............................................................................................6
4. Ancillary Development..................................................................................................................6
5. Satellite Relationship and Underdevelopment.............................................................................7
6. Unequal Exchange.........................................................................................................................8
CONFLICT OF INTERESTS..................................................................................................................9
A. Myrdal’s View.................................................................................................................................10
B. Prebisch-Singer Thesis...................................................................................................................10
1. Marx and Baran Thesis...............................................................................................................11
2. The New School of Dependency..................................................................................................12
3. Trank’s Thesis:............................................................................................................................12
4. Unequal Exchange.......................................................................................................................12
5. Samir Amin’s Thesis....................................................................................................................13
CONCLUSION........................................................................................................................................13

2|Page
INTRODUCTION
Two pictures of the developing world compete in the media for the public’s attention. The first is
misery in places like rural Africa or unsanitary and overcrowded urban slums in South Asia. The
second is extraordinary dynamism in places like coastal China. Both pictures convey important
parts of the great development drama. Living conditions are improving significantly in most,
though not all, parts of the globe—if sometimes slowly and unevenly. The cumulative effect is
that economic development has been giving rise to unprecedented global transformations.

Consider the world of 1992, a time when the divide between the rich developed nations and the
low-income developing nations was apparently widening. Rich countries were growing faster
than poor countries; and the dominance of high-income industrialized nations in the global order
was clear-cut. The United States had just won the Cold War, with the Soviet Union
disintegrating in the last days of 1991. The end of the Cold War also saw the European Union in
the ascendency, full of confidence with its high-profile Europe ‘92 Single Market project
(Beginning of the European Union). The real estate and stock market bubble in Japan was just
beginning to deflate, with almost no one predicting the protracted stagnation that would follow
Japan’s long period of high economic growth.

Yet in 1992, many developing nations, including Brazil, Russia, India, China, and South Africa
(now sometimes grouped by the media as the “BRICS”), found themselves in precarious
conditions if not full-scale crisis. Brazil—like most of Latin America—was still struggling to
emerge from the 1980s’ debt crisis. Russia was descending into depression after the collapse of
its Soviet economy. India was trying to rebound from its worst economic crisis since
independence. China had launched its period of very rapid growth, but the 1989 massacre in
Tiananmen Square was a fresh memory and future prospects for reform and growth in China
were uncertain. Meanwhile, the end of apartheid was still being negotiated in South Africa, while
the continent as a whole was entering its second consecutive lost decade of slow economic
growth, and pessimism prevailed. Despite pressing development needs, there were widespread
concerns that with the end of the Cold War, the rich world would lose interest in development
assistance. And at the 1992 Earth Summit, while the world was taking its first tentative steps to
acknowledge and try to restrain climate change due to global warming, almost no one imagined
that 30 years later China and India would be among the top three greenhouse gas emitters.

3|Page
But since 1992, we have moved from a sharp dualism between a rich Center and a backward
Global South periphery to more dynamic and complex relationships. Asia has been growing at an
average rate almost triple that of high-income Western countries, and growth has returned to
Africa, heralding the promise of an era of global convergence. The scale of transformation is
immense.

We had the Dot com bubble burst of 2001, mortgage crisis-leading-to-financial depression of
2008-09, and the current economic crisis due to Covid-19. In between, we have seen countries in
Asia and Africa soar economically, and USA and Western Europe pulling further ahead, only
now being shadowed by China’s dominant economic prowess (which has now slowed down too).

However, there are countries in many regions which have struggled economically, even when
having huge resources. Venezuela, Nigeria, Congo come into mind in this context. In this project
we shall be analyzing the development gap and underdevelopment in such economies.

A LOOK AT THE HISTORY

To analyses the economies of developing countries, we need to study economic development in
historical perspective. The story of growth is important as it helps determine whether societies
can meet basic needs of food, clothing, housing, health and literacy, and widen human choice to

4|Page
enable people to control their environment, enjoy greater leisure, acquire learning and use more
resources for aesthetics and humanistic endeavors.

