Development economic first appeared as distinct area of research in 1940’s & 50’s, concurrently with decolonisation of Asia, Middle East and Africa. The main object of the research was to uncover the causes of the underdevelopment. As a result of this pursuit, two distinct approaches appeared:
◦ Modernisation: invented neoliberal economics with roots in the classical and neoclassical economic school of thought. ◦ Dependency school of though embedded in Marxist interpretation economic underdevelopment at the hands of the exploitative nature of capitalist economic system.
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To Marx, the survival and growth of capitalism was very much dependent on the exploitation of human, natural material resources of Third World. It was in the context, the European imperialism in the shape of economic and political occupation of the Asian and African and Middle Eastern countries took place subjecting these countries to unequal exchange. According to dependency school of thought that the problem of underdevelopment can not be eliminated until unless the global structures of capitalism are not altered. For that developing countries have to forge unity and mount pressure on the industrialised courtiers to get rid of the unequal relationship.
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However, the neoliberal policies of the capitalism draws inspiration from the classical political economy of 18th and 19th century represented by Adam Smith (17231790), Thomas Robert Malthus (1766-1834), David Ricardo (1772-1832) and John Stuart Mill (1806-1873). Adam Smith (1723-1790):
◦ He underlined the critical role of the market mechanism. ◦ The major thrust of his argument was that there may be producers who will try to sell inferior goods at high prices, but if the producers are competing hey will all eventually be forced to deliver proper goods at reasonable prices.

According to central argument of Adam Smith, when market expanded as a result of population growth and territorial expansion of British Empire then demand would increase and production would grow as a result of that.
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At the same time specialisation would also increase as a result of the competition. Specialisation, for number of reasons, would lead to higher productivity per working hour. The major condition for this was an increased accumulation of wealth which had to come form rich, especially industrialist and their profits for productive investment in new industries. As a result, the newly emerging industrial sector would serve as a base of aggregate growth. To Smith accumulation and investment of profits were the mist important determinant of economic growth have played important role in the debated ever since.

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David Ricardo: he was the first one to elaborate on the Adam Smith’s political economy, especially on Land-rent, distribution and the theory of comparative advantage. In addition to capital, Ricardo found two other sources of growth, that is, technical innovation and international trade. Ricardo further argued that continued population growth and the corresponding increase in the demand for food would result in the conclusion of all land for agricultural production, even the marginal land with low productivity. Hence, the utilization of poor and poorest land would cause the land value/rent to go up, mainly due to the farmers competition for the better and more profitable land.

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According to David Ricardo, this process would result in a redistribution of national income to the benefit of landed aristocracy and to the detriment of industrialists. Simultaneously marginal cost of agriculture production would then rise with increase in the cultivation of marginal land. Food prices would then rise, leading to stronger pressure on wages which would in return, eat into the profits of industrialists from outside. Final result would be the squeezing of the industrial profits to zero whereby the whole foundation of growth would disappear.

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According to Ricardo, only technical innovation and international trade could prevent this sad outcome. The theory of comparative advantage was elaborated in continuation above argument. According to which each country should concentrate its production in areas where it had comparative advantage in relation to other country with respect o the productivity of its workers.
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In accordance with this basic thesis, Ricardo suggested that non-industrialised countries such as Portugal should refrain form trying to build up industries and instead concentrate on production of, for instance, wine. Industrialised countries like England on the other hand should produce and exchange products such as textile and clothing for Portuguese. Malthus:
◦ According to his theories, population increase faster than resources. So countries should concentrate their efforts on population control in order to achieve the target of growth. ◦ In case no attempt is made on the part of the countries, then nature would intervene in the form of natural calamities in order to maintain balance between population and resources.

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Karl Marx (1818-1883), he took holistic view of the development. He was interested in the totality of the society. His focus was on how and why various forms of society emerged, changed and disappeared and replaced by new one. He classified the society into communes, the old classless society, tribal society, feudal society, capitalist society and industrial society. And according to his formation of the society, society after capitalist society it would return to stateless society.

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He divided society into super structure Structure Base State Political Parties Masses/Workers

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To him, the most important source of growth were valorisation of and accumulation compulsion which individual capitalist are subject to. To achieve profits, capitalist must exploit labour by paying the workers the less than the equivalent of the value they produce. In valorisation compulsion, the capitalist (Individual factory owner) has continuously accumulated capital in order to survive in competition with other, that is expand his capital apparatus through the pilling up of the surplus value generated by workers and through merging with other companies (capital centralisation).
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The process embodies, natural tendency on the part of the capitalist to invest in technical innovation in order to marginalise workers and finally this would lead to joblessness and its growth. As a corollary of this, it would generate tension and overthrow of capitalists and establish socialism and later communism. Joseph Schumpeter: According his theory growth as the gradual extension of capitalist apparatus and increasing production.
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He asserted that development could occur only when technical innovation introduced new production techniques, new products or new means of organising production. His innovators were entrepreneurs. Schumpeter broke ranks with classical conception of capitalist savings and accumulation as being the most important source of growth. He believed that growth was driven by technical innovation, in association with the entrepreneurs mobilization of credit in economic system.

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John Maynard Keynes: in his book on the General Theory of Employment, Interest and Money did not focus on growth and conditions in the colonies but rather discussed relationship between state and market. To Keynes employment was key to growth. Therefore, he strongly focused in the dual role of state and market. According his arguments that market imperfection could be overcome by state intervention. Further to support the state, he envisioned the institutional control of international trade and finance.

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It was in this context that the IMF and World Bank were formed in 1944 with the objective to help the development process in Europe and bring financial stability by controlling exchange control and providing liquidity to the members states facing problem of balance of payment. By the time there was clear difference in stand of three main schools of thought Neoclassical economist saw the economic development in terms of the utility maximisation on the part of the consumer, profit maximisation on the part of the producer and the central role of the market as determining factor.

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Development saw the economic development in terms of the redistribution of the growth and more so in terms of the social development of the society. The Neo-Marxist economist approached the economic development in terms of the multidisciplinary enterprise and argue that there exist heterogeneous structures of the economy around the world with different modes of production. Modernisation theorist saw the economic development as a process of the transformation of the society from traditionalism to modernitsm.

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They are mainly concerned with how traditional values, attitudes, practices and traditional structures break down and replaced with more modern one. What condition promotes and impedes such transformation was the main focus of the modernisation theorist. Capital Accumulation and Balanced Growth Rosenstein Rodan and Nurkse.

He was polish born economics. According his theory of the development that only massive industrialisation way forward to growth and progress for back ward areas for Eastern Europe and rest of the world.
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He further expanded his argument into the theory of ‘Big Push’, according to which the backward areas were characterised by low income and little buying power. Further they were characterised by high employment and under employment in agriculture. To break out of this mould, it is necessary to industrialize. However, private companies can not do this alone, partly due to the lack of the incentives to invest as long as market for their products remained small.

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To him , for example, one of the major impediment to the growth is the cost being incurred on the training of workers. According to him barriers to growth could be overcome with the state intervention and investment in education of the workforce and planning and organising of large scale investment in industrial sector. Rosenstein Rodan compared big push with aeroplane which needs critical ground speed before becoming airborne. A similar condition applied to the growth process. Launching country into the self-sustaining growth requires critical mass of simultaneous investment and other initiatives.
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Nurkse

He further developed many of Rodan’s points. He asserted that the economically backward countries were caught in vicious circle of poverty. The reason for this situation is that the demand in backward society is low as a consequence of the very low income. When demand is low and market limited then there will not be much incentive to make private investment. Therefore, capital formation and accumulation remain at very low.

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As a result no productivity improvement occurs and income therefore remain low. on the supply side, the low incomes result in a small capacity to save which, in turn, is reflected in lack of capital and low productivity. The final outcome is reproduction of mass poverty. Nurkse added to this that whole problem with attaining the necessary savings and capital investment was compounded by rich people’s tendency to copy, in their own consumption, the consumption standards and patterns of industrially advanced countries. This propensity on the part of the rich finally leads to reduction in the saving rate.

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To break out of this these poverty circles, according to Nurkse, the creation of strong incentives to invest along with increased mobilisation of investible funds. This requires significant expansion of the market through simultaneous massive and balanced capital investments in a number of industrial sectors. This further depends on the active involvement of state.

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Demand side low level of capital formation

Little incentive to invest

low productivity level

limited market

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Supply side Low income

Small capacity to save

low Productivity

Lack of capital

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Unbalance growth and income distribution. Hirschman and Kuznets

Unlike Rosenstein Rodan and Nurkse, Hirschman rejected the notion that growth process could be initiated with balanced capital investment in several sectors. He claimed that there was a need to maintain and accelerate imbalances and disequilibria in backward economies. According to them there were other barriers to growth than limited market and the lack of capital investment. According to them the major impediment to growth is lack of entrepreneur class and management.

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According to them if the country were ready to apply the doctrine of balanced growth hen it would be underdeveloped. Instead of spending resources thinly over several sector and manage badly, developing countries should invest in selected sectors which had many forward and backward linkages. Again they suggest redistribution in favour of rich as they have tendency to save and invest and they could be major source of growth. After which there will be trickle down to the poor in such way that in the end everybody would be better off. Simon Kuznets had the same views that growth would initially produce inequality but later inequality would be

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Modernisation and stages of growth Lewis and Rostow.

They considered development as modernisation process. Developing courtiers have abundant labour force but due to the low income their saving rate is low. They considered the existence of entrepreneur class necessary for the transition to modernisation. Lewis divided economy into the capitalist and subsistence sector. The capitalist sector employs wage earners, used reproducible capital and paid capitalists for the use of capital.

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Subsistence sector was characterised by being based primarily on family labour, by not using reproducible capital and by low labour productivity. It was in the subsistence sector that the abundant labour reserves were fond not necessarily in the shape of many unemployed but rather in the shape of many underemployed. These underemployed could be transferred to the capitalist sector with out bringing about a decline in the subsistence sector’s total production, and a wage which was determined by the average in the subsistence sector. The central problem in the in the theory of economic development was therefore to investigate under which circumstances it would possible to increase the rate of saving and investment in a backward and stagnant economy.

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Lewis’s answer to this central problem was that the poor in the subsistence sector and workers in the capitalist sector could not produce increased savings, because they were simply too poor to save a significant proportion of their income. The rich in the subsistence sector could either, because they were mostly landowners, who used their rents and other income unproductively to existing assets rather than to create new ones. Therefore capitalists, the other components of the such in the basic model, had to produce the necessary increase in the saving rate.
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Rostow like Lewis, differentiated between the traditional sector and modern capitalist sector. Further, he agreed with Lewis that a crucial precondition for lifting an economy out of low income stagnation and into precondition for lifting an economy out of low income stagnation and into sustained growth was significant increase in the share of saving and investment in national income. But Rostow was more interested in describing the whole process through which society develops in different stages.

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Rostow divided the development process in the following five stages: ◦ Traditional Society. ◦ The establishment of the precondition for take off. ◦ Take off stage. ◦ The drive to maturity ◦ The epic of high mass consumption. Counter Revolution (John Toye) Washington Consensus – the era of Neoliberalism consisting of: Liberalisation Privatisation Deregulation.

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