Perspectives on Development

Mohamed Rabie

Mercantilism was probably the first theory of economic development the European nation-states
invented; it called for the development of industry, the promotion of exports, and the limitation of
imports through protectionism. But as these policies were being pursued with a vengeance, a
world of interdependence was slowly emerging and making mercantilism controversial. Adam
Smith published his thesis The Wealth of Nations in 1776, which brought new economic ideas
and paved the way for the development of the classical economic theory.

David Ricardo developed the comparative economic advantage concept, which states that each
country has an economic advantage over most other countries in one respect or another.
Because of this, Ricardo argued that each country should specialize in producing the goods in
which it has a comparative advantage. Specialization based on the comparative advantage
would enable each country to produce some goods at lower cost than most other countries,
making trade beneficial for all nations involved. Ricardo argued convincingly that mercantilism
limits trade and denies society the benefits of cheaper and often better foreign goods. The Corn
Laws, enacted by the British Parliament in 1815 to protect Britain’s landed aristocracy from
foreign competition, were consequently revised in 1832 and repealed in 1846.

The ideas articulated by Adam Smith in the Wealth of Nations were instrumental in developing
the classical economic theory. Two of the most enduring ideas formulated by Smith are the law
of supply and demand and the free market “invisible hand.” The first concept says simply that
the price of any commodity is determined by the amount supplied by producers and the amount
demanded by consumers. In other words, the price of each commodity is determined by the
amount offered for sale by its owners and the amount desired by its potential buyers. When the
supply of a commodity increases in excess of what is demanded, its price declines; when the
demand for a commodity exceeds what is being supplied, its price increases. So, to have stable
prices, supply and demand needs to be in balance, which the forces of a free market are able to
manage. As for the invisible hand, it is created by the workings of supply and demand, which
give the free market the capacity to allocate available resources among the many investment
opportunities and distribute products among the many consumers and users. In the 1950s and
1960s, traditionalism was perceived as causing underdevelopment in the Third World, and

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modernization was perceived as the solution to that problem. ( John Knippers Black, Development
in Theory and Practice (Westview Press, 1989 15)

As a consequence, modernization was associated with Westernization and development with

industrialization, causing development to be seen as an automatic process that follows the
Western model of economic change. As a result, many economists argued that all that was
needed to launch Third World development was to create an economic process and put it on the
right path. John Kenneth Galbraith, for example, wrote development “is the faithful imitation of
the developed.” (John Kenneth Galbraith, Economic Development, Harvard University Press, 1969 3)
But for many reasons the Western experience could not be replicated. Peoples of the Third
World in general tend to oppose modernization because they view it as a facet of colonialism
pursued through foreign investment and large corporations. Another factor that contributed to
the failure of the modernization theory is its emphasis on the economic aspects of life and lack
of interest in most other aspects; modernization theorists tend to think that while everything in
life matters, economics matter most.

The World Bank built its programs on the premise and promise of modernization, which calls for
transforming traditional states of life and ways of life through investment in infrastructure,
industry, and education; it also calls for the application of the capitalist model of economic
growth with emphasis on savings and trade. While the good intentions behind modernization
provided Third World peoples with better health-care services, sanitation, and education, they
caused problems associated with high population growth rates, rising expectations,
urbanization, and authoritarianism to be aggravated. As a consequence, modernization became
more of a bind tying people to things they could not afford, like consumerism, and less of an
open space to free them from traditions and authority and unleash their creative potentialities.

Moreover, modernization caused many of the treasured traditional values and social and
political systems to be corrupted without developing alternative values and systems to replace
them, creating a trust deficit. And despite the introduction of modern education, the new system
failed to produce well-trained and disciplined workers or establish stable political systems that
recognize peoples’ rights and respect the law. Aspects of modernity that Third World nations
have generally borrowed were instrumental in giving a small segment of each society a lifestyle
that made them look modern on the outside but hid a great deal of sociocultural traditionalism
and political authoritarianism inside.

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Generally speaking, there are three major perspectives on development. The first is a classical
one that follows a traditional capitalist approach and emphasizes economic liberalism. The
second is a socialist one that emphasizes state intervention and economic planning to manage
national resources. And the third perspective is a cultural one that emphasizes the role of
culture in determining the pace and fate of development. While the first perspective sees
development as an evolutionary process moving economy from traditional agriculture to
industry, the second sees development as a revolutionary program to undo the impact of
colonialism and end dependency on the capitalist system, and the third perspective sees culture
as the most important factor that determines the fate of societal development.

Nonetheless, all perspectives are largely based on assumptions that view economies as
national entities functioning within specified borders and view the nation-state as a power
controlling most decisions including the economic ones. Consequently, the primary market in
which economy functions is national and so are the major obstacles it faces. And since the state
is in control, it has the capacity to overcome obstacles and influence the course of economic
change. But due to economic and cultural globalization, free trade, common markets, and
knowledge, this presumed reality has been changed, causing the assumptions upon which
development theories are based to be largely invalidated.

After the development of Europe following the industrial revolution, no nation could develop on
its own; every nation became, in one respect or another, dependent on Europe. And once
dependency develops, it becomes difficult to overcome. Attempts to start indigenous processes
of development, while ignoring what the developed nations have already accomplished in the
fields of economic ideas, management, and technology, are self-defeating. Since advanced
technologies and knowledge are today available and rather easy to get, developing nations
need to get as much of them as possible; these are two critical agents of economic growth that
can facilitate economic and sociocultural transformation. However, development must be
understood and approached as a comprehensive process of societal change that exists and
functions in a global environment.

The Classical Perspective

The first generation of development theorists viewed development as economic growth only,
and, therefore, they emphasized the role of capital and investment in accelerating economic
growth, which led them to call for raising national savings rates and building the physical

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infrastructure. The neoclassical theorists emphasized not only the role of savings, investment,
and infrastructure but also technology and education. They saw a strong connection between
savings and capital accumulation and believed that for capital to be productive it needs modern
technology. Utilizing modern technologies makes it possible to produce a larger amount of
goods using the same amount of inputs, as well as producing the same amount of goods using
a smaller amount of inputs; it also makes it possible to produce better, more competitive goods
and services.

To the classical theorists in general, development is an automatic process caused by

investment. Since no investment is possible without capital, higher levels of savings were
needed to cause capital accumulation and thus investment and economic growth, making the
availability of investment capital the primary factor that determines the fate of development. And
for investment to be effective, classical theorists gave priority to infrastructural projects and
basic industries. Not much was said about noneconomic factors, such as culture or politics, and
their potential role in inducing economic development and hindering sociocultural change.

Nonetheless, classical economists recognized the role of the entrepreneur and education in
influencing the pace of development. If such factors were adequate, some argued, development
would follow without much delay. The entrepreneur, according to Joseph Schumpeter, is the
one who directs investment and determines where and when to invest. Since the entrepreneur
is the one who takes the risk of making decisions, he becomes an indispensable player in the
development process. Education, meanwhile, was emphasized as a critical factor in raising
labor productivity. However, while education increases the knowledge of workers, it does not
necessarily lead to transforming workers’ attitudes, and if attitudes do not change, productivity
will not increase. By acknowledging the positive role of education only, classical theorists failed
to see the other side of education that can, under certain conditions, make it a liability. And by
ignoring culture, they failed to see how traditions, values, religion, attitudes, and social and
political structures affect change in society.

B. F. Hoselitz said, “The main problem in the theory of economic growth, which arises as a
consequence of relating social-structural and cultural factors to economic variables, is to
determine the mechanisms by which the social structure of an underdeveloped country
becomes altered and takes on the features which characterize an economically advanced
country.” (Cited by Yusif Sayigh, The Determinants of Arab Economic Development, St. Martin’s Press,
1978 24) This clearly indicates that Hoselitz understood the critical role of the sociocultural factor

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in development; however, he provided no plan to address this issue within a theory of
development. The dilemma that Hoselitz and others faced in dealing with the sociocultural
aspect of life led classical theorists to concentrate on savings, investment, technology, and
entrepreneurship as primarily economic variables. But despite the importance of these
variables, they cannot be harmonized because decisions dealing with them are taken by
different people who often have little in common and rarely have contact with one another.

Moreover, the emergence of the large investment bank, the multinational corporation, and the
numerous aid agencies and not-for-profit organizations have complicated all decisions; they
made decisions regarding savings and investment and technology transfer beyond anyone’s
control. For example, money deposited in a small bank anywhere in the world is usually
transferred within hours to one of the larger European, American, or Asian capital pools, where
bankers act on their own and make investment decisions without feeling an obligation to consult
with depositors or governments. People who control money today do not know who owns the
money they control, and they do not seem interested to know.

In 1960, W. W. Rostow published The Stages of Economic Growth, in which he provides a

theory of development. The book, which gained unusual attention at the time, outlines five
stages through which underdeveloped economies are supposed to go to become fully
developed. Rostow called his book a noncommunist manifesto, claiming that his approach, and
not the Marxist one, provides the right strategy for the underdeveloped countries to join the
developed world. Rostow’s approach was not much different from the approach advocated by
classical theorists; it was only more detailed and deterministic. The sense of determinism the
strategy contains was apparently necessary for Rostow to call it a noncommunist manifesto.

The stages of economic growth as outlined by Rostow are as follows: the traditional stage, the
preconditions for take-off, the take-off, the drive to maturity, and the mass consumption stage.
Each stage has its preconditions and accomplishments, and accomplishments serve as the
preconditions for the succeeding stage. Rostow, nevertheless, has difficulty explaining how
economies and societies move from one stage to another and identifying the major obstacles
that face development at each stage. And while emphasizing savings as other classical
theorists did, he fails to explain when and why people start to save more and when and where
they start to invest. In addition, Rostow largely ignores the role that noneconomic factors, such
as traditions, values, institutions, and politics, play in influencing decisions related to savings
and investment. Nevertheless, Rostow acknowledges that many economic changes come as a

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consequence of noneconomic human behavior. He interpreted human behavior as “an act of
balancing alternative and often conflicting human objectives in the face of the range of choices
men perceive to be open to them.” (W. W. Rostow, Stages of Economic Growth, Cambridge University
Press, 1965 149)

The stage interpretation of development outlined by Rostow implies that all economies are
destined to advance along the lines described by his theory. But such interpretation fails to
explain why many economies have remained in the traditional stage while others have passed it
or why some economies have reached the preconditions for take-off and remained there for
decades unable to make further progress. Furthermore, Rostow’s analysis gives the impression
that a less developed country is advised to start with the agricultural sector before launching a
rapid industrialization program. While this advice sounds logical, it ignores the following:

1. That industry is a major force in agricultural development because of the modern tools,
irrigation systems, and improved seeds and fertilizers it makes available for farmers to raise
productivity and utilize land more efficiently; and

2. That waiting for agriculture to develop may complicate the situation by increasing
unemployment and lowering the land per capita ratio, especially in densely populated regions of
the world where population growth rates are usually high.

