Development theories in Economics

April 30, 2016
Economic Development

Development theory cluster of research and theories on economic and political development.

The emergence of development theory

The use of the term development to refer to national economic growth emerged in the United States beginning in the 1940s and in association with a key American foreign policy concern: how to shape the future of the newly independent states in ways that would ensure that they would not be drawn into the communist Soviet bloc. Motivated by this concern, the United States enlisted its social scientists to study and devise ways of promoting capitalist economic development and political stability in what was termed the developing world. Development theory refers to the research and writing that resulted from this effort.

There are different conceptions of development and, consequently, disparate approaches to the subject. However, all approaches are concerned with the relationship between development and governance. Development is usually seen as crucially determined by structures of governance; governance is interpreted through and shaped by the goal of development. Most development theory equates development with national economic growth and sees the state as its primary agent; consequently, one of its central concerns is to understand and explain the role of the state in development and the nature of government-market relations. Because these explanations relate development outcomes to the extent and form of the state’s role in development, there is a close relationship between development theory and practice.

Development theory has changed over time with changes in ideology and the international environment, and, as it changes, so do its conceptions of development and governance and how they are related. Changing conceptions of governance and its relation to development can be traced through the major perspectives on development that have emerged since World War II, as represented by theories of modernization and growth, dependency and world systems theories, the resurgence of neoclassical theory, and an array of newer critical perspectives.

Theories of modernization and growth

Development involves innumerable variables, including economic, social, political, gender, cultural, religious, and environmental factors. But though development theory integrates concepts and perspectives from a range of disciplines, it was highly influenced by economic thought from the start. Early theoretical models of development equated development with economic growth and industrialization, and theorists saw countries that had not yet achieved these as being at an earlier or lower stage of development relative to Europe and North America. The most influential proponent of this view was the American economic historian Walt W. Rostow. His 1960 book, , elaborated a linear-stages-of-growth model that defined development as a sequence of stages through which all societies must pass. This conception of the nature and process of development became the basic blueprint for modernization theory.

Modernization theory emerged following World War II to address the issue of how to shape the economies of states emerging from European colonization. Its implicit aim, as the subtitle of Rostow’s book makes clear, was to shape the development of these countries along capitalist lines. Modernization was, thus, conceived of as the relations of production and standards of living characteristic of western Europe and the United States. In line with Rostow’s model, modernization theorists treated underdevelopment as a stage common to all developing countries and a result of weaknesses in the various factors of production—land, labour, and capital. Theorists emphasized increased savings and investment as the key to development and argued that international trade in products particularly suited to national factor endowments would enable more efficient resource allocation and greater earnings, and these could be translated into savings and then used to promote development. Theorists envisioned that—by disseminating technology, knowledge, managerial skills, and entrepreneurship; encouraging capital inflow; stimulating competition; and increasing productivity—foreign trade, together with foreign investment and aid, would be the engine of growth for developing countries.

Dependency and world systems theories

Modernization theory claimed that once developing societies came into contact with western European and North American societies, they would be impelled toward modernization and, eventually, would achieve the economic, political, and social features characteristic of the nations of western Europe and the United States. However, by the 1960s it was apparent that the Third World was not passing through a stage of underdevelopment, as envisioned by modernization theory, but remaining underdeveloped. Thus, a counterclaim was advanced—that developing countries today are structurally different from the advanced countries and so will have to develop along different lines. This claim became the core of the structuralist thesis developed by intellectuals from Chile, Argentina, Brazil, and Peru brought together by the United Nations Economic Commission for Latin America (ECLA; today known as Economic Commission for Latin America and the Caribbean, ECLAC).

The main theoretical tenet of ECLA’s approach was that former colonies and nonindustrialized nations were structurally different from industrialized countries and, therefore, needed different recipes for modernization. ECLA argued that colonization restructured former colonies’ economies so that they specialized in producing raw materials, cash crops, and foodstuff for export at low prices to the colonizers’ home countries. These structures created a dynamic that was continuing to impoverish former colonies and to thwart their modernization. According to ECLA, the international division of labour created by colonization had separated the international economy into a centre, consisting of the industrialized countries, and a periphery, which included all the rest of the countries around the world outside of the socialist camp. Because the prices of manufactured goods bought by the periphery were rising faster than those of raw materials, cash crops, and foodstuffs sold by the periphery to the centre, international trade ensured the persistence of an unbalanced process of development. Thus, in contrast to modernization theory, which emphasized the benefits of free trade, foreign investment, and foreign aid, these theorists argued that free trade and international market relations occur in a framework of uneven relations between developed and underdeveloped countries and work to reinforce and reproduce these relations.

This perspective formed the basis of what came to be known as dependency theory. Dependency theory rejects the limited national focus of modernization theory and emphasizes the importance of understanding the complexity of imperialism and its role in shaping postcolonial states. Its main tenet is that the periphery of the international economy is being economically exploited (drained) by the centre. Building on ECLA’s perspective, dependency theorists argued that colonialism recast economies in the Third World in a highly specialized export-producing mold, creating fundamental and interrelated structural distortions that have continued to thwart development. Once this reshaping was accomplished, market forces worked to perpetuate the relationship of dominance and exploitation between centre and periphery.

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