capitalism

Development, Economic 121
economics, which emphasized macroeconomic stimulation
of national demand to reduce unemployment and spur
growth. The apparent success of the Soviet Union at industrialization
also influenced policy prescriptions for rapid growth.
From the beginning, the orthodoxy in this field viewed industrialization
and capital accumulation—characteristics associated
with advanced economies—as policy goals. The lack
of capital was seen as a major cause of poverty. Paul
Rosentstein-Rodan and Hans Singer wrote about the
“vicious circle” of poverty, in which the lack of savings and
investment perpetuated underdevelopment as small markets
and limited resources made it unlikely that private
investment would rise to a level sufficient to raise growth.
Theorists assumed a direct relationship between investment
levels and growth rates, and growth models calculated the
“financing gap” said to exist in poor countries. Foreign aid
was used to fill that gap.
Trade pessimism also dominated the thinking of development
economists and Third World governments. Ragnar
Nurkse believed that the conditions that helped developed
countries increase exports in the 19th century no longer held
and that trade would stimulate unnecessary consumption and
reduce savings rates in poor countries. Raul Prebisch argued
that developing countries faced deteriorating terms of
trade—the price of their exports, mainly primary products,
fell in relation to the price of their imports, mainly industrial
goods from rich countries. Thus, free trade favored rich
countries and condemned poor nations to poverty.
The policy response to these analyses was protectionism
and development planning. Poor nations erected trade barriers
to encourage the growth of domestic industry. The
contribution of agriculture to development was considered
to be limited, and the rural poor were thought to be unresponsive
to price signals in a market economy. Because private
capital was seen as unable or unwilling to invest in
poor countries, government planning became widespread.
Policies included reliance on price and wage controls, stateowned
enterprises, agricultural marketing boards, government-directed
credit, capital controls, and extensive
regulation of the private sector. Gunnar Myrdal recommended
“central planning as a first condition of progress.”
Countries such as India and Pakistan adopted Soviet-style
5-year plans.
Such planning was supported and encouraged by the
World Bank and other aid agencies, which were thought to
provide a “big push” to poor nations and, in the view of
Walt Rostow, lead to an economic takeoff. The idea that
modernity had to be forced on backward societies pervaded
the development orthodoxy. Myrdal wrote approvingly
about compulsion to make planning succeed.
Dissent against the development consensus arose, but
was limited to a few voices in the wilderness. Peter Bauer,
the most articulate of the dissenters, criticized the disregard
of individual choice, reliance on extensive state
interventionism, and the obsession with capital accumulation.
Bauer explained, “To have money is the result of
economic achievement, not its precondition.” Thus, he
noted that the notions of a vicious circle of poverty and of
foreign aid as essential to development were absurd as is
evidenced by rich countries that were once poor but developed
without outside aid. In Bauer’s view, decentralized
decision making in the market led to the best use of
resources and limited an increase in “man’s power over
man.” Economic progress depended on the complex interaction
of policies, institutions, and values, not all of which
were easily susceptible to measurement or manipulation.
It would take decades of development experience, however,
before some of those views became more widely
shared. By the 1960s, inward-looking development strategies
were already failing. Protection of domestic industries
increased production costs on agriculture and prices on
consumer goods, but failed to produce quality products.
Agricultural goods also often faced export taxes. The bias
against agriculture depressed that sector, perpetuating
poverty in rural areas, and reduced its export earnings.
Imports of capital goods and even food increased, exchange
rates became overvalued, and countries began having balance
of payment problems.
Highly protected industrialization turned out to discourage
exports and lead to macroeconomic distortions. But not
all developing countries followed that model. In the 1960s,
South Korea and Taiwan began turning away from import
substitution industrialization and toward the open trade
policies that characterized Singapore and Hong Kong. In
1979, Ian Little documented the four nations’ reliance on
comparative advantage:
The major lesson is that labor-intensive export-oriented
policies, which amounted to almost free-trade conditions
for exporters, were the prime cause of an extremely rapid
and labor-intensive industrialization, which revolutionized
in a decade the lives of more than 50 million people,
including the poorest among them.
As the four tigers advanced economically, wages rose,
poverty fell, and their economies became modern, more
service-oriented, and dependent on higher skills and higher
technology. Japan’s postwar rise from devastation to First
World country within a matter of decades also set an example.
Labor-intensive production then shifted to other
countries in Asia as, among others, Thailand, Malaysia,
Indonesia, and China began opening their economies.
The development orthodoxy, meanwhile, went through
various fads and adjustments, emphasizing, for example,
government support for agriculture and redistribution to the
poor. However, it was not until the outbreak of the Third
World debt crisis in the early 1980s and the subsequent collapse
of central planning that the failure of state-led development
became widely acknowledged.