Capitalism rose in the West from the 15th to 18th centuries with the decline of feudalism, the
breakdown of church, authority, strong nation-states supporting free trade, a liberal ideology
tailor-made for the bourgeois, a price (market) revolution that speeded capital accumulation,
advances in science and technology, and a spirit of rationalism. In the last 150 years, sustained
economic growth occurred primarily in the capitalist West and Japan. But the development of
underdeveloped countries was held in check by colonization.

It started as a form of economic exploitation and has distorted the economic structure of the
Third World countries from the very beginning. The underdeveloped countries were forced to
become suppliers of raw materials to industrial countries. This unhealthy development
effectively blocked industrial development in the primary producing countries.

The foreign domination of these countries has limited the growth of the domestic market and the
establishment of basic national industries for widespread development throughout the whole
economy.

Thus, the gap between developed and developing countries of Asia and Africa and Latin
America has increased greatly over the years. A study of economic history reveals the following
basic differences in the historical processes of development between developed and developing
countries.

1. Peripheral Capitalism:
According to Celso Furtado, since the 18th century, global changes in demand resulted in a new
international division of labour in which the peripheral countries of Asia, Africa and Latin
America specialised in the production and export of primary products in an enclave controlled by
foreigners while, at the same time, importing consumer goods that were the result of techno-
logical progress in the central countries of the West.

The increased productivity and new consumption patterns in peripheral countries benefited a
small ruling class and its allies, who cooperated with the developed countries to achieve
modernisation (economic development among a modernising minority). The result is peripheral

5|Page
capitalism, capitalism unable to generate innovation and dependent for transformation upon
decisions from the external world.

2. Adoption of Western Economic and Political Systems:

According to A.G. Frank, contemporary underdeveloped countries (UDCs) do not reassemble the
earlier stages of now-developed countries. To him and many others modernization in UDCs is
simply the adoption of economic and political systems developed in Western Europe and North
America.

3. The Creation of Underdevelopment:

For Frank, the presently developed countries were never underdeveloped, although they may
have been underdeveloped. In his view, underdevelopment does not mean traditional that is non-
modern economic, political and social institution but subjection of UDCs to colonial rule as also
imperialism, i.e., imperial domination of foreign powers.

Frank sees underdevelopment as the effect of the penetration of modern capitalism into the
archaic economic structures of the Third World countries. In his view the deindustrialization of
India during the British period and the disruption of African societies by the slave trade and
subsequent colonialism are examples of creation of underdevelopment.

4. Ancillary Development:

Simply put, the economic development of the rich countries leads to the underdevelopment of
the poor. Development in an LDC is neither self-generating nor autonomous, but ancillary. The
LDCs are economic satellites of the highly developed regions of North America and Western
Europe in the international capitalist system.

Thus Afro-Asian and Latin American countries which were the least integrated into the system
tend to be highly developed. For Frank, Japanese economic development after the 1860s is the
classic case illustrating Frank’s theory. Japan’s industrial growth remains unmatched. The reason
is that, Japan, unlike most of the Asian countries, was never a capitalist satellite.

5. Satellite Relationship and Underdevelopment:

6|Page
Brazil perhaps best illustrates the connection between the satellite relationship and underdevel-
opment. Since the 19th century, the growth of its major cities has been satellite development —
largely dependent on outside capitalist powers, specially Britain and the USA. Consequently,
some regions in interior Brazil have become satellites of these two countries and, through them,
of the Western capitalist countries.

Frank suggests that satellite countries experience their greatest economic development when they
are least dependent on the world capitalist system. Thus, Argentina, Brazil, Mexico and Chile
grew most rapidly during World War I (1914 -18), the Great Depression (1929-33) and World
War II (1939-45), when their trade and financial relations with the major capitalist countries
were the weakest. Interestingly enough and significantly, too, the most underdeveloped regions
today are those that have had the closest ties to Western capitalism in the past.

They were the greatest exporters of primary products, and the biggest sources of capital for
developed countries and were abandoned by them when—for one reason or another — business
fell off. Frank gives examples of undivided Bengal, the one-time sugar-exporting West Indies,
and Northeastern Brazil, the defunct mining areas of Brazil, highland Peru and Bolivia; and the
former silver regions of Mexico in this context.

He contends that even the large plantations that had contributed much to underdevelopment in
Latin America, originated as a commercial, capitalist enterprise, not a feudal institution. This
very fact contradicts the generally held thesis that a region is underdeveloped because it is
isolated and pre capitalist.

Causes of Underdevelopment:

According to Frank the following economic activities have contributed to

underdevelopment, not development:

1. Replacing indigenous enterprises with technologically more advanced, global, subsidiary

companies.

2. Forming an unskilled labour force to work in factories and mines and on plantations.

3. Workers migrating from villages to foreign-dominated urban complexes.

4. Opening the economy to trade with, and investment from, developed countries.

7|Page
According to dependency theorists, the causes of underdevelopment are not to be found in
national systems alone but must be sought in the pattern of economic relations between
hegemonic, or dominant, powers and their client states.

Secondly, both within and among states, the unfettered forces of the market-place tend to
exacerbate rather than to mitigate existing inequalities. The dominant foreign power benefits at
the expense of its client states and the clientele class benefits at the expense of other classes.

For these two reasons development does not take place through the trickle-down of wealth or
through the gradual diffusion of modern attitudes and modern technology and thus the upward
mobility of individuals expressed by their gradual absorption into the modern sector is no
solution to the problem of the impoverishment of the masses.

To dependency theorists, foreign investment and aid did not promote development in the Third
World, but were used as a means of exploitation, that is, of extracting capital from client states.
Even where such transfers from the developed states generated economic growth dependency,
theorists would expect it to be a distorted pattern of growth that exacerbated inequalities among
classes as well as among regions within client states.

6. Unequal Exchange:

Dependency based on the international division of labor led to unequal exchange relation
between the rich and the poor. The terms of trade of LDCs deteriorated because LDCs had to pay
high prices for developmental imports and received less prices for their exports. So, their balance
of trade position deteriorated.

According to Frank, a Third-World economy can develop only by withdrawing from the world
capitalist system. However, this implies a large reduction in trade, aid, investment and
technology from the developed capitalist countries.

In the post Second World War (1939 – 45) period, developing countries grew much faster than
they did earlier. Yet, the post War growth of such countries has not been no faster than that of
developed countries. Whether this means convergence or divergence depends on time, scope and
definitions.

8|Page
Although conditions in the poor countries are for different from those in the advanced capitalist
nations, the mainstream of development thought has still been rooted in traditional neoclassical
economies. Despite the earlier anticipation of some development economists, however, an
entirely new sub-discipline of development economies has not arisen. On the contrary, devel-
opment economists have come to rely more and more on conventional principles of price
analysis and the market mechanism.

Even the revision of development strategies during 1970s has been dominated by international
trade liberalisation. It is believed that there are mutual gains from trade to be realised by both
rich and poor countries alike if they liberalise their foreign trade regimes. Foreign investment
from rich country to a poor country yields some gains both to lender and borrower. The
promotion of a liberal international economic order should yield a positive sum game – not a
North-South confrontation.

CONFLICT OF INTERESTS:
But the orthodox liberal ideology is not true in the real sense. The rich, capitalist developed
nations gain from trade liberalization at the expense of poor countries. In an earlier period,
Lenin’s warnings of imperialism contradicted Ricardo’s mutual gains from trade as a result of
free trade. In recent decades, parallel to the rise of the new development economies and the
revision of development strategies, there have been a number of dissenters who propound a
radical critique of mainstream development thinking.

There are many proponents of “Conflict of Interests”. They are Rail Prebisch, former head of
Argentine central bank and first Executive Director for the U.N. Economic Commission for
Latin America (ECLA); Gunnar Myrdal, Secretary of the European Economic Commission and
author of the American Dilemma; and Hans Singer, an economist who had studied
the “depressed areas” of Britain and joined the United Nations as early as 1946. Unlike Marx-
ists who concentrate on the unfavorable effects of imperialism or colonialism, these critics did
not base their critique on any notion of “deliberate exploitation” by the advanced capitalist
nations.

9|Page
A. Myrdal’s View:

Swedish Economist argued that “Market forces will tend cumulatively to accentuate

international inequalities, [and] a quite normal result of unhampered trade between two
countries, of which one is industrial and the other underdeveloped, is the initiation of a
cumulative process toward the impoverishment and stagnation of the latter.”

Myrdal based his argument on the possibility that the factors that made for increasing disparity
between rich and poor countries – what he called “backwash effects” – could out weight the
factors that made for the spread of prosperity from rich to poor countries – what he called the
“spread effects”.

By backwash effects Myrdal refers the destruction of local handicrafts and small-scale industry
by cheap imports from the industrialized countries, the drain of spilled labor force from the less
developed countries, and the biasing of the economy toward enclaves that produce primary
product exports.

Believing that trade in primary products will only produce a polarization effect that is stronger
than the spread effect, Myrdal argues that “economic development has to be brought about by
policy interferences” instead of through a dependence on international markets that “strengthen
the forces maintaining stagnation or regression.”

B. Prebisch-Singer Thesis:

Raul Prebisch and Hans Singer are the main critics of this ideology. The found that after opening
up trade the terms of trade of the developing nations have fallen. This occurs because the

10 | P a g e
technological innovations take place in the highly industrialised developed nations. They export
manufactured goods and increase their relative terms of trade.

Prebisch-Singer have found out that if the income of a particular individual increases, then he
prefers manufactured goods than primary products. As the income levels of developed nations
are very high compared to the developing ones, the normal residents of those countries prefer
manufactured goods.

They also support Myrdal’s view of deindustrialization and economic drain. They also supported
Myrdal’s view that cheap foreign goods destroy the domestic industries of underdeveloped
nations. This is nothing but “backwash effects”.

Industrialisation based on import substitution is, therefore, advocated to protect the one-sided
gains from trade. Tariff protection and quotas on industrial imports are believed capable of
forestalling a further deterioration in the terms of trade, avoiding BOP fluctuates which check
growth when export prices fall and promoting the absorption of the labour surplus in industry.

In their advocacy of industrialisation protection, and planning, Myrdal, Prebisch, Singer

influenced the early tenets of the new development economies. Their argument had considerable
appeal to the newly emerging countries, especially when they were combined with Rostow’s
“stages” and Rosenstein-Rodan’s “big push”.

11 | P a g e
By the 1960s, however, the new development economies were subject to criticism from two
divergent streams of thought – neoclassical economics, which underlay the revision of
development strategies and the dependency school.

Dependency:

During the 1960s, a number of writers went beyond the formulation of disequalising forces as
examined by Prebisch, Singer, Myrdal, to a more vigorous interpretation of external dependency.
Most prominent were the dependencies in Latin America and the New World Group in the
Caribbean.

Not “development economies” but “dependency economies” became their concern. They argued
that conditions of dependency in world markets of commodities, capital, and labour power are
unequal and combine to transfer resources from dependent countries to dominant countries in the
international system.

1. Marx and Baran Thesis:

In an earlier period, Lenin, and Marx warned about the orthodox liberal ideology which
contradicted Ricardo’s mutual gains from trade as a result of free trade.

And, from a Marxsist perspective, Stanford Probessor Paul Baran had written: “what is decisive
is that economic development in underdeveloped countries is profoundly inimical to the
dominant interests in the advanced capitalist countries. The backward world has always
represented the indispensable hinterland of the highly developed capitalist West”.

2. The New School of Dependency:

The new school of dependency differs from the disequalising forces approach and the Marxian
view. Being heavily represented by sociologists and political factors neglected by economists,
dependency theorists argued that the developing countries are nothing but the periphery after
trade opens up.

After industrialisation the developing country remains a periphery. Because the rich nations have
monopoly power in R and D and are the home of multinational corporations (mines). The quality
of technology used in production differs in a developing country from a highly capitalist
developed one.

12 | P a g e
3. Frank’s Thesis:

As a Marxist analyst of Latin American affairs, Andre Gunder Frank states: “It is capitalism,
world and national, which produced under development in the past and still generates
underdevelopment in the present.” Underdevelopment, according to Trank, is not simply non-
development but a unique type of socioeconomic structure that results from the dependency of
the underdevelopment country on advanced capitalist countries. This results from foreign capital
removing a surplus from the dependent economy to the advanced country by structuring the
underdeveloped economy in an “external orientation.”

4. Unequal Exchange:

Centre-periphery trade is also characterised by “unequal exchange”. This refers to deterioration

in the peripheral country’s terms of trade. It may also refer to unequal bargaining power in
investment, transfer of technology, taxation, and relations with multinational corporations.

Let us take into consideration the relationship between MNCs and the host country. MNCs
siphon off surplus from this country, use inappropriate capital-intensive technology, alter con-
sumers’ tastes and preferences and even reduce the ability of the government to control the
economy.

5. Samir Amin’s Thesis:

A more Marxist analysis of unequal exchange has been presented by Samir Amin, an Egyptian
economist who has specialised on African economics. Amin also analyses world capitalism in
terms of two categories – centre and periphery. The economy of the periphery is distorted by
outward effects. Hence, they are affected adversely by rich, capitalist, developed countries.

By “unequal exchange” Amin means “the exchange of products whose production involves wage
differentials greater than those of productivity”. He assumes that the techniques of production
used in those sectors of the periphery dominated by international capital are similar to those used
at the centre.

But since wage rates are much lower in the periphery than at the centre, unequal exchange
results. Thus, “unequal exchange means that the problem of the class struggle must necessarily
be considered on the world scale”.

13 | P a g e
CONCLUSION:
If we study the history of centre and periphery argument then we see that the developing nations
are affected from time to time. If industrialisation in the developing nation takes place; then the
quality of the product produced in those countries are backdated than those produced in
developed nations.

So, the price of the commodities produced from developing countries not only deteriorates terms
of trade but also the quality of the product. This is Sarkar-Singer’s “Double Jeopardy
Theory” (1991).

If protection takes place then the respective infant industry in present becomes more infant in the
future and requires more protection. If export promotion takes place then the respective country
may prosper in the future.

But for the case of large internal economies like India and China (which have large internal
markets), import substitution is more preferable than export promotion. Economists are yet to
reach a consensus about which policy is more attractive. So, we are not able to reach a clear
conclusion about the policy choice of the developing countries in the long run.

REFERENCE

 Ray, Debraj. 2015. Development Economics. 15th ed. Princeton, NJ: Princeton University
Press
 Janvry, Alain de, and Elizabeth Sadoulet. Development Economics. 1st ed. Routledge,
2016
 Schaffner, Julie. Development Economics: Theory, Empirical Research, and Policy
Analysis. 1st ed. Hoboken, NJ: Wiley, 2014.
 Smith, Stephen C., and Michael P. Todaro. Economic Development 12th ed. Harlow:
Addison-Wesley, 2008
 Myint, Hla. Economic Theory and the Underdeveloped Countries. Vol. 73. New Haven,
CT: Yale Univ., 1965
 Yülek Murat A. How Nations Succeed: Manufacturing, Trade, Industrial Policy, and
Economic Development. Singapore: Palgrave Macmillan, 2018

14 | P a g e