THEORIESOFECONOMIC

DEVELOPMENT
Tomanypeople,atheoryisacontentionthatisimpractical,orhasnofactual
support.SomeonewhosaysthatfreemigrationtotheUnitedStatesmaybe
allrightintheory,butnotinpracticeimpliesthatdespitethemeritofthe
idea,itwouldbeimpractical.Likewise,thestatementthattheideathatlower
wealthtaxesinIndiawouldstimulateeconomicgrowth"isjustatheory
indicatesanunveriedhypothesis.
Fortheeconomist,however,atheoryisasystematicexplanationofthe
interrelationshipsamongeconomicvariables,anditspurposeistoexplainthe
causalrelationshipsamongthesevariables.Usually,atheoryisusednotonly
tounderstandthe.worldbetter,butalsotoprovideabasisforpolicy.Inany
event,theoristscannotconsiderallthefactorsinuencingeconomicgrowthin
asingletheory.Theymustdeterminewhichvariablesarecrucial,andwhich
areirrelevant.However,realityissocomplicatedthatasimplemodelmay
omitcriticalvariablesintherealworld.1Andalthoughcomplexmathematical
modelscanhandlealargenumberofvariables,theyhavenotbeenverysuc
cessfulinexplainingeconomicdevelopment,especiallyinthethirdworld.
SCOPEOFTHECHAPTER
Thischapterdiscussesafewofthemajortheoriesofeconomicdevelop
ment,reservingforsubsequentchapterslesscomprehensivetheoriesdealing
withspeciceconomicquestions.Today,scholarspaylessattentiontogrand
theoriesofdevelopmentthantheydidinthe19505and19605.Itisnowappar
entthattheeconomicdevelopmentofmorethan100countriesonsixconti
nentsencompassingdecadesistoocomplextoexplainwithonevasttheory.
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TheoriesofEconomicDevelopment
ThersttwomodelsofeconomicdevelopmentdiscussedthatoftheEn
glishclassicaleconomists,andoftheirforemostcritic,KarlMarxwerewrit
tenmorethanacenturyago,atthetimeofearlycapitalistdevelopmentin
WesternEuropeandtheUnitedStates.DespitethisfocusonDCgrowth,the
theorieshavesomeapplicationtodayinLDCs.
Othertheoriespresentedinthischapter,largelyformulatedsince.WorldWar
II,concentrateontheexperienceofdevelopingcountries.WalterRostow's
model,writtenasanalternativetoMarxstheoryofmodernhistory,setsforth
fivestagesofeconomicgrowthforLDCs,basedontheexperienceofthe
industrializedcountries.Theviciouscircletheory,whichfocusesontherea
sonsforlowsavingratesinpoorcountries,waswidelyacceptedintheearly
19505.Thetheoreticaldebateonbalancedversusunbalancedgrowthhas
clariedimportantissuesconcerningthebigpushandeconomiesofscale.
PaulBaran'scoalitionsmodeldrawsonMarxshistoricaldynamicsandLenin's

theoryofimperialismtoanalyzeeconomicbackwardnessinAsia,Africa,
andLatinAmerica.Finally,dependencytheory,whichborrowsfromBar
ansapproach,arguesthatunderdevelopmentinthirdworldcountriesre
sultsfromtheirparticipationintheinternationalcapitalistsystem.
THECLASSICALTHEORY
OFECONOMICSTAGNATION
TheModel
TheclassicaltheorybasedontheworkofthreeEnglisheconomistsofthe
earlynineteenthcenturyThomasR.Malthus,DavidRicardo,andjohnStuart
Millwaspessimisticaboutthepossibilityofsustainedeconomicgrowth.
Malthus,rememberedforthegloomyEssayonthePrincipleofPopulation(1798,
1803),alsowrotePrinciplesofPoliticalEconomy(1820),whosetheoryofunder.
consumptionandoverproductionforeshadowedmodernmacroeconomictheory.
AlthoughMillsPrinciplesofPoliticalEconomy(1848)synthesizedandrefined
classicaltheory,RicardosPrinciplesofPoliticalEconomyandTaxation(1817)made
themajorcontributiontotheclassicaltheoryofgrowthandstagnation.For
Ricardo,whoassumednotechnicalprogressorimprovedproductionmeth
ods,growthwaslimitedbylandscarcity.
TheclassicaleconomistswereinuencedbyNewtonianphysics.justas
Newton"positedthatactivitiesintheuniversewerenotrandom,butsubject
tosomegranddesign,thesemenbelievedthatthesamenaturalorderdeter
minedprices,rent,andeconomicaffairs.
ThelateeighteenthcenturyclassicaleconomistAdamSmitharguedthat
eachindividual,byactinginhisorherowninterest,promotedthepublic
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BasicPrinciplesandConcepts
interest.Itwasasifaninvisiblehandwerebehindtheselfinterestofcapital
ists,merchants,landlords,andworkers,directingtheiractionstowardmaxi
mumeconomicgrowth.2
Theclassicalmodelalsotookintoaccount(1)theuseofpapermoney;(2)
thedevelopmentofinstitutionstosupplyitinappropriatequantities;(3)cap
italaccumulationbasedonoutputinexcessofwages;(4)freeforeigntrade;
and(S)divisionoflabor(limitedprimarilybythesizeofthemarket).Amajor
classicaltenetwasthelawofdiminishingreturns,referringtosuccessively
lowerextraoutputsfromaddinganequalextrainputtoxedland.Theclas
sicaltheoristsbelievedthatdiminishingreturnsfrompopulationgrowthand
aconstantamountoflandthreatenedeconomicgrowth.Sincethelevelof
technologywasassumedtobestatic(ordependentoncapital),increasingcap
italwasseenastheonlywaytooffsetthisthreat.
Theirreasoningtookthefollowingpath.Inthelongrun,thenaturalwage

isatsubsistencethecostofperpetuatingthelaborforce(orpopulation,which
increasesatthesamerate).Thewagemaydeviatebuteventuallyreturnstoa
longrunequilibriumatsubsistence.Ontheonehand,ifthewagerises,food
productionexceedswhatisessentialtomaintainthepopulation.Extrafood
meansfewerdeaths,andthepopulationincreases.Morepeopleneedfoodand
theaveragewagefalls.Populationgrowthcontinuestoreducewagesuntil
theyreachthesubsistencelevelonceagain.Ontheotherhand,awagebelow
subsistenceleadstomoredeathsand,eventually,toalaborshortage,which
raisesthewage.Populationdeclineincreaseswagesonceagaintothesubsis
tencelevel.Inbothinstances,thetendencyisforthewagetoreturntoequi
libriumatsubsistence.
Withthisironlawofwages,totalwagesincreaseinproportiontothe
laborforce.Outputincreaseswithpopulationbut,otherthingsbeingequal,
outputperworkerdeclineswithdiminishingreturnsonxedland.Thus,the
surplusvalue(outputminuswages)perpersondeclineswithincreasedpopu
lation.Atthesametime,landrentsperacreincreasewithpopulationgrowth
sincelandbecomesmorescarcerelativetootherfactors.
Sincetheleveloftechnologyisassumedtobestatic,theonlywaytooffset
diminishingreturnsistoaccumulateadditionalcapitalperperson.However,
capitalistsrequireminimumprotsandinterestpaymentstomaintainorin
creasecapitalstock.Yet,sincesurplusvalueperpersondeclinesandrentsin
creasewithpopulationgrowth,thereisadiminishingsurplusavailableforthe
capitalistsaccumulation.Theclassicaleconomistsfearthatthisdeclining'sur
plusreducestheinducementtoaccumulatecapital.Laborforceexpansionleads
toadeclineincapitalperworkeroradecreaseinworkerproductivityand
incomepercapita.Thus,theclassicalmodelbringsabouteventualeconomiC
stagnationordecline.
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TheoriesofEconomicDevelopment
A Critique
Paradoxically,theclassicaleconomists'stagnationtheorywasformulated
amidstnumerousscienticdiscoveriesandtechnicalchangesthatmultiplied
output.Clearly,theseeconomistsunderestimatedtheimpactoftechnological
advanceinoffsettingdiminishingreturns.Duringtheperiodinwhichtheclas
sicistswrote,thespinningjen'ny(1770),thepowerloom(1785),interchange
ableparts(1798),theselfcleaningsteelplow(1837),andthemechanicalreaper
(1834)werealldeveloped.SinceRicardostime,rapidtechnologicalprogress
contributedtounprecedentedeconomicgrowth.3Furthermore,theironlaw
ofwagesdidntforeseetheextenttowhichpopulationgrowthcouldbelim
ited,atleastintheWest,throughvoluntarybirthcontrol.
Moreover,itdidnotoccurtotheclassicaleconomiststhatprivateowner

shipoflandandcapitalisnotaneconomicnecessity.Landandcapitalwould
stillbeusedevenifrentsandinterestwerenotpaid,asinstateownershipof
thesemeansofproduction.Ironically,classicalstagnationmightresultina
Marxianscenario,inwhichwagesandinvestmentwouldbemaintainedonly
ifpropertywereconscatedbysociety,andpaymentstoprivatecapitalistsand
landlordsstopped.
MARXSHISTORICALMATERIALISM
KarlMarxsviewswereshapedbyradicalchangesinWesternEurope:the
FrenchRevolution;theriseofindustrial,capitalistproduction;politicaland
laborrevolts;andagrowingsecularrationalism.Marx(18181883)opposed
theprevailingphilosophyandpoliticaleconomy,especiallytheviewsofuto
piansocialistsandclassicaleconomists,foraworldviewcalledhistorical
materialism.
TheTheory
Marxwantedtoreplacetheunhistoricalapproachoftheclassicistswitha
historicaldialectic.Marxistsconsiderclassicalandlaterorthodoxeconomic
analysisasastillphotograph,whichdescribesrealityatacertaintime.Incon
trast,thedialecticalapproach,analogoustoamovingpicture,looksatasocial
phenomenonbyexaminingwhereitwasandisgoing,anditsprocessofchange.
Historymovesfromonestagetoanother,sayfromfeudalismtocapitalismto
socialism,onthebasisofchangesinrulingandoppressedclasses,andtheir
relationshiptoeachother.Conictbetweeritheforcesofproduction(thestate
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BasicPrinciplesandConcepts
ofscienceandtechnology,theorganizationofproduction,andthedevelop
mentofhumanskills)andtheexistingrelationsofproduction(theappropria
tionanddistributionofproductionaswellasasociety'swayofthought,ide
ology,andworldview)providethedynamicmovementinthematerialist
interpretationofhistory.Theinteractionbetweenforcesandrelationsofpro
ductionshapespolitics,law,morality,religion,culture,andideas.
Accordingly,feudalismisundercutby:(1)themigrationofserfstothe
town;(2)factorycompetitionwithhandicraftandmanoralproduction;(3)
expandedtransport,trade,discovery,andnewinternationalmarketsonbehalf
ofthenewbusinessclass;and(4)theaccompanyingriseofnationstates.The
newclass,theproletariatorworkingclass,createdbythisnextstage,capital
ism,istheseedforthedestructionofcapitalism,andthetransformationtothe
nextstage,socialism.Capitalismfacesrepeatedcrisesbecausethemarket,de
pendentlargelyonworkerconsumption,expandsmoreslowlythanproduc
tivecapacity.Moreover,thisunutilizedcapacitycreates,inMarxsphrase,a

reservearmyoftheunemployed,acheaplaborsourcethatexpandsand
contractswiththeboomandbustofbusinesscycles.Furthermore,withthe
growthofmonopoly,manysmallbusinesspeople,artisans,andfarmersbe
comepropertylessworkers,whonolongerhavecontroloftheirworkplaces.
Eventually,theproletariatrevolts,takescontrolofcapital,andestablishesso
cialism.Intime,socialismissucceededbycommunism,andthestatewithers
away.
Marxsideaswerepopularizedbyhiscollaborator,FriedrichEngels,espe
ciallyfrom1883to1895,whenhefinishedMarxsuncompletedmanuscripts,
interpretedMarxism,andprovideditsintellectualandorganizationalleadership.
A Critique
Marxsmainanalysiswasofcapitalism,buthisdiscussionsofsocialismand
communismwerenotwelldeveloped.Evenhisanalysisofcapitalism,andthe
transitiontosocialism,hadanumberofaws.Hehadtheorizedworkerrevolt
intheindustrializedWest,buttherevolutionrstoccurredinRussia,oneof
theleastdevelopedcapitalisticcountriesinEurope.
MarxistssuggestseveralreasonswhyWesternworkershaveyettoover
throwcapitalism.Havingrealizedthedangersofarebelliousworkingclassat
home,thecapitalistshavedevelopedatacticofdivideandrulethatdepends
onexploitationofworkersoutsidetheWest.Furthermore,thenewsmedia,
educationalinstitutions,andchurchescreateafalseconsciousnesssupporting
rulingclassideologies.Andthecapitaliststatehaspowerfullegal,police,mil
itary,andadministrativemachinerytoquellpotentialresistance.
MarxalsooverlookedthepossibilitythattheinterestsofworkersandCap
italistsmightnotconict.Thus,workersintheWestmayhavesupportedcapi
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TheoriesofEconomicDevelopment
talismbecausetheygainedmoreinthelongrunbyreceivingarelativelycon
stantshareofarapidlygrowingoutputthanbytryingtoacquirealargershare
ofwhatmighthavebeenamoreslowlygrowingoutputunderanalternative
system.
RegardlessofhowweviewMarxism,itremainsarallyingpointfordis
contentedpeople.Theironyisthatnationalistgroupswhooverthrowtheir
rulersinthenameofMarxismarefrequentlythreatenedbyclassantagonisms
fromthosetheyrule.Almostnoothersocialistgovernmentiswillingtogoas
farasthelateChairmanMaoTsetungofChina,whorecognizedtheexistence
ofclassesundersocialism,andcalledforacontinuingrevolutiontoopposethe
encrusted,socialist,upperclasses.Othertheoristshaverevisedoraddedto
Marxism,includingPaulBaranandthedependencytheorists.Weconsider
theseviewsinsucceedingsectionsofthischapter.
ROSTOWSSTAGESOFECONOMICGROWTH

Peopleexistedforcenturieswithlittlechangeintheireconomiclife.When
majorchangesoccurred,asinthelast500yearsorso,theyoftentookplace
abruptly.InTheStagesofEconomirGrowth(1961),WalterW.Rostow,anemi
nenteconomichistorian,setsforthanewhistoricalsynthesisaboutthebegin
ningsofmoderneconomicgrowthonsixcontinents.
TheFiveStages
Rostowseconomicstagesare:(l)thetraditionalsociety;(2)theprecondi
tionsfortakeoff;(3)thetakeoff;(4)thedrivetomaturity;and(5)theageof
highmassconsumption.
Rostowhaslittletosayabouttheconceptoftraditionalsociety,exceptto
indicatethatitisbasedonattitudesandtechnologyprominentbeforetheturn
oftheeighteenthcentury.TheworkofIsaacNewtonusheredinchange.He
formulatedthelawofgravityandtheelementsofdifferentialcalculus.After
Newton,peoplewidelybelievedthattheexternalworldwassubjecttoafew
knowablelaws,andwassystematicallycapableofproductivemanipulation.5
ThePreconditionsStage
Rostowspreconditionstageforsustainedindustrializationincludesradi
calchangesinthreenonindustrialsectors:(1)increasedtransportinvestment
toenlargethemarketandproductionspecialization;(2)arevolutioninagri
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BasicPrinciplesandConcepts
culture,sothatagrowingurbanpopulationcanbefed;and(3)anexpansion
ofimports,includingcapital,nancedperhapsbyexportingsomenaturalre
sources.Thesechanges,includingincreasedcapitalformation,requireapolit
icaleliteinterestedineconomicdevelopment.Thisinterestmaybeinstigated
byanationalistreactionagainstforeigndomination,orthedesireto_havea
higherstandardofliving.
Rostowscentralhistoricalstageisthetakeo,adecisiveexpansionoccur
ringover20to30years,whichradicallytransformsacountryseconomyand
society.Duringthisstage,barrierstosteadygrowtharenallyovercome,
whileforcesmakingforwidespreadeconomicprogressdominatethesociety,
sothatgrowthbecomesthenormalcondition.Thetakeoffperiodisadramatic
momentinhistory,correspondingtothebeginningoftheindustrialrevolution
inlateeighteenthcenturyBritain;preCivilWarrailroadandmanufacturing
developmentintheUnitedStates;theperiodafterthe1848revolutioninGer
many;theyearsjustafterthe1868Meijirestorationinjapan;therapidgrowth
oftherailroad,coal,iron,andheavyengineeringindustriesinthequartercen
turybeforethe1917RussianRevolution;andaperiodstartingwithinadecade
ofIndiasindependence(1947)andthecommunistvictoryinChina(1949).

Rostowindicatesthreeconditionsmustbesatisedfortakeoff.
1.Netinvestmentasapercentageofnetnationalproduct(NNP)in
creasessharplyfrom5percentorlesstoover10percent.Ifanin
vestmentof3.5percentofNNPleadstoagrowthof1percentper
year,then10.5percentofNNPisneededfora3percentgrowth(or
a2percentpercapitaincreaseifpopulationgrowsat1percent).
2.Atleastonesubstantialmanufacturingsectorgrowsrapidly.Thegrowth
ofaleadingmanufacturingsectorspreadstoitsinputsuppliersex
pandingtomeetitsincreaseddemand,andtoitsbuyersbeneting
fromitslargeroutput.Inthelastthreedecadesofthe17005,forex
ample,thecottontextileindustryinBritainexpandedrapidlybecause
oftheuseofthespinningjenny,waterframe,andmuleintextiles,
andtheincreaseddemandforcottonclothing.Thedevelopmentof
textilemanufactures,andtheirexports,hadwidedirectandindirect
eEectsonthedemandforcoal,iron,machinery,andtransport.Inthe
UnitedStates,France,Germany,Canada,andRussia,thegrowthof
therailroad,byWideningmarkets,wasapowerfulstimulusinthe
coal,iron,andengineeringindustries,whichinturnfueledthetakeoff.
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TheoriesofEconomicDevelopment
3.Apolitical,social,andinstitutionalframeworkquicklyemergesto
exploitexpansioninthemodernsectors.Thisconditionimpliesmo
bilizingcapitalthroughretainedearningsfromrapidlyexpandingsec
tors;animprovedsystemtotaxhighincomegroups,especiallyin
agriculture;thedevelopmentofbanksandcapitalmarkets;and,in
7 most instances, foreign investment. Furthermore, where state initiativeislacking,theculturemustsupportanewclassofentrepreneurs
preparedtotaketheriskofinnovation.
TheDrivetoMaturity
Aftertakeoff,therefollowsthedrivetomaturity,aperiodofgrowththatis
regular,expected,andselfsustained.Thisstageischaracterizedbyalabor
forcethatispredominantlyurban,increasinglyskilled,lessindividualistic,and
morebureaucratic,andthatlooksincreasinglytothestatetoprovideeco
nomicsecurity.
TheAgeofHighMassConsumption
Thesymbolsofthislaststage,reachedintheUnitedStatesinthe19205and
inWesternEuropeinthe19505,aretheautomobile,suburbanization,andin
numerable,durableconsumergoodsandgadgets.lnRostowsview,otherso
cietiesmaychooseawelfarestateorinternationalmilitaryandpoliticalpower.
ACritique
RostowstheorywasthevogueamongmanyU.S.governmentofcialsin

the19605,especiallyintheinternationalaidagencies,asitpromisedhopefor
sustainedgrowthinLDCsaftersubstantial,initialinfusionsofforeignassis
tance.Butamongscholars,Rostowsworkmetwith,atbest,mixedreviews.
Rostowisaccusedofoverambition.[anDrummondcomplainsthatprobably
notheoryhasbeensowidelycirculatedfromsoslightabaseoforganizedfact
andcarefulanalysis.6
Anothereconomichistorian,A.K.Cairncross,arguesthatonecanbelieve
inanabrupttakeoff,orindustrialrevolution,onlyifonesknowledgeofhis
toryisimsyandoutofdate.CairncrossarguesthatmanyofRostowscon
ditionsaredefinedsovaguelythattheystretchtocoveranycase,andthathe
seemsonlytoowillingtoadmitexceptions,whentakeoffoccursatatime
differentfromwhathistheorysuggests.7
Indeed,Rostowsstages,impreciselydened,arediiculttotestscienti
cally.Foratheorytobemeaningful,itmusthepossibletoproveitwrong.If
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BasicPrinciplesandConcepts
thestagesaretoexplainhoweconomicdevelopmentiscaused,therelation
shipscannotbecircular.Thestagesmustbedenedintermsotherthaneco
nomicdevelopment,thevariablethetheoryistryingtoexplain.Forexample,
theconceptsoftraditionalsocietyandhighmassconsumptionsocietydenerather
thanexplainreasonsforthelevelofeconomicdevelopment.Furthermore,
pasteconomiesprimitive,ancient,medieval,andthoseofthepresentlyde
velopedcountriesofaCenturyortwoagoareallplacedwithpresently
underdevelopedcountriesinasinglecategory,thetraditionalsociety.
ThedesignationoftraditionalsocietiesaspreNewtonianneglectsthedual
ismofmanypresentdayLDCs.Muchofthelargemanufacturing,plantatin,
andminingsectorsofIndia,Indonesia,Nigeria,andPakistanutilizemodern
methodsandtechniques,andcannotbeconsideredtraditionalinRostowssense.
MuchofRostowsthesisaboutconditionsfortakeoffiscontradictedby
empiricaldata.Increasesininvestmentratesandgrowthdonotoccurinthe
2030yearspanRostowdesignatesfortakeoff.Growthininvestmentrates
andnetnationalproductinGreatBritain,Germany,Sweden,andJapanindi
cateaslowandrelativelysteadyaccelerationratherthananabrupttakeoff.
Frequently,thecharacteristicsofoneofRostowsstagesarenotuniqueto
it.Whywouldnttheagriculturalrevolution,capitalimports,andsocialover
headinvestmentofthepreconditionsstagebeconsistentwiththeabruptin
creaseininvestmentratesduringthetakeoffstage?Whycouldntthedevel
opmentofleadingsectorsortheemergenceofaninstitutionalframework
exploitinggrowthtakeplaceinthepreconditionsstage,aswellasthetakeoff

stage?Whywouldnttheabruptincreaseingrowthandinvestmentratesdur
ingthetakeoffcontinuethroughthedrivetomaturity?
UnlikeMarxsdialecticalmaterialism,Rostowsapproachdoesntshowhow
thecharacteristicsandprocessesofonestagemoveasocietytothenextstage.
Howdoweexplaintherelativelyeffortlessselfsustainedgrowthaftertakeo?
Presumably,someobstaclestogrowthhavebeenremoved.Whatarethey,and
howdoeshistheoryexplaintheirremoval?
Rostowspremisethateconomicmodernizationimpliesachangefroman
underdevelopedeconomytoonesimilartothoseinNorthAmericaandWest
ernEuropetodayisanotherproblem.RostowlikensLDCsatindependence
totheformationofnationstatesintheWest.Heassumesthatthedevelop
mentofunderdevelopedcountrieswillparalleltheearlierstagesoftodays
advancedcountries,butheneglectstherelationshipofcontemporaryunder
developedcountrieswithdevelopedcountriesaswellaseachLDCshighly
individualhistory.
Rostowisethnocentricwhenhechooseshighmassconsumptionsociety,
characterizedbyautomobiles,suburbanization,andconsumergadgets,asthe
culminatin'gstageofeconomicgrowth.Forhim,todaysmodernizedsocieties,
Page 10
TheoriesofEconomicDeveloPmenl
thearchetypeofwhichistheUnitedStates,areanimageofthefutureof
traditionalsocieties.Surely,thestudyofcomparativehistoryshouldalertus
tothedangerofusingtheexperienceoftheUnitedStates(oranyothercoun
try)asamodelforcountrieswithverydifferentculturalandpoliticalback
groundstoemulate.9.
THEVICIOUSCIRCLETHEORY
Theviciouscircletheoryindicatesthatpovertyperpetuatesitselfinmu
tuallyreinforcingviciouscirclesonboththesupplyanddemandsides.
TheSupplySide
Becauseincomesarelow,consumptioncannotbedivertedtosavingfor
capitalformation.Lackofcapitalresultsinlowproductivityperperson,which
perpetuateslowlevelsofincome.Thus,thecircleiscomplete.Acountryis
poorbecauseitwaspreviouslytoopoortosaveandinvest.
TheDemandSide
Furthermore,becauseincomesarelow,marketsize(forconsumergoods
suchasshoes,electricbulbs,andtextiles)istoosmalltoencouragepotential
investors.Lackofinvestmentmeanslowproductivity,andcontinuedlowin
come.Acountryispoorbecauseitwaspreviouslytoopoortoprovidethe
markettospurinvestment.
InsuicientSaving:ACritique
TheviciouscircletheoryseemsplausibletothoseWesternerswhoimagine

thattheentirepopulationofthethirdworldispoorandhungry.Theyare
surprisedthatanyoneintheLDCssaves.Butyouprobablycanidentifysome
awsintheseviews.WesternersmaybejudgingthesavingpotentialinLDCs
0nthebasisofWesternstandardsofliving.Ofcourse,mostofusnditdif
culttoimaginesavingonthe$7,000annualsalaryreceivedbyamiddleman
agerinIndia.Butremembertherelativepositionthat$7,000'representsin
India.Thereisreasonforbelievingthatlowincomecountriescansavesub
stantiallymorethantheydo.ThehighestincomegroupsinlowincomeLDCs
livefarabovesubsistencelevels.AstudybyWorldBankeconomistShailjain
indicatesthattheirrichest5percentreceivesabout1535percentofthein
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BasicPrinciplesandConcepts
come,anamountperhead820timesthatofthepoorest10percentofthe
people.8Sinceevidenceindicatesthatconsumptionlevelsaredeterminedless
byabsolutelevelsofincomethanbyrelativeincome(incomeincomparison
toneighborsandmembersofthecommunity),thehigherincomeclassesin
LDCscouldsaveinconsiderableamountsiftheyweresufcientlymotivated.
Onereasontheymaynotdosoisbecauseofthedemonstratione'ectof
consumptionlevelsintheWest,andofelitesintheLDCs.Thatis,peoplemay
spendbeyondtheirincometokeepupwiththeJoneses,theSridhars,orthe
Abdullahis.
Youshouldalsokeepinmindthatpersonalsavingisusuallyasmallpro
portionoftotalsavinginanLDC.Corporatesaving,governmentsaving,pub
licenterpriseprots,socialsecuritycontributions,lifeinsurancepremiums,
andprovidentandpensionfundreservesmaybeothersourcesforsaving(see
Chapter14).
Ifwelookatsavingfromthisbroaderviewpoint,thereareadditionalar
gumentstosuggestthatpoorcountrieshaveasubstantialcapacitytosave.
Throughouthistory,fewsocietieshavebeentoopoorinwagewar.Yetany
warrequiresashareofthecountrysresourcesthatwouldbesufcientfora
signicantrateofcapitalformation.TheOverseasDevelopmentCouncilin
dicatesthatmorethan3percentoftheGNPof35lowincomecountriesgoes
formilitaryexpenditures.9Perhapsifcountriesmobilizedforeconomicdevel
opmentastheydidforwar,theycouldincreasesaving.
Furthermore,somepoorsocietieshavebeenabletobuildmagnicentmon
uments.AsA.K.Cairncrossargues:Anyonewholooksatthepyramids,
cathedrals,andpagodasthatcivilizationshavebequeathed,canhardlyregard
theconstructionofrailways,dams,andpowerstationsasimposinganun
precedentedburdenonapoorcommunity.10
SmallMarkets:ACritique

EverettE.Hagencontendsthatthemarketisampletousemodernproduc
tionmethodseffectivelyforproductscommonlyconsumedbylowincome
peoplesugar,milledrice,milledour,soap,sandals,textiles,clothing,cig
arettes,matches,andcandies.Hearguesthatevenafairlysmallimprovement
inproductivityforanyofthesecommoditieswouldcaptureasizeablemarket.
Moreover,largeestablishmentsrequirenotonlylargemarketsbut,more
importantly,complexmachineryandprocesses,whichdemandentrepreneur
ial,managerial,andtechnicalskillsandexperiencethatarefrequentlyscarce
indevelopingcountries.IllaMyintarguesthatcostadvantagesfromearly
entry,oreconomiesofexperience,aremoreimportantforlargescalepro
ductionthaneconomiesofscalefromincreasedmarketsize.12
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Theories of Economic Development
BALANCEDVERSUSUNBALANCEDGROWTH
Amajordevelopmentdebatefromthe1940sthroughthe19605concerned
balancedgrowthversusunbalancedgrowth.Someofthedebatewasse
mantic,asthemeaningofbalancecanvaryfromtheabsurdrequirementthat
allsectorsgrowatthesamerate,tothemoresensiblepleathatsomeattention
begiventoallmajorsectorsindustry,agriculture,andservices.However,
absurditiesaside,thediscussionraisedsomeimportantissues.Whatarethe
relativemeritsofstrategiesofgradualismversusabigpush?lscapitalor
entrepreneurshipthemajorlimitationtogrowth?
Balanced Growth
The synchronized application of capital to a wide range of different
industries is called balanced growth by its advocates. Ragnar Nurkse
considers this
strategy the only way to escape from the vicious circle ofpoverty.
He does not
consider the expansion of exports promising since the price
elasticity of demand (minus percentage change in quantity demanded divided by
percentage
change in price) for the LDCs predominantly primary exports is
less than one,
thus reducing export earnings with increased volume, other things
being equal.
The Big Push Thesis
Those advocating this synchronized application of capital to all
major sec-

tors support the big push thesis, arguing that a strategy of

gradualism is
doomed to failure. A substantial effort is essential to overcome the
inertia inherent in a stagnant economy. The situation is analogous to a car
stuck in the
snow: It will not move with a gradually increasing weight; it needs
a big push.
For Paul N. Rosenstein-Rodan, the factors that contribute to
economic
growth, like demand and investment in infrastructure, do not
increase smoothly,
but are subject to sizablejumps or indivisibilitics. '4 These
indivisibilitics result from aws created in the investment market by external
economies, that
is, cost advantages rendered free by one producer to another.
These benets
Spill over to society as a whole, or to some member of it, rather
than to the
investor concerned. As an example, the increased production,
decreased average
Costs, and labor training and experience that result from additional
investment
in the steel industry will benet other industries as well. Greater
output stimulates the demand for iron, coal, and transport. Lower costs may
make vehicles and aluminum cheaper. In addition, other industries may
benet later
by hiring laborers who acquired industrial skills in the steel mills.
Thus, the
Social protability of this investment exceeds its private
protability.
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BasicPrinciplesandConcepts
IndivisibilityinInfrastructureForRosensteinRodan,amajorindivisibility
isininfrastructuresuchaspower,transport,andcommunications.Thisba
sic,socialcapitalreducescoststootherindustries.Toillustrate,therailroad
fromKanpurtotheCalcuttadocksincreasesthecompetitivenessofIndias
wooltextilesdomesticallyandabroad.However,thecapitalinvestedforthe

600mile,KanpurCalcuttaraillineisvirtuallyindivisibleinthatalineafrac
tionaslongisoflittlevalue.BuildingtheAswanDamortheMonterrey
MexicoCitytelegraphlineissubjecttosimilardiscontinuities.
IndivisibilityinDemandThisindivisibilityarisesfromtheinterdepen
denceofinvestmentdecisions;thatis,aprospectiveinvestorisuncertainwhether
theoutputfromhisinvestmentprojectwillndamarket.RosensteinRodan
usesanexampleofaneconomyclosedtointernationaltradetoillustratethis
indivisibility.Heassumesthattherearenumeroussubsistenceagriculturalla
borerswhoseworkaddsnothingtototaloutput(thatis,themarginalproduc
tivityoftheirlaborequalszero).If100ofthesefarmworkersarehiredina
shoefactory,theirwageswouldincreaseincome.
Ifthenewlyemployedworkersspendalloftheiradditionalincomeonshoesthey
producetheshoefactorywillndamarketandwouldsucceed.Infact,however,they
willnotspendalloftheiradditionalincomeonshoes.Thereisnoeasysolutionof
creatinganadditionalmarketinthisway.Theriskofnotndingamarketreducesthe
incentivetoinvest,andtheshoefactoryinvestmentprojectwillprobablybeabandoned.5
However,insteadletusput10,000workersin100factories(andfarms)that
amongthemwillproducethebulkofconsumergoodsonwhichthenewly
employedworkerswillspendtheirwages.Whatwasnottrueoftheshoe
factoryistrueforthecomplementarysystemof100enterprises.Thenew
producersareeachothers'customersandcreateadditionalmarketsthrough
increasedincomes.Complementarydemandreducestheriskofnotndinga
market.Reducinginterdependentrisksincreasestheincentivetoinvest.
A Critique ofBalanced Growth
Advocatesofbalancedgrowthemphasizeavariedpackageofindustrialin
vestmentattheexpenseofinvestmentinagriculture,especiallyexports.But
Chapter17showsthatacountrycannotgrowrapidlyifitfailstospecialize.
whereproductionismostefficient.RecentexperienceindicatesthatLDCscan
notneglectagriculturalinvestmentiftheyaretofeedtheirpopulation,supply
industrialinputs,andearnforeigncurrency.Chapter15pointsoutthatthe
recentdemandforprimaryproductexportsincreasedsotheirvaluegrewaS
fastasGNP.
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TheoriesofEconomicDeveloment
Furthermore,infrastructureisnotasindivisibleasRosensteinRodanim
plies.Roads,rivers,canals,orairtraiccansubstituteforrailroads.Roads
maybedirt,graveled,blacktopped,orpaved,andofvariouswidths.Power
plantscandiffergreatlyinsize,andtelegramandtelephonesystemscanbe
smallorlargeorintermediate.Largeinfrastructurefacilities,thoughperhaps
economicalathighlevelsofeconomicdevelopment,arenotessentialtoLDC
growth.6.

Somecriticsarguethattheresourcesrequiredforcarryingoutapolicyof
balancedgrowtharesovastthatacountrythatcouldinvestthecapitalcalled
forwouldnot,infact,beunderdeveloped.Infact,farmworkerswithzero
marginallaborproductivityarenotavailable(Chapter10).Inanycase,where
isanLDCgoingtogetthecapital,skilledlabor,andmaterialsneededforsuch
awideindustrialexpansion?Wecannotforgetthatalthoughnewindustries
maybecomplementaryonthedemandside,theyarecompetitorsforlimited
resourcesonthesupplyside.
AdvocatesofbalancedgrowthassumeLDCsstartfromscratch.lnreality,
everydevelopingcountrystartsfromapositionthatreectspreviousinvest
mentdecisions.Thus,atanytime,therearehighlydesirableinvestmentpro
gramsnotbalancedinthemselves,butthatarewellintegratedwithexisting
capitalimbalances.l7
Butperhapsthemajordiscreditorofthebalancedgrowthstrategywasthe
widespreadevidenceinthe19605and19705thatLl)Csweregrowingrap
idlywithoutanyattemptatthemassiveinvestmentsinthewiderangeof
industriesthatadvocatesofthestrategyconsideredessential.
HirsrlmmnsSrmrwoUnbalana'
.U
Albert0.Hirschmandevelopstheideaofunbalancedinvestmenttocom
plementexistingimbalances.InHecontendsthatdeliberateunbalancingofthc
economy,inlinewithapredesignedstrategy,isthebestpathforeconomic
growth.Hearguesthatthebigpushthesismaymakeinterestingreadingfor
economists,butitisgloomynewsfortheLDCs:Theyhaventtheskillsneeded
tolaunchsuchamassiveeffort.ThemajorshortageinLDCsisnotthesupply
ofsavings,buttheabilitytoinvestbyentrepreneurs,therisktakersand
decisionmakers.Thisabilityisdependentupontheamountandnatureofex
istinginvestments.Hirschmanbelievespoorcountriesneedadevelopment
strategythatspursinvestmentdecisions.
llelsuggeststhatsinceresourcesandabilitiesarelimited,abigpushissen
sibleonlyinstrategicallyselectedindustrieswithintheeconomy.Growththen
spreadsfromonesectortoanother(similartoRostowsconceptofleadingand
followingsectors).
However,investmentshouldnotbeleftsolelytoindividualentrepreneurs
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BasicPrinciplesandConcepts
inthemarketsincetheprotabilityofdi'erentinvestmentprojectsmayde
pendupontheorderinwhichtheyareundertaken.Forexample,assumein
vestmentinatruckfactoryyieldsareturnof10percentperyear,inasteel

factory,8percent,withtheinterestrate9percent.Iflefttothemarket,a
privateinvestorwillinvestinthetruckfactory.Lateron,asaresultofthis
initialinvestment,returnsonasteelinvestmentimreaseto10percent,sothen
theinvestorinvestsinsteel.
Assume,however,thattheestablishmentofasteelfactorywouldincrease
thereturnsinthetruckfactoryinthenextperiodfrom10to16percent.So
cietywouldbebetter03'toinvestinthesteelfactoryrst,andthetrucken
terprisesecond,ratherthanmakingindependentdecisionsbasedonthemar
ket.Plannersneedtoconsidertheinterdependenceofoneinvestmentproject
withanother,sothattheymaximizeoverallsocialprotability.Theyneedto
maketheinvestmentthatspursthegreatestamountofnewinvestmentdeci
sions.Investmentsshouldoccurinindustriesthathavethegreatestlinkages,
includingbackwardlinkagestoenterprisesthatsellinputstotheindustry,
andforwardlinkagestounitsthatbuyoutputfromtheindustry.Thesteel
industry,havingbackwardlinkagestocoalandironproduction,andforward
linkagestotheconstructionandtruckindustries,hasgoodinvestmentpoten
tial,accordingtoHirschman.
Evenagovernmentthatlimitsitsmajorroletoprovidinginfrastructurecan
timeitsinvestmentprojectstospurprivateinvestments.Governmentinvest
mentintransportandpowerwillincreaseproductivityandthusencourage
investmentinotheractivities.
Initially,plannerstryingtomaximizelinkageswillnotwanttohamperim
portstoomuchsincedoingsowilldeprivethecountryofforwardlinkagesto
domesticindustriesusingimports.Infact,oicialsmayencourageimports
untiltheyreachathreshold,soastocreatetheseforwardlinkages.Oncethese
linkageshavebeendeveloped,protectivetariffswillprovideastronginduce
mentfordomesticentrepreneurstoreplaceimportswithdomesticallypro
ducedgoods.
A Critique of Unbalanced Growth
Hirschmanfailstostresstheimportanceofagriculturalinvestments.Ac
cordingtohim,agriCulturedoesnotstimulatelinkageformationasdirectlyas
otherindustries.However,despiteitsrelativelyweaklinkagestoothersectors,
agriculturalgrowthmakesvitalcontributionstothenonagriculturalsector
throughincreasedfoodsupplies,addedforeignexchange,laborsupply,capital
transfer,andlargermarkets.19
Whatconstitutestheproperinvestmentbalanceamongsectorsrequirescareful
analysis.Insomeinstances,imbalancesmaybeessentialtocompensatefor
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TheoriesofEconomicDevelopment
existingimbalances.Ontheotherhand,Hirschmansunbalancedgrowthshould
havesomekindofbalanceasanultimateaim.Generally,theconceptsofbal

anceandimbalanceareoflimitedvalue.Tobehelpful,theirmeaningsneedto
bedenedcarefullyinspecicdecisionmakingcontexts.
BARANSNEDMARXISTTHESIS
Africa,Asia,andLatinAmericawerenotofmajorinteresttoMarx.He
regardedproductionintheseregionsasfeudalandbackward,comparedtothe
moreprogressivemodesofcapitalism.Thus,hesawtheintroductionofEu
ropeancapitalismintheseregionsasbenecial.Butinthetwentiethcentury,
Marxiananalysiscametoencompassaninternationalclassstruggle,including
theconictbetweenrichandpoorcountries.VladimirllichLenin,whonot
onlyfurnishedintellectualandorganizationalleadershipfortherevolutionary
takeoverofpowerbytheCommunistPartyinRussiainOctober1917,but
alsowaschairmanofthepartyfromthenuntilhisdeathin1924,provided
muchofthisnewMarxianrevision.Hearguedthatitwasessentialtorecog
nizethedifferencebetweenthemonopolycapitalismofhisperiodandthe
competitivecapitalismofMarx'sday.AccordingtoLenin,alogicaloutgrowth
ofthemonopolystageofindustrialandnancialcapitalismistheimperialist
dominationofpoorcountriesbyrichcountries.
The'llu'sis
ThelateAmericanMarxist,PaulA.Baran,incorporatedLenin'sconcepts
ofimperialismandinternationalclassconictintohistheoryofeconomicgrowth
andStagnation.ForBaran,capitalistrevolution,homegrownvariety,inLDCs
wasunlikelybecauseofWcsterneconomicandpoliticaldomination,especially
inthecolonialperiod.Capitalismarosenotthroughthegrowthofsmallcom
petitivermsathome,butthroughthetransferfromabroadofadvancedmo
nopolisticbusiness.Baranfeltthatascapitalismtookhold,thebourgeoisie
(businessandmiddleclasses)inLDCs,lackingthestrengthtospearhead
thoroughgoinginstitutionalchangeformajorcapitalaccumulation,wouldhave
toseek.alliesamongotherclasses.
Thus,incertaininstances,thebourgeoisiewouldallyitselfwiththemore
moderateleadersoftheworkersandpeasantstoformaprogressivecoalition
WithaNewDealorientation(suchastheCongressPartygovernmentsunder
PrimeMinisterJawaharlalNehru,19471964,inIndia).Attheoutset,sucha
Popularmovementwouldbeessentiallydemocratic,antifeudal,andanti
imperialist,andinsupportofdomesticcapitalism.However,theindigenous,
16
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BasicPrinciplesandConcepts
capitalist,middleclasseswouldultimatelybeeitherunwillingorunableto
providetheleadershipforasustainedeconomicdevelopmentthatwouldalso
greatlyreducepovertyandliberatethemasses.Intime,thebourgeoisie,

frightenedbythethreatoflaborradicalismandpopulistupheavalandthepos
sibleexpropriationoftheirproperty,wouldbeforcedintoanalliancewiththe
landedinterestsandtheforeignbourgeoisieintheirmidst,whosegovern
mentscouldprovideeconomicandmilitaryassistancetostaveoffimpending
disaster.
Thedifferenceswithinthiscounterrevolutionarycoalitionwouldnotinter
ferewiththeoverridingcommoninterestinpreventingsocialism.Evensothe
coalitionwouldbeunabletoraisetherateofcapitalaccumulationsignicantly.
Aprogressiveincometaxsystemtoeliminatenonessentialconsumption,the
channelingofsavingsfromthelandedaristocracyintoproductiveinvestment,
andtheundertakingofsubstantialpublicinvestmentinsectorswhereprivate
capitaldoesnotventure,wheremonopolisticcontrolsblockexpansion,or
whereinfrastructureisrequiredwouldbebeyondthecoalitionsabilityor
desire.Thus,thisconservativealliancethruststhepopularforcesevenfurther
alongtheroadofradicalismandrevolt,leadingtofurtherpolarization.Finally,
Barantheorizesthattheonlywayoutoftheimpassemaybeworkerandpeas
antrevolution,theexpropriationoflandandcapital,andtheestablishmentof
anewregimebasedontheethosofcollectiveeffort,andthecreedofthe
predominanceoftheinterestsofsocietyovertheinterestsofaselectedfew.20
A Critique
AlthoughBaransapproachexplainsthedifficultiesthatsomereformed,
capitalistLDCsfaceinspurringeconomicdevelopment,thetheoryfailsto
examineanumberofeconomicandpoliticalconictsofinterest.Although
therearecertainlymanylocalagents,managers,merchants,industrialists,bu
reaucrats,andpoliticianswhobenetconsiderablyfromforeigncontrolled
capitalandtechnology,therearealsosomelocalcapitalistswhoseinterests
competewithforeignbusiness.Thesecapitalistsandtheiralliesfrequentlylead
movementsforindependence.(Forexample,theIvoryCoastcocoafarmers
whoopposedtheformationofFrenchcocoaplantationsweremajorsupport
ersofthenationalistDemocraticPartyinthe19505.)Afterindependence,these
nationalistelementsmaybecomeevenstrongeracolonialeconomictiesare
graduallyweakened.Economicpolicyunderacoalitionofdomesticcapital
ists,politicians,andbureaucratsmayerodethepowerofforeigncapital.The
alliesandcompetitorsofforeignbusinesspeopleareoftenlockedineconomic
andpoliticalconict.
Baranalsbignorestheprobabilitythatpowerismorefrequentlytransferred
fromoneelitetoanotherwhenrevolutionoccurs,ratherthanfromtheadvan
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Theories of Economic Develnpment
taged classes to the politically dispossessed masses: Very few of the Soviet
and

Chinese revolutionary leaders were workers or poor peasants.

For Baran, the society closest to a new social ethos [that] will become the
spiritandguideofanewage21istheSovietUnionafter1917.Hearguesthat
despitethepoliticalviolenceusedbyStalininthe1930s,andthelossofseveral
millionlivesduringthisperiod,thecollectivizationofagricultureintheSoviet
Unionwastheonlypossibleapproachtoeconomicgrowth,givenanirrational
and illiterate peasantry. However, he ignores the substantial growth in both
agriculture and industry from 1921 to 1928 under the Soviet New Economic
Policy of market socialism. This policy consisted of the widespread reliance
on market prices, limited private ownership (especially in agriculture), and
state ownership ofmost ofthe largest industrial enterprises. After Stalin
began
collectivization, agricultural production declined, the peasant's standard
ofliving dropped signicantly, and even the savings agriculture contributed to
the
industrial sector probably did not increase. There were widespread violence,
famine, forced labor, and purges during collectivization. Although the performance of Soviet agriculture since then has improved, the relatively slow
growth in agricultural productivity has frustrated the Soviet leadership in
their
attempt to increase average consumption levels to those expected in a high

income economy.
Baran does not ask whether a more gradual, less .centralized approach to
agricultural production would have resulted in more rapid development. But
perhaps such a question cannot be resolved. Some historians argue that
raising
living levels, increasing life expectancy, and improving literacy during economic growth have inevitable human costs. The economic transitionmay be
marked by the squalor, poverty, unhealthy environment, high infant
mortality
rate, and a high, premature death rate among the working poor as occurred
during Europes Industrial Revolution, or by the disruption, famine, and
death
among peasants in the USSR in the 19305. But, in any case, the human
costs
cannot be avoided.
Several Marxian economists have argued that the Russian Revolution of
1917 did not erase divergent class interests. One French economist argues
that
the USSR abandoned the socialist road, creating a new ruling classmade
up

Of the Communist party, the Praesidium, and the bureaucracywhose economic interests are antagonistic to those of Soviet workers.22
THEDEPENDENCYTHEORY
A major contributor to dependency theory, Andre Gunder Frank, is a
U-S. expatriate recently affiliated with Englands University of East Anglia.
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BasztdmiplesandConcepts
Frank,writinginthemid19605,criticizedtheviewofmanydevelopment
scholarsthatcontemporary,underdevelopedcountriesresembletheearlierstages
ofnowdevelopedcountries.Manyofthesescholarsviewedmodernizationin
LDCSassimplytheadoptionofeconomicandpoliticalsystemsdevelopedin
WesternEuropeandNorthAmerica.
ForFrank,thepresentlydevelopedcountrieswereneverunderdeveloped,
thoughtheymayhavebeenundeveloped.Hisbasicthesisisthatunderdevel
opmentdoesnotmeantraditional(thatis,nonmodern)economic,political,
andsocialinstitutions,butLDCsubjectiontothecolonialruleandimperial
dominationofforeignpowers.Inessence,Frankseesunderdevelopmentas
theeffectofthepenetrationofmoderncapitalismintothearchaiceconomic
structuresofthethirdworld.HeseesthedeindustrializationofIndiaunder
Britishcolonialism,thedisruptionofAfricansocietybytheslavetradeand
subsequentcolonialism,andthetotaldestructionofIncanandAzteccivi
lizationsbytheSpanishconquistadoresasexamplesofthecreationof
underdevelopment.
Ormoreplainlystated,theeconomicdevelopmentoftherichcountries
contributestotheunderdevelopmentofthepoor.DevelopmentinanLDCis
notselfgeneratingorautonomousbutancillary.TheLDCsareeconomicsat
ellitesofthehighlydevelopedregionsofNorthernAmericaandWesternEu
ropeintheinternationalcapitalistsystem.TheAfroAsianandLatinAmerican
countriesmostweaklyintegratedintothissystemtendtobethemosthighly
developed.japaneseeconomicdevelopmentafterthe18605istheclassiccase
illustratingFrankstheory.japansindustrialgrowthremainsunmatchcdzjapan
wasneveracapitalistsatellite.
Brazilbestillustratestheconnectionbetweenthesatelliterelationshipand
underdevelopment.Sincethenineteenthcentury,thegrowthofmajorcities,
SioPauloandRiodeJaneiro,hasbeensatellitedevelopmentlargelydepen
dentonoutsidecapitalistpowers,especiallyBritainandtheUnitedStates.As
aresult,regionsininteriorBrazilhavebecomesatellitesofthesetwocities,
andthroughthem,oftheseWesterncapitalistcountries.
Franksuggeststhatsatellitecountriesexperiencetheirgreatesteconomicde
velopmentwhentheyareleastdependentupontheworldcapitalistsystem.
Thus,Argentina,Brazil,Mexico,andChilegrewmostrapidlyduringWorld

WarI,theGreatDepression,andWorldWarII,whentradeandnancialties
tomajorcapitalistcountrieswereweakest.Signicantly,themostunderde
velopedregionstodayarethosethathavehadtheclosesttiestoWesterncapi
talisminthepast.Theywerethegreatestexportersofprimaryproductsto,
andthebiggestsourcesofcapitalfor,developedcountries,andwereaban
doned'bythemwhenforonereasonoranotherbusinessfelloff.Frankpoints
toIndiasBengal;theonetime,sugarexportingWestIndiesandNortheastern
Brazil;thedefunctminingdistrictsofMinasGeraisinBrazil,highlandPeru,
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TheoriesofEconomicDevelopment
andBolivia;andtheformersilverregionsofMexicoasexamples.Hecontends
thateventheIatimdium,thelargeplantationorhaciendathathascontributed
somuchtounderdevelopmentinLatinAmerica,originatedasacommercial,
capitalistenterprise,notafeudalinstitution,whichcontradictsthegenerally
heldthesisthataregionisunderdevelopedbecauseitisisolatedandprecapitalist.
Itisanerror,Frankfeels,toarguethatthedevelopmentoftheunderdevel
opedcountrieswillbestimulatedbytheindiscriminatetransferofcapital,il'gL
stitutions,andvaluesfromdevelopedcountries.Hesuggeststhat,infact,the
followingeconomicactivitieshavecontributedtounderdevelopment,not
development:
1.Thereplacementofindigenousenterpriseswithtechnologicallymore
advanced,global,subsidiarycompanies.
2.Theformationofanunskilledlaