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The political economy of development
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Since the late 1930s until the 1950s industrialised countries scholars
built a set of disparate concepts which became the unscientific base
of a group of ideas loosely grouped in what was known as "development
economics" or "modernization theories". All of them conceptualized
structures aiming at "pushing" economic development through imposing
on third world societies the Western European (liberal) type of state.

By 1977, M. Todaro ("Economics for a Developing World", Longman, 1977)
summarized "literature on economic development has been dominated by
two major strands of thought:

(1) the 'stages of economic growth' theories of the 1950s and early
    1960s; (which the World Bank sponsored since then until today,
    in the 1990s, R.R.)

(2) the 'structural-internationalist' theories of the late 1960s and
    early 1970s; (ECLAC) (both theories have been used as a base for
    formulating various patterns of state intervention in economic
    growth-development, covering a wide range from "guided capitalism"
    to "market-friendly capitalism". A third strand, which is not about
    the role of the state, civil society and the market in the process
    of economic growth-development but an overall criticism of the
    global dominance of the capitalist system generating a system of
    dominance-dependence, is "dependency theory". R.R.)

"The thinking of the 1950s and early 1960s focused mainly on the concept
of successive 'stages of economic growth' in which the process of
development was seen as a series of successive stages through which all
countries must pass. It was primarily an economic theory of development
in which the right quantity and mixture of saving, investment and
foreign aid were all that was necessary to enable Third World nations to
proceed along and economic growth path which historically had been
followed by the more developed countries. Development thus became
synonymous with economic growth. (Social welfare was thought as a
by-product of economic growth with the "trickle-down theory", thus
the main task of the state-government appeared as one of economic
participation/leadership rather than redistributing income. R.R.)

"This view has now been replaced to a great extent by what may be
called the 'structural-internationalist' school of thought. This
approach views underdevelopment in terms of international and domestic
power relationships, institutional and structural economic rigidities,
and the resulting proliferation of dual economies and dual societies
both within and among the nations of the world. Structuralist theories
tend to emphasize external and internal institutional constraints on
economic development. Emphasis is placed on policies needed to eradicate
poverty, to provide more diversified employment opportunities and to
reduce income inequalities. These and other egalitarian objectives are
to be achieved within the context of a growing economy but economic
growth PER SE is not given the exalted status accorded to it by the
linear stages model." (Todaro, op. cit., p. 87)

Actually, the "linear stages' model and 'structuralism' are different
descriptions of the same theory, which states that the only way open
to societies to attempt 'modernization' is via the capitalist system,
the market system as is loosely defined by tha majority of the scholars
praising its virtues and ignoring its lethal effects on huge sectors of
human population.

(Recommended reading-browsing:

 E. Hagen, "The Economics of Development", Irwin, 1968, chap. 6 and 7;
 C. P. Kindleburger, "Economic Development", McGraw-Hill, 1965, Part 1;
 H. Chenery, "The structuralist approach to development policy", in
             AMERICAN ECONOMIC REVIEW, May 1975;
 H. Singer, "Dualism Revisited: A New Approach to the Problems of Dual
             Society in Developing Countries", JOURNAL OF DEVELOPMENT
             STUDIES, October 1970.)

The following basic concepts fostered the idea that governments had a
very special role in the quest for development in former colonized
areas: dualistic economies, lump-sum capital and vent for surplus,
balanced versus unbalanced growth, and stages of growth. I take the
above heavily drawing  from D. Salvatore and E. Dowling, "Development
Economics", SCHAUM'S OUTLINE SERIES, McGraw-Hill, 1977.


Western european 'scientists' in the past have pointed to cultural,
sociological, and climatic conditions as the reason for underdevelopment
in many parts of the world. As a result, they argued, there exists in
many underdeveloped countries a system of dual economies: a small,
modern, efficiently run sector, frequently in the hands of foreigners,
existing side by side but not interconnecting with the traditional
economy. Economic development did not spread because of 'local
ineptitude', said some scholars, while others argued that dual
economies and and the consequent lack of development are the result of
foreign interferences and exploitation, not native inability. To push
the modern sector to spread and 'modernise' the rest of the economy,
a general agent was necessary: a 'modernizing' government, with civil
servants 'educated' in Western european ways of doing business.