Egypt is a good case that proves the utter importance of the sociocultural factor. The Aswan
Dam, which was completed in 1969, was supposed to expand the irrigated land area by one-
third and keep pace with population growth, giving the industrial sector the opportunity to
expand and create new jobs for the unemployed and the new entrants to the labor market.
When industry failed to develop as fast as anticipated, despite the availability of electric power
generated by the dam, the Egyptian development strategy failed to materialize. Consequently,
the land per capita ratio declined, unemployment rose, poverty increased, and illiteracy rates
remained high.

When the Egyptian minister of planning at the time (1969) was asked by this author during a
meeting in the minister’s office in Cairo in July 1969 about the reasons for the failure of the
industrial sector to exploit the electric power produced by the Aswan Dam, his answer was
simple and instructive: “Since we doubted the sincerity of the Russians to complete the dam, we
did not develop industrial projects to utilize the anticipated electric power; our rationalization
was, let the Russians complete the dam first and then God will take care of the rest.” But since

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God had not been consulted before work on the dam started, he seems to have declined to help
after the dam was completed.

Development is not a process that can start by itself and move under its own weight to a
predetermined destination; rather, it is a conscious process of change created by society to
accomplish certain economic and noneconomic goals deemed desirable. But for people to act,
they need incentives to do so, be it to please God, appease authorities, make money, learn
more, or change their status quo. The question is how to create enough incentives for people to
act in the way societal development requires them to act. The need, therefore, is for a theory of
development that sees economy as one aspect of societal life that cannot escape being
influenced by all other aspects, and sees economic and sociocultural restructuring as two faces
of one societal process.

Classical economists had correctly emphasized the need for savings, because economies at the
time were largely closed, forcing savings to stay at home and be invested in national
economies. Today, people save and deposit their savings in local and foreign banks, while
investment is made by nationals and foreigners alike. As a consequence, the role of national
savings in facilitating investment is no longer as critical as it once was. In fact, capital has been
investing in industries such as gold and silver mining, oil exploration and production, and
railroads in foreign countries for a long time.

Another example that demonstrates that national savings no longer play the crucial role they
once did can be explained by looking at the American economy. For years, Americans kept
consuming and investing in their economy about 6 percent more than what they were
producing. Foreign investors, fearing political instability in their countries, have been sending to
the United States more than two billion dollars a day. “As a nation,” wrote Paul Volcker, a former
chairman of the US Federal Reserve Board, “we are consuming and investing about 6 percent
more than we are producing . . . What holds it all together is a massive and growing flow of
capital from abroad, running to more than $2 billion every working day.” (Paul A. Volcker, “An
Economy on Thin Ice,” The Washington Post, April 10, 2005 B7)

In contrast to most classical theorists, H. Myint was able to see the relationship that ties
populations to national resources and thus economic growth. Underdevelopment, Myint says, is
caused primarily by fast population growth rates that resulted from colonial rule. “The
introduction of an orderly framework of administration by the colonial governments and the
provision of basic public services, especially public health, have reduced the death rates and

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caused a rapid growth of population. This has disrupted the traditional balance between
population, natural resources and technology.” (Hla Myint, Economic Theory and the
Underdeveloped Countries, Oxford University Press, 1971 18–19 ) Myint argued further that the
migration of labor from rural areas to cities, where services and employment opportunities
usually exist, has caused the disguised agricultural unemployment to become open
unemployment in the shanty towns around the big cities. (Hla Myint, Economic Theory and the
Underdeveloped Countries, 73)

Myint provides good analysis of the consequences of higher population growth rates and their
negative impact on economic conditions, but he does not tell us how to escape the population
trap. He views traditionalism as an obstacle to economic development; therefore, he says on
page 141-42, “There is the problem of choice for the mass of people in the underdeveloped
countries between having higher material incomes and a faster rate of economic growth and
preserving their traditional social, cultural and religious values and ways of life.” 8 Nonetheless,
Myint does not provide concrete ideas to restore the old balance between population,
resources, and technology or change the traditional social and cultural values to make them
compatible with modern science and technology. He seems to say to the poor people living in
the developing countries, “You have a choice: higher material incomes and a faster rate of
economic growth or preserving your traditional ways of life.” Since most poor people fear the
unknown and tend to resist change that undermines their values, traditions, and way of life,
such advice is unlikely to find people willing to listen to it.

Another theory that gained some recognition for a while is the “Big Push.” Advocates of this
theory argued that all economies are capable of following the path traveled by the Western
nations and achieving economic development. However, underdeveloped economies suffer
from certain constraints and insufficient incentives to grow, which makes them in need of a big
push. This push, often seen in the development of a major industry or an economic sector, is
required to invigorate the national economy and give it enough power to gain momentum. But a
big push that leads to the building of a major industry is more likely to cause economic duality
and deepen the socioeconomic gaps in society; it will ultimately fail because no industry can
function in isolation of other spheres of life where it recruits workers, buys raw materials, and
markets its products. Yusif Sayigh argued, “Societies are not believed to be in a continuum
leading from primitiveness to traditionality to modernity, but to have islands of modernity
alongside and concurrently with areas of traditionality, while others stand in distinctly transitional
stage.” (Sayigh, The Determinants of Arab Economic Development, St. Martin’s press 108)

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 The Neoclassical Perspective

While the 1970s witnessed the failure of the classical approach to development, the 1980s
witnessed the failure of the socialist approach. All capitalist and socialist theories had failed to
identify the obstacles hindering development, and because of that, they were unable to
articulate workable plans to enable poor nations to overcome underdevelopment. Consequently,
a new liberal school emerged to lead the debate regarding the right strategy to Third World
development. This neoclassical school bases its arguments on the magic of free markets. While
this approach has its roots in classical thinking, it reemerged to reclaim the future as a
consequence of five major developments:

1. The economic success of the Asian Tigers, which is based on a strategy that combines state
intervention with the free enterprise system;

2. The failure of socialism and revolution to achieve development, political freedom, or

economic independence;

3. The debt crisis that proved that Third World leaders were largely corrupt and unable to
manage their national economies;

4. The growing global economic power and reach of the multinational corporation; and

5. The writings of economist Milton Friedman, who said, among other things, “In a free economy
“there is one and only one social responsibility of business—to use its resources and engage in
activities designed to increase its profits so long as it stays within the rules of the game.”
(Capitalism and Freedom, University of Chicago Press, 2002 Fortieth Anniversary E dition 133)
.https://bfi.uchicago.edu/feature-story/corporate-social-responsibilty-friedmans-view

“The neoliberal consensus assumes that domestic policies of the less developed countries are
the cause of their failure to grow,” says Sunil Kureja. ( Sunil Kureja The Neoliberal Consensus on
Development; in David N. Balaam and Michael Veseth Introduction to International Political Economy,
Prentice Hall, 2001 333) as a result, the neoliberal economists emphasize privatization,
deregulation, free trade, and export-led economic strategies. Both the World Bank and the IMF
were quick to articulate a program in the 1980s called “structural adjustments” and to move
vigorously to impose it on poor states, particularly the highly indebted ones. Adjustments
included currency devaluation to encourage exports, reduction of state’s spending and food
subsidies to reduce budget deficit, and privatization of state enterprises to attract foreign capital
and improve productivity. However, the only tangible results the structural adjustments have

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produced are to be found in widening the income and wealth gaps between rich and poor,
spreading corruption, deepening dependency on foreign capital and imports, and causing the
state to lose ownership of the assets that were generating some income.

Although the ideas promoted by the neoliberal theorists had no track record of success, they
were able to gain wide acceptance. Most people in the Third World had by then lost faith in their
governments, and therefore they were willing to try a different approach. Governments had no
choice but to accept the prescribed medicine due to World Bank, IMF, and US pressure, which
made the adoption of such measures a precondition for further financial aid and new loans. And
with the collapse of communism at the end of the decade, all potential challengers to the free
market philosophy were removed. However, the only export-led strategy that proved its utility
was the Asian Tigers strategy. This strategy—to be reviewed after the next section—was based
not on neoliberal ideas but on ideas borrowed from both free markets and state capitalism.

The Dependency Perspective

Socialist intellectuals in general and Third World nationalists in particular claim that economic
dependency was caused by colonialism. They argue that colonialism has exploited the
resources of poor nations and made their economies dependent on the international capitalist
system, and, as a consequence, they deprived poor nations of the opportunity to develop on
their own. The dependency theory sees the world divided into centers and peripheries, where
the first exploits the second, and the second is forced to serve the interests of the first. Dos
Santos defines dependency as “a situation in which the economy of one country is conditioned
by the development and expansion of another to which the former is subjected.” (Theotonio Dos
Santos, “The Structure of Dependence,” American Economic Review 60, May 1970 231) In other words,
dependency theorists such as Raul Prebisch, Andre Gunder Frank, Theotonio Dos Santos, and
Samir Amin say that dependency is a relationship between the center and the periphery
whereby the periphery is subjected to decisions taken by the center, not in economic matters
only but also in matters related to domestic and foreign affairs. And while the center represents
the industrialized nations, the periphery represents the underdeveloped and largely poor ones.

Dependency theorists also claim that the diffusion of capitalism to the world outside the
developed states causes underdevelopment rather than development. As a consequence, they
believe that the world’s capitalist economy poses the biggest obstacle to the development of
poor nations, and that the unevenness of development is a consequence of the control that

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capitalism has on the world economy. Therefore, the underdevelopment of the Third World is
not a natural consequence of continued global economic change, but a consequence of the
negative impact of world capitalism and the division of international trade, which enabled the
center to dominate and exploit the periphery. This domination and exploitation, according to
dependency theorists, is primarily due to the rich countries controlling capital, technology, and
trade, which enable them to confiscate the poor countries’ surpluses and limit their ability to
develop their economies.

There is no doubt that the Western capitalist nations and their corporations have worked hard to
deepen the dependency of Third World economies on their own, and because of that,
colonialism did contribute to hindering the transformation of Third World economies in general.
Nevertheless, there was nothing that agricultural society could do to avoid dependency on the
industrial one; dependency was and still is a natural historical development that no agricultural
society could escape.

Dependency theorists tend to generalize and thus overlook the particularities of each economy,
and in their zeal to blame the former colonial powers for all ills, they fail to recognize that not all
poor nations of today were colonies in the past, and not all colonies of the past have remained
poor today. For example, Yemen was not subjected to colonialism but still failed to develop and
enter the industrial age, while Singapore and Malaysia, both of which were subjected to
colonialism, were able to industrialize and join the community of developed nations. If the
dependency theory is able to explain underdevelopment, as its proponents seem to claim, it
would be foolish to expect any poor nation to develop in the future, because economic, political,
and technological dependency has deepened its roots and become structural.

To free poor nations from poverty and dependency, socialist intellectuals called for severing the
bonds that tie Third World nations to the international capitalist system. To achieve this goal,
they advocated the nationalization of large domestic enterprises and financial institutions, the
adoption of central planning, and the implementation of an economic strategy based on import
substitution and protectionism. States that adopted this strategy showed some improvement at
the beginning but failed to develop further, reduce dependency on the capitalist system, or
decrease poverty in a meaningful way. Meanwhile, lack of investment capital forced many of
these states to borrow from foreign sources to finance their economic plans. And when their
economies failed to perform as expected, most of them failed to generate enough funds to

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service their debt, forcing them to seek help from the international financial centers of capitalism
they were supposedly trying to sever ties with.

For example, due to a steep decline in the prices of agricultural exports and energy in the early
1980s, most indebted Third World nations faced a serious debt crisis that forced them to comply
with the dictates of the IMF and the World Bank and lose in the process whatever economic
freedom and political independence they may have had at the time. Meanwhile, nationalization,
import substitution, and protectionism led to fostering authoritarian rule and widening the income
and wealth gaps separating the powerful rich from the powerless poor. Chester A. Croker wrote
“what sovereign rights, if any, do governments have to prevent outsiders from telling them how
to treat their people, their economies, and their environments?” (Chester A. Crocker, “The Global
Law and Order Deficit,” The Washington Post, December 20, 1992 A21)

The drive to blame the other for Third World underdevelopment led dependency theorists to
overlook the role of indigenous cultures in resisting change, as well as facilitating popular
submission to foreign dictates and national dictators. So, instead of examining the complexity of
traditional cultures and their socioeconomic and sociopolitical roles, some dependency theorists
called for relying on indigenous knowledge and traditional ways of living to develop and restore
a sense of happiness to people. There is no doubt that indigenous cultures are a source of
happiness, but there is also no doubt that living in the past and imitating times long gone cannot
help nations develop or restore lost status in a world dominated by competitive economic and
political players; it also cannot restore happiness to people who have become aware of the
world around them and the many comforts of life it offers.

Indigenous cultures and traditional ways of living are capable of bringing to people a sense of
tranquility and contentment but cannot free them from dependency, poverty, need, or
authoritarianism. In fact, dependency on foreign technologies has become the shortest and
least expensive way of getting access to many of the necessities of life, such as medicine, food,
modern communications systems, and capital goods, which are indispensable tools to enabling
citizens of poor nations to develop their economies, live a decent life, and die a dignified death.
As a consequence, the dependency theory is neither able to explain Third World
underdevelopment nor provide a road map to achieve societal development. It is rather a
sophisticated argument to blame others and unconsciously justify failure. David Landes
described the dependency theory as “Latin America’s most successful export.” (David S. Landes,
The Wealth and Poverty of Nations, W. W. Norton, 1999 328)

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There is a big difference between being content and being happy; contentment reflects
acceptance of life conditions as they are, while happiness reflects enjoyment of life as being
shaped by people. Contentment in this age, I believe, reflects more ignorance than happiness; it
reflects a lack of understanding of science and technology and the role they play in making
people’s lives more productive and enjoyable. Because of this ignorance, impoverished people
usually lack the drive to change their way of life, develop their economies, and change their
traditions. Since no one can escape the traumas of our times, happiness can no longer be found
in contentment alone; it can only be sought in freedom, liberty, respect for human rights, and
getting access to good education, rewarding jobs, and other things that enrich life. Optimism is
an important aspect of happiness; to realize optimism and happiness, people must have an eye
on the future, not on the past, and work hard to shape it through education, sociocultural
transformation, and active participation in the development process.

Nevertheless, dependency theorists have called for reforming the international economic
system and establishing a New International Economic Order. Raul Prebisch, for example, “was
instrumental in founding, under the auspices of the United Nations, the United Nations
Committee on Trade and Development (UNCTAD) to monitor and recommend policies that
would help redistribute power and income between Northern developed and Southern
developing countries” in a more equitable fashion. (David Balaam and Michael Veseth, Introduction
to International Political Economy, Prentice Hall, 2001 79) But due to resistance by the industrialized
Western nations, all efforts have failed to accomplish the UNCTAD objectives, causing the
situation in many poor countries to deteriorate further.

As dependency theory and theorists were becoming popular, a successful experiment in

development that defied the classical, neoliberal, and socialist thinking was unfolding. The Asian
Tigers were proving that underdevelopment, poverty, and dependency could be overcome, and
unprecedented economic growth rates could be achieved in a relatively short time. Neither
dependency, nor low per capita income, nor abject poverty, nor lack of investment capital
seemed to present a real obstacle. The center-periphery dichotomy, therefore, could no longer
hold. In response to that challenge, Emmanuel Wallerstein developed the world systems theory,
or the semi-periphery concept, in which he claims that nations representing the semi-periphery
are neither fully developed nor underdeveloped; they are nations in transition. As such, they are
neither victims of exploitation by the capitalist system nor a part of it engaged in exploiting the
periphery. Instead, they are seen as playing both roles at the same time.

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Wallerstein argues that the modern world system goes back to the sixteenth century, when
Europe adopted capitalism as an economic system and began to emerge from the agricultural
age and move into the industrial age, creating a core of industrial states and a set of periphery
and semi-periphery states. Within this perspective, Wallerstein sees exploitation as an inherent
characteristic of the structure of the capitalist system, and, therefore, exploitation does not exist
between the core and the periphery only but also within and among the core, periphery, and
semi-periphery states. (David Balaam and Michael Veseth, Introduction to International Political
Economy, Prentice Hall, 2001 79-80)

The New Development Theory

Recognizing the shortcomings of the different approaches to development, some economists

and practitioners developed what might be called, as Gerald M. Meier suggests, the “New
Theory of Development.” This theory recognizes that the economic aspects of life are tied to the
social and cultural ones, and that no development is possible without taking into consideration
the role that culture plays in societal life. Proponents of this theory seem to acknowledge that
production is a function of many factors, some of which are economic, others scientific and
technological, and many more cultural and political in nature. As a consequence, they tend to
emphasize the importance of information, institutions, and incentives in development.

For example, Peter Drucker argued that knowledge has become the most important factor of
production, more important than labor and capital combined. Gerald Meier recognizes the value
of knowledge and information but adds that it is highly specific. “Innovations depend on
incentives, they must be diffused, and there must be absorptive capacity.” ( Gerald Meier,
Biography of a Subject: An Evolution of Development Economics , Oxford University Press, 2005 100)

While knowledge is fast becoming easy to acquire, most developing nations have failed to
appreciate its critical role in economic development and sociocultural transformation. As a
consequence, they have failed to build a capacity to absorb knowledge and diffuse it in ways
that impact production, improve labor productivity, and benefit the poor and the unemployed.
Without building the right institutions to acquire, produce, and diffuse knowledge, the developing
nations are more likely to continue to lack the capacity to use information efficiently and employ
knowledge to develop their economies, transform their cultures, and make progress.

Appreciation of knowledge and its role in society is a function of education, attitudes, and public
policy, which culture largely shapes. And because cultural values, traditions, and attitudes are

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not the same everywhere, the ability of underdeveloped nations to adopt and adapt knowledge
and innovate varies from one nation to another, causing their capacities to make progress to
vary as well. To take such factors into consideration, the new development theory has built
models to incorporate as many variables as possible. For example, the theory realizes that
capital means much more than physical capital; therefore, instead of emphasizing physical
capital only, it emphasizes human, technological, and social capital as well.

While physical capital is easy to measure and build, human capital is difficult to quantify and
build. Improving the productivity of human resources is still more difficult; it requires formal and
informal education and the adoption of values and attitudes that appreciate hard work and value
time and money. Technological capital means the quantity and quality of technical, scientific,
and managerial know-how acquired by society to raise the productivity of labor, machines, and
the overall production process. Technological capital, therefore, involves most aspects of
knowledge that include institutions of scientific research and development, schools and
universities and training centers, information and communications systems, and modern
management systems.

Social capital is probably the most important but the least understood type of capital. It is often
assumed that it is an aspect of culture, but social capital is not an aspect of culture only; it is a
social characteristic that is partially created and partially inherited. Social capital involves laws
and regulations, public policy, culture and societal systems, and therefore it is a function of how
far laws and regulations are developed, how far the state is willing to go to enforce the law, the
nature and intentions of public policy and how it is perceived by the public, as well as the
sophistication of societal systems and people’s attitudes toward science, technology, and the
other. Social capital, broadly defined, is the formal and informal relationships and networks and
institutions, and laws and contractual arrangements that facilitate and regulate formal
interactions in society and shape the behavior of participants in everyday life.

The new development theory is probably the most realistic one; however, the models it has built
have not produced tangible results to prove its utility. As a consequence, most poor nations are
still searching for a new strategy to invigorate their largely stagnating economies, improve the
general living standards of their peoples, and enable them to overcome the obstacles that
hinder their development. This simply means that there is a need for a strategy that sees
economic restructuring and sociocultural transformation as two inseparable parts of one
comprehensive societal development process.

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 The Asian Tigers

The Asian Tigers began in the 1970s to change course and devise a development strategy
along capitalist lines with active state involvement; they formulated new visions, set new
priorities, drew new economic and educational plans, and implemented them with a vengeance.
The Tigers sought to accomplish their national goals through building state institutions,
controlling corruption, arming their labor forces with the right skills and attitudes, and creating
new social, legal, and political environments attractive to foreign investment. These states,
whose numbers have continued to grow, followed a strategy based on export promotion and
protection of domestic markets and national industries. It was a strategy to consciously engage
rather than disengage the international capitalist system, and its success demonstrates that
neither private enterprise alone nor government ownership of national means of production by
itself is capable of transforming economic realities on the ground. The major components of that
strategy are:

1. Improving economic and labor competitiveness through educational programs that sought to
change individual attitudes and enhance workers’ skills;

2. Producing consumer durable goods of high quality destined for export;

3. Protecting domestic markets and infant industries from foreign competition;

4. Planning and financing economic expansion and exports;

5. Making exports more competitive internationally and making foreign imports less competitive
domestically, through currency devaluation; and

6. Encouraging savings and domestic and foreign investment.

These measures, while causing economies to grow rapidly, were instrumental in achieving other
objectives: low inflation rates and budget deficits, high savings rates, and investment in
research and development. As this strategy was being implemented, the sociocultural and legal
contexts were being transformed to accelerate societal change. Heavy investment in human
resources, technical training, and fighting corruption ensured industrial success in the short run
and attracting foreign investment in knowledge-based industries in the long run. Investment in
education and technical training usually produces quality labor forces capable of contributing to
industrial flexibility, high productivity, greater income equality, as well as appreciation for hard
work, life, freedom, and independence.

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This export-led economic strategy could not have succeeded without state leadership in
planning and financing economic expansion, protecting the rights of people, enforcing the law,
and ensuring economic and trade performance. As the state assumed these responsibilities,
foreign corporations provided a good portion of the investment capital needed to make
development a reality. In fact, foreign direct investment since the 1970s has become the major
source of finance, technology, management systems and skills, and knowledge that continues
to help several Asian and non-Asian states grow their economies.

However, the export-led strategy has transformed the nation-state in Asia into a “trading state”
interested in maximizing economic gains only. In the 1980s and beyond, the new trading state
emerged as a huge economic enterprise committed to exporting whatever it produces and
getting as much for it as it could. Consequently, the trading state has failed to develop interest in
the cultures of peoples it trades with, limiting its interest in such peoples to studying their habits
to produce the kind of goods that meet their needs and satisfy their desires. In addition, the
trading state has generally failed to promote its own culture in societies it depends upon for their
markets or offer needy client states financial aid or technical assistance to alleviate poverty and
develop their economies. The trading state model started with Japan but was adopted by South
Korea, Taiwan, and China; India seems to be on its way to adopting the same strategy of taking
as much as possible and giving as little as it can in return.

While classical economists gave more attention to the financial aspects of development,
dependency theorists gave more attention to the political aspects of underdevelopment. Both
groups of theorists, however, have largely ignored culture—its societal role and capacity to
facilitate economic development and hinder political change and sociocultural transformation.
Economic and noneconomic forces in society interact with one another continuously and
through their interaction the pace and fate of societal development is determined. Without taking
the economic, cultural, and political variables into consideration, any theory of development will
be deficient and hardly relevant.

On the other hand, the neoclassical theorists gave priority not to developing the means of
production but to private ownership of the means of production and thus to freeing markets from
state regulations. And this, in turn, gave the free market system, the multinational corporation,
and globalization the big push they sought to become the major forces driving global change
and influencing the fate of nations. David Korten criticized this development, accusing the new
global system of favoring the rich and powerful while discriminating against the poor and

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powerless. “A globalized economic system has an inherent bias in favor of the large, the global,
the competitive, the resource-extractive, and the short-term. Our challenge is to create a global
system that is biased toward the small, the local, the cooperative, the resource-conserving and
the long-term—one that empowers people to create a good living in balance with nature.” (David
Korten, When Corporations Rule the World, Berrett-Koehler Publishers, 2001 241)

The ideas of Milton Friedman, despite their popularity within the international circle, are
misguided. The Great Recession has proven that corporate maximization of profits means the
minimization of public welfare. By giving more power to the private sector and the multinational
corporation, the new system gives little economic power to the state and none to the working
class and the poor. Having the freedom to invest anywhere with little or no state supervision,
multinationals are increasingly opting for investments that serve their interests only,
concentrating on industries in which they have a competitive edge and services that foster their
global reach. As a consequence, the multinational corporation, just like the trading state, is
unable to develop interest in other peoples’ cultures or living conditions or pay attention to their
legitimate concerns and needs. The rising popular opposition to Chinese investment in Africa is
a sign that the trading state strategy is not viable in the long run.

Today, most capital accumulation is done at the international and not at the national level. And
though multinational corporations own but a fraction of that capital, they are the entities that
have access to it and control most decisions related to its allocation among alternative
investments. Consequently, multinational corporations have become the primary actors that
make decisions regarding when and where to invest, where to establish production facilities and
distribution centers, and how much to invest in each country. They are also the ones that decide
what types of jobs to create and where to create them. And because they own most of the
commercial patents and modern technologies and management systems, it has become
counterproductive for any state to deny them access to its markets. Recognizing this fact, poor
nations seem eager to get multinational corporations to invest in their economies and are more
inclined to offer them preferential tax treatments and oftentimes subsidies to encourage them to
do so. However, poor nations lack the ability, and sometimes the knowledge, to take advantage
of what corporations are able to offer while avoiding being taken advantage of by corporations.

International organizations struggling to eradicate world poverty, promote political freedoms,

protect the environment, and cancel Third World debt tend to see globalization as the last phase
of imperialism pursued through the multinational corporation. Though the anti-globalization

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movement is itself a by-product of globalization, it is creating the first effective global forum in
history for the have-nots to air their grievances, promote their causes, and organize to regain
their rights. Despite the growing power of the multinational corporation, the future, I believe, is
on the side of the poor and their supporters; the spread on poverty and injustice in most parts of
the world is undermining the very system the multination corporation is working to build and
foster.

Relevance of Development Theories

Every Third World nation has its own particular culture, as well as its political, social, and
economic systems. Therefore, no theory of development can answer all questions and meet the
basic requirements of every country; and no theory can describe the prevailing conditions and
identify all obstacles that face development. Dudley Seers wrote decades ago, “The existing
body of theory cannot explain what has to be explained, nor can it give the help that is politically
essential.” (Dudley Seers, ‘The Limitations of the Special Case’ in Development Economics, Kurt
Martin and John Knapp, Editors, Aldine Publishing Company, 1967 2) Gerald Meier adds,
“Conventional economics does not have a great deal to offer by way of advice.” (Gerald M. Meier,
Leading Issues in Economic Development , Oxford University Press, 1970 62 ) Michael Edwards goes
further to say, “Many of us who are involved in the field of development studies have become
part of the problem of underdevelopment rather than part of the solution to these problems.”
(Michael Edwards, “The Irrelevance of Development Studies,” Third World Quarterly, January 1989 117)
Since economic theories developed by western thinkers are largely based on the European
experience, they are neither able to capture the essence of Third World underdevelopment nor
prescribe the right medicine to treat it.

“We cannot change the world successfully unless we understand the way it works; but neither
can we understand the world fully unless we are involved in some way in the process that
changes it.” (Michael Edwards, The Irrelevance of Development Studies, 124) Gerald Meier adds, “An
intuitive knowledge of the basic cultural traits of a community is indispensable for laying out the
basis of its economic theory.” (Meier, Leading Issues in Economic Development, 71) While this is
true, little has been done to correct the deficiencies that development theories suffer from. No
theory was able to capture the essence of underdevelopment, not even the dependency theory,
which originated in the Third World. Paul Ormerod criticizes theories of development in general;
he says that the prescriptions they “so freely offer are no longer relevant in many situations.”
(Paul Ormerod, Butterfly Economics, Pantheon Books, 2000 6) Conditions that prevailed in Europe

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at the time of the industrial revolution and made economic development possible do not exist in
the less developed social, political, intellectual, and economic freedoms, the separation of
religion and state, and a relatively advanced level of indigenous technological and scientific
knowledge.

Generally speaking, people of the Third World tend to consider Western colonialism, political
corruption at home, and globalization the major forces responsible for their sad state of
underdevelopment. On the other hand, traditional intellectuals tend to place problems of
underdevelopment in certain historical and often religious contexts that make them too
complicated to analyze and understand; and what one cannot understand, one is unable to deal
with. Consequently, it has become difficult for Western economists and organizations like the
World Bank and the IMF to diagnose the conditions of underdevelopment accurately and make
culturally sensitive recommendations that could be helpful to people and acceptable to their
traditional leadership. Albert Hirschman wrote, “As we have become used to looking at reality
through certain theoretical glasses, we may for a long time be unable to see it as it really is.”
(Albert Hirschman, The Strategy of Economic Development, Yale University Press, In John
Knippers Black, Development in Theory and Practice, Westview Press, 1989 15)

Since the failure of the World Bank to help poor nations develop, almost all theories of
development written in the 1950s, 1960s, and 1970s were abandoned. As a consequence, new
books on development tend to deal with issues of development rather than with the process of
development’ issues such as freedom, corruption, poverty, inequality, culture, economic
freedom, the role of government, and the like, thus avoiding the complicated issue of societal
development. Emphasis on issues of development enables us to gain a better understanding of
the root causes of underdevelopment, but it leaves the discussion about sustainable societal
development to move in all directions without a sense of direction. While there is no single path
to development, culture and how to transform it remains the main issue. No poor nation needs
to start from where Europe started; poor nations can learn from the developed countries and
start their own development processes, relying primarily on borrowing ideas and technologies
that work for them.

Development theories need to provide tools to analyze existing situations and identify obstacles
that hinder societal change, and they need to construct models to overcome obstacles and
transform reality to be conducive to change and development. Successful theories must be able
to chart a new path to cultural, social, political, and economic change and create processes that

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 lead to development. Change needs to have incentives to motivate people to work hard and
entice them to be involved in the development process; it also needs a strong political will to do
what it takes to remove the hindrances that retard sociocultural transformation. Since it is easier
to criticize than analyze, prescribe than describe, destroy than build, old development theories
written in the West have failed to do what they were intended to do. As we pass through the
transitional period separating the industrial age from the knowledge age, all economic theories
and models are fast losing whatever relevance they may have had in the past. New times
demand new thinking; and new challenges require new thoughtful answers.

Prof. Rabie is an author and former distinguished professor of international political economy. He
studied, lived and taught in 4 continents at 11 universities, and lectured at more than 100
universities and research institutes worldwide. Participated in tens of conferences and published
44 books and over 1,000 articles; his interests, writings and activities reflect a strong commitment
to peace, freedom, social justice and dialogue between followers of different cultures.

professorrabie@yahoo.com

www.yazour.com

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