Theories of Development and Underdevelopment

1. Theories of Development and Underdevelopment Heterodox Theories Structuralism Institutionalism Marxian Dependency School Ch. 6 in Cypher & Dietz

2. What is Heterodox Economics? orthodox / mainstream / neoclassical economics heterodox / non-mainstream / alternative economics Heterodox / non-Mainstream / alternative economics such as: Keynesian economics / post-Keynesian economics Marxian economics / neo-Marxian economics Structuralist economics Institutionalist economics Ricardian economics Feminist economics

3. What is Heterodox Economics? Heterodox economists as distinct from Neoclassical economics: do not propose that �capitalism� (i.e. �the free market system�) is an ultimately perfect system of organizing society; unlike neoclassical economists they criticize the shortcomings of the market system to various degrees; call for government intervention to overcome these shortcomings; emphasize political, social, cultural, historical, structural and institutional factors that interplay with economic factors.

4. Heterodox Theories of Development Structuralism Institutionalism Neo-Marxian Underconsumptionist School Neo-Marxian Dependency School Classical Marxian School

5. Latin American Structuralists(Furtado, Prebisch; Singer) Emphasize structural and institutional differences between less-developed and developed nations. Structural characteristics of underdeveloped economies: Juxtaposition of traditional low-productivity agricultural sector with A modern sector usually dominated by foreign capital towards primary exports No domestic design and production of K goods for modern sector Small employment in modern sector Land tenure systems restrict increase in agricultural output Domestic supply rigidity in key branches of the economy & low price elasticity of export demand ? low growth of exports High income and low price elasticity of import demand in the modern sector ? high growth of imports High population growth

6. The structuralism of Raul Prebisch Until early 1920s, Argentina?an outstanding example of the theory of comparative advantage. Cost advantage for producers in the production of beef & wheat for the world market. Enormous growth of the Argentinian economy from 1980s until the second decade of 20th century. In 1920s-30s, Argentina faced the adverse effects of Great Depression and the dominance of US in the world market and had difficulties with its primary trade partner; Britain. Both prices of and demand for its exports started to fall; it started to accummulate foreign debt. Prebisch�s work showed that during Great Depression: export prices of agricultural primary goods fell much more and faster than prices of manufactured, secondary products. This observation lead Prebisch to develop a critical perspective on the static formulation of the neoclassical comparitive advantage theory of international trade; and rather emphasize the dynamic effects of real economic forces.

7. Elasticity of Supply and Equilibrium Price AdjustmentFigure 6.1, on p. 161 in Cypher & Dietz

8. The Prebisch-Singer Hypothesis The distinction between nations: the center and the periphery. The center gets all the benefits of international trade whereas the periphery gets nothing. Opposes to the Ricardian Theory of Comparative Advantage. Argues given the differences in the existing economic, productive and labor market structures between the periphery and the center, -in the application of technology in traded goods. -in the market structures; oligopoly vs. competitive Calls for implementation of specific developmental policies by governments of developing countries and the solution to the development problem can not be left to the market mechanism alone.

9. Latin American Structuralists Given these structural differences less-developed countries can not replicate what developed economies have done in the past. This is not a phase through which every growing economy passes but a specific historical condition. Furtado: Industrialized countries ? supply-lead growth through technological change first in consumer goods, then in capital goods. Industrializing countries ? (export) demand-lead growth through external interaction with industrialized economies, which has resulted in hybrid structures.

10. Latin American Structuralists But external export demand cannot be relied on to sustain growth indefinitely because: It�s susceptible to trade cycles (transitory or permanent demand shortages) Risks of declining ToT (especially primary products) Productivity increase is limited, hence wage increase is limited when specilization is in labor-intensive export goods. Hence use exports to develop the domestic market, but this is dependent on: Employment scale of production and technology Wages, i.e. supply price of labor from traditional to modern sector Tax paid by modern enterprises which in turn determines public expenditure Demand for domestically produced K goods by the modern sector Extent of profits and salaries being spent domestically BoP constraints in an open economy

11. Policy Recommendations Import Substitution Industrialization (ISI) particularly in products that show high income elasticity of demand (begining with manufacturing of simple, consumer non-durables ? consumer durables ? intermediate K goods ? basic K goods) Take care of external factors such as BoP constraints Cut nonessential imports Expand primary product and manufactured products exports Guide investment into key import-substitutiong sectors in infant industries Advanced economies shold give trade preferences, foreign aid and finace Form common regional markets amongst developing economies to enlarge market size Active Gov�t policies to enact effective tariff barriers to protect the new ISI industries from foreign competition; also providing and allocating public expenditures to the areas where the highest rate of return could be anticipated.

12. Neomarxist Schools of Development: Underconsumptionists (Paul Baran and Paul Sweezy) Advanced capitalism emerged due to a long period of competitive capitalism which fostered K accummulation and technological breakthrough 3 conditions for emergence of capitalism increase in agricultural output and displacement of peasants growth of commodity production and division of labor accummulation of capital by emerging class of merchants and rich peasants 1&2 occurred everywhere with similar pace; yet �3� was hindered in the 3rd World because Low surplus: European expansion siphoned off the surplus of the South Low investment incentives: Economic and social structures in the South was unable to promote use of surplus for investment and Capital accummulation Hence the world economy starting from a state of parity got divided into rich and poor. eg. India inhibited by British colonialism versus Japan independent state support for industrialization

13. Neomarxist Schools of Development: Underconsumptionists (Paul Baran and Paul Sweezy) Development in industrialized market economies leads to ever increasing concentration of capital in fewer hands, i.e. Capitalist system has a natural built-in tendency to Monopoly Capitalism Monopoly eliminates the disciplining device of competition and leads to a diversion of surplus away from productive investment towards wasteful uses. As monoploies invest less they lead to chronic lack of demand, i.e. Underconsumption. Hence monopoly capital becomes the ultimate cause of stagnation in both advanced and underdeveloped countries. In this process, underdeveloped countries are dominated by foreign capital with its local hangers on, i.e. mercantile and landlord interests.

14. Neomarxist Schools of Development:Dependency School (A. G. Frank, I. Wallerstein, S. Amin) Dependency theory sees the world as divided into a center/core/metropolis versus a periphery/satellite. Capitalism is the main reason behind such a split; i.e. the cause of underdevelopment of the periphery. Incorporation into the World capitalist system leads to development in a few areas and to development of underdevelopment elsewhere; a small core surrounded by a large periphery.

15. Neomarxist Schools of Development:Dependency School (A. G. Frank, I. Wallerstein, S. Amin) Metropolis/center uses the satellite/periphery for Cheap labor Raw materials Market outlets The chain of metropolis-satellite (center-periphery) relations and dichotomy is created as a necessary part of capitalist development not only amongst different nations on a world scale but also within single nations on a regional basis.

16. Heterodox Theories of Development heterodox theories of development as distinct from orthodox developmentalist theories do not believe that relatively minor changes in economic conditions would be sufficient to create the �big-push� or the �take-off� into sustained growth that economic development is a linear, universal process that capitalism (market economy) is the ultimate goal Heterodox theories of development propose the following: the process of development has geographically and historically unique features varying from one place to another caution the possibility of adverse path dependence emphasize the unequal relations of power between South and North and Capital and Labor underline the importance of socioeconomic and political structures and institutions in the development process