Economic policies pushed by those governments were necessary. Some
authors saw the small size of the market as one of the major causes of
underdevelopment and suggests that large sums of capital are needed to
build up the infrastructure before development can take place. Improving
the infrastructure ties the country together and creates markets of
regional and national size, where economies of scale can take place and
innovations and competition are encouraged.

Some critics noted that given the pattern of the dual economy the new
infrastructure was going to push development in the cities, not rural
areas, thus further weakening the importance of an extensive
infrastructure and an 'overall planning' carried out but the state.


An alternative economic policy to lump-sum capital was exports, which
can also increase the size of a country's market. In classical theory
this is called VENT FOR SURPLUS. Vent for surplus, or increased export
demand, results in the utilization of otherwise idle resources, permits
greater specialization, and facilitates increased productivity and
development. Hla Myint (see his "The Classical Theory of Trade and
Underdeveloped Countries", ECONOMIC JOURNAL, June 1958. R.R.), however,
challenges the necessary connection between increased export demand and
development. He claims that in many less developed countries
specialization in export production merely involved expansion of old
techniques to new areas; no qualitative change in production took place.
The economies grew, they didn't develop. Specialization, moreover,
frequently hurt local producers. When the international market turned
soft, they had nothing to fall back on an ended up in debt to foreigners
or the moneyed class.


Balanced growth approach is a more elaborated version of 'lump-sum
capital' concept. Nurkse (see his "Problems of Capital Formation in
Underdeveloped Countries", Basil Blackwell, 1953. R.R.) holds that
investment must take place in all parts of the economy at once to
overcome the small size of the market, which calls for strong state/
government intervention in the economy 'organizing' investment.
Rosenstein-Rodan (see his "Problems of Industrialization of Eastern
Europe and South Eastern Europe", ECONOMIC JOURNAL, June-September 1943.
R.R.) argues that synchronized investment is necessary to increase
income and demand. When investment is piecemeal, not enough income is
generated in society to increase demand. Coordination of investment,
however, provides externalities, or services not fully compensated for,
inasmuch as new industries increase the demand for each other's products
and lower the cost of their inputs. Integration of investment also
insures the training of a broader pool of labour from which all
industries benefit.

Critics maintain that if the country had the resources to launch a
program of balanced growth, it would not be underdeveloped in the first
place. For instance, Schumpeter (see his "The Theory of Economic
Development", Oxford University Press, 1961 -first edition 1934.R.R.)
maintains that innovation, not capital expenditures, is the key to
development. Innovation can involve a new good or a new quality of good,
the discovery of a new method of production, the creation of a new
market, or the location of a new source of supply. Hirschman (see his
"The Strategy of Economic Development", Yale University Press, 1958)
emphasizes the role of the entrepreneur in development. By cutting costs
or improving quality, entrepreneurs free resources for use in other
areas of the economy and create favourable atmosphere for further


Walter Rostow's books on economic growth are the main source for those
who support the idea that all societies in history have been following
the same path: from rural societies to urban societies organized along
capitalist relations of production.

Rostow's theory of growth involves five stages: the traditional society,
the preconditions for growth, the take-off, the drive to maturity, and
the age of high mass-consumption. For Rostow the take-off stage is the
period when traditional attitudes finally break down, investment jumps
to to more than 10% of national income, crucial new industries are
started, and society's structures are consistent with economic growth.

From his main work "The Stages of Economic Growth", Cambridge University
Press, 1965, page 38, I reproduce Rostow's list of take-off dates for
some nations:

        Great Britain     1783-1802
        France            1830-1860
        Belgium           1833-1860
        United States     1843-1860
        Germany           1850-1873
        Sweden            1878-1900
        Japan             1878-1914
        Russia            1890-1914
        Canada            1896-1914
        Argentina         1935-  ?

After take-off, in the drive to maturity, the new technology spreads
to other corners of the economy and the range of productions expands.
In the age of high mass- consumption, consumers have more of their
material needs satisfied. As you can see from above, the presence of
Argentina in his listing makes of his theory a very unreliable one. But,
on the other hand, Rostow's point of view was useful to support the
notion that the state/government should intervene/help modernization
with capitalist relations of production.

The characteristics of the different stages can be set forth as

(1) The traditional society, where
         1.1 age-old customs determine organization and production
         1.2 science and technology have little impact;
         1.3 people feel no need for change.

(2) The Preconditions for Change, where the following happens:
         2.1 gradually changing attitudes in society;
         2.2 higher rates of saving and investment;
         2.3 introduction of technology.

(3) The Take-off, where
         3.1 investment doubles and exceeds 10%;
         3.2 attitudes and institutions firmly geared towards economic
         3.3 important lead-off industries started.

(4) The Drive to Maturity, when
         4.1 technology spreads to all areas of the economy;
         4.2 range of production expands.

(5) The Age of Mass Consumption, when
         5.1 basic needs are no longer a problem;
         5.2 there exist popular consumption of durable goods.

In this sequence, stages (2) and (3) justify the notion of a state
playing the role of "manager" leading society through those stages
with the tools of economic theory, specially Keynesian concept of
managing aggregate demand. Also, Rostow's approach was good because
didn't address political issues like class stratification and instances
of national and international domination.

Also, it could be argued that yes, one possibility is the state being
the agent to unleash the forces of 'modernization', but other
possibility is the free-market unleashing the same forces, and the state
just adjusting its size and reach to the dynamic of the free-market. In
both cases, condition 3.2, which is crucial was fulfilled: "attitudes
and institutions firmly geared to economic growth".


The history of capitalism dominance of the world economy is the
history of "imperfect markets" interacting with state-governments for
the sake of those agents making markets imperfect: big capital.

Two stages are clear here. The so-called stage of "free-market" during
XIX and early XX century, when political imperialism was thriving, and
the "cold war" since late 1940s until the 1990s, with some efforts to
go "beyond" under total domination of transnational corporations.

This economic, political, cultural and ideological intercourse between
oligopolic capital, civil society and the state, could help to clarify
how the state have been evolving not only in the central capitalist
powers, but also in the rural/semi-capitalist/dependent capitalist
societies in Asia, Africa and Latin America. Thus, some description is


The main features of the first stage of what I call
'regulated capitalism', roughly from the late 1800s until
the 1930s, are as follows:

1.- The concentration and centralization of industrial,
    banking and commercial capital;
    markets became progressively regulated in comparison with
    the preceding epoch of "liberal capitalism" (proto-capitalism";
    special growth in producers' goods industries; 
    the increased interconnection of banks and industries; 
    and the proliferation of cartels;
    the concentration of industrial capitalist relations within
    relatively few industrial sectors and within a small number
    of economically significant nation-states;
    the development of extractive/manufacturing industry as the
    dominant sector with a relatively large number of workers
    the concentration of different industries within different
    regions, so that there are clearly identifiable regional
    economies based on a handful of economically significant
    extractive/manufacturing industries;
    the growth of numbers employed in most plants as the economies
    of scale dictate growth and expansion within each unit of
    the growth and increased importance of very large industrial
    cities which dominate particular regions through the provision
    of centralized services (i.e. commercial and financial)

2.- The growth of the separation of ownership from managerial control:
    the bureaucratization of control, and
    the elaboration of complex managerial hierarchies

3.- The growth of new sectors of managerial/scientific/
    technological/intelligentsia, and
    the growth of a bureaucratically employed middle class

4.- The growth of collective organizations in the labour market,
    particularly of regionally and then nationally organized
    trade unions

5.- The growth of collective organizations of employers,
    particularly employers' associations, regionally and
    nationally, alongside nationally organized professions, etc.

6.- The increasing inter-articulation between the state and the
    large monopolies, with the latter becoming 'engines of growth'
    and, therefore, having the upper hand in political matters.

7.- The increasing inter-articulation between collective
    organizations and the state as the latter increasingly
    intervenes in social conflicts to protect the monopolies.

8.- Development of class-specific welfare-state legislation.

9.- The expansion of empires and the control of markets and
    production outside the core of capitalist societies:
    the existence of 'captive markets-centres of production'
    working for specific individual empires (i. e. Britain,
    Germany, France, Netherlands, United States)

10.- Changes in politics and the state:
     the increasing number and size of state bureaucracies;
     the incorporation of various social categories into the
     national political arena;
     the increased representation of diverse interests in and
     through the state; and
     the transformation of administration from merely 'keeping
     order' to the attainment of various goals and objectives, all
     of them related to attaining consensus for further economic
     growth lead by big corporations.

11.- Various ideological changes concerning the role of technical
     rationality and the glorification of science.

By the end of this period, the early 1940s, the idea of a liberal
state was taken as a law of nature. Shades of liberal states were
necessary to 'modernize the whole world'.


The second stage of "regulated capitalism" roughly covers from
the late 1940s until today (late 1990s). An important feature of 
this second stage is that contains a 'sub-stage' otherwise known 
as the period of the 'cold war', which lasted from 1947/48 until the 
collapse of the bureaucratic socialist socio-economic systems in 
Eastern Europe and Western Asia (former USSR). This sub-stage was 
mainly political but it did have some economic outcomes. The main 
features of the second stage are:

1.- The development of transnational corporations which became
    catalysts of fundamental change. In particular, the growth and
    complexity of cross-border economic linkages are embedding the
    national organization of economic activity within a global
    system of processes and transactions:
    because many transnational corporations in manufacturing and
    services are also large domestic firms with a significant share
    of domestic assets, employment and output, the overall
    influence of transnational corporations is unprecedented
    overall, as much as one-third of world output is now under the
    direct governance of transnational corporations, with the
    indirect influence being almost certainly much greater (1994);
    the influence of transnational corporations on the process of
    international economic integration is not only confined to
    production, the have also changed the nature and scope of 
    integration: the pressures increasing intra-industry trade --
    product differentiation, technological progress and global
    economies of scale-- are closely associated with transnational
    corporations activity, as the rise of trade in services. The
    internationalization of financial markets is closely associated
    with the spread of international production.

2.- The continued expansion of the number of white-collar workers
    and particularly of a distinctive service sector (of managers,
    professionals, educators, scientists, et al) becomes an
    increasingly significant element in the modern functioning
    of capitalism.

3.- Decline in the absolute and relative size of the core working
    class, that is of the manual workers in manufacturing industry,
    as economies become more service centered (the so-called
    process of de-industrialisation)

4.- Decline in the importance and effectiveness of national-level
    collective bargaining procedures in industrial relations and
    the growth of company and plant-level bargaining. This is
    defined as an outcome of a shift from Taylorist to 'flexible'
    forms of work organization

5.- Increasing independence of large monopolies-oligopolies
    (transnational corporations) from direct control and regulation
    by individual nation-states; 
    the breakdown of most neo-corporatist forms of state regulation
    of wage bargaining, planning, social welfare, etc;
    increasing contradiction between state and capital (fiscal 
    crisis, etc.);
    a contradiction being solved with a gradual rolling back of the
    state as an economic agent, and a reinforcement of its role as
    a political agent in charge of keeping the legal, cultural, social
    and ideological environment consistent with the interests of 
    international capital.

6.- The forced/not forced spread of capitalism into less developed
    countries, which has involved increased numbers of basic
    extractive/manufacturing industries (i.e. steel, coal, oil,
    heavy industry, automobiles), shifting part of these jobs to
    less developed societies.

7.- An increase in cultural fragmentation and pluralism, resulting
    both from the commodification of leisure and the development
    of new political/cultural forms since the 1960s;
    the decodification of some existing cultural forms;
    the related reductions in time-space distanciation ( the
    'global village') undermine the construction of unproblematic
    national subjects

8.- Increased importance of service industry for the structuring
    of social relations (smaller plants for producing for big
    corporations as subcontractors, a more 'flexible' labour
    process, increased feminization, a higher 'mental' 
    component, etc)

9.- The overlapping effect of new forms of spatial division of
    labour has weakened the degree to which industries are
    concentrated within different regions ( no more 'regional
    economies', etc), creating 'global economies' which are
    centered in the board of transnational corporations.

10.- Decline in average plant size because of shifts in industrial
     substantial labour-saving capital investment, with
     unemployment consequences; 
     the hiving off of various sub-contracted activities;
     the export of relatively labour-intensive activities to
     foreign-owned factories in some less developed countries,
     and to 'rural' sites in developed countries (Ireland,
     Portugal, Spain, and to a lesser extent, Britain, etc.)

11.- The industrial and population collapse of the 'inner cities';
     the increase in population in smaller towns and more
     generally of semi-rural areas, the movement away from older
     industrial areas, etc;
     cities also become less centrally implicated in the circuits
     of capital and become progressively reduced to the status
     of alternative pools of labour-power.

12.- The appearance and mass distribution of a cultural-ideological
     configuration of unscientific concepts revolving around the
     idea that knowledge is not acquired  but 'received' ('post-
     modernism', etc); this affects high culture, popular culture
     and the symbols and discourse of everyday life, and, of
     course, disarticulate political pressure on the prevailing
     socio-economic system.

All the above makes the political-economic environment for the
functioning of modern states both in industrialised areas and in
dependent areas (the so-called less developed societies).


F.H.Cardoso,  Dependency and Development in Latin America
R.Rojas, A market-friendly strategy for development
R.Rojas, The 'adjustment' of the world economy
E. Galeano, Latin America and the Theory of Imperialism

from World Development 1997 (The World Bank)
The economic rationale for state intervention and some definitions

Market failure and the concern for equity provide the economic rationale
for government intervention. But there is no guarantee that any such
intervention will benefit society. Government failure may be as common as
market failure. The challenge is to see that the political process and
institutional structures get the incentives right, so that their
interventions actually improve social welfare.

MARKET FAILURE refers to the set of conditions under which a market
economy fails to allocate resources efficiently. There are many sources
of market failure and many degrees of failure. The implications for the
role of the state and the form of public intervention can be quite
different in each case.

PUBLIC GOODS are goods that are NONRIVAL ( consumption by one user does
not reduce the supply available for others) and NONEXCLUDABLE (users
cannot be prevented from consuming the good). These characteristics made
it infeasible to charge for the consumption of public goods, and
therefore private suppliers will lack the incentive to supply them.
National public goods, such as defense, benefit an entire country; local
public goods, such as rural roads, benefit a small area. PRIVATE GOODS
are those that are both rival and excludable, COMMON PROPERTY GOODS are
nonexcludable but rival (an example is groundwater irrigation), and
CLUB GOODS are nonrival but excludable (examples are interurban highways
and toll roads).

EXTERNALITIES arise when the actions of one person or firm hurt or
benefit others without that person or firm paying or receiving
compensation. Pollution is an example of a NEGATIVE EXTERNALITY, which
imposes uncompensated costs on society; the broader benefit to society
at large of a literate population is a POSITIVE EXTERNALITY of primary
education. Governments can curb negative and promote positive
externalities through regulation, taxation or subsidy, or outright

A NATURAL MONOPOLY occurs when the unit cost of providing a good or
service to an additional user declines over a wide range of output,
reducing or eliminating the scope for competition. But left to operate
freely, monopoly providers can restrict output to increase prices and
profits. Governments have addressed this problem by regulating private
monopolists or providing the good or service themselves. Changes in
technology have created new scope for competition in services once
considered natural monopolies, such as telecommunications and power

problems and can result in inefficient outcomes. Markets are incomplete
whenever they fail to provide a good or service even though the cost
would be less than what individuals are willing to pay. Imperfect
information on the part of consumers can lead to systematic
undervaluation of some services, such as primary education or preventive
health care. Asymmetry of information -when suppliers know more than
consumers, or vice versa- can lead to excessive or supplier-induced
demand, for example in the provision of medical care. Problems of
adverse selection and moral hazard can lead to the failure of insurance

ADVERSE SELECTION occurs when buyers of a service tend to impose higher-
than-average costs on the service provider, or when sellers are able to
exclude such high-cost customers. Health insurance provides an example:
those who are more likely to need care are more likely to buy insurance,
and more likely to be turned down by insurers.

MORAL HAZARD is present when persons carrying insurance have an incentive
to cause or allow the insured-against event to happen. An examp[e is the
tendency of health care consumers to seek, as well as providers to
provide, more treatment than they need when a third party, the insurer,
is paying most of the cost. Governments have sought to address these
problems by ensuring widespread coverage and holding down costs. They
have done this by either regulating private insurance, or providing
health care themselves.

EQUITY may prompt state intervention even in the absence of market
failure. Competitive markets may distribute income in socially
unacceptable ways. Persons with few assets may be left with insufficient
resources to achieve acceptable living standards. Government action may
be required to protect the vulnerable.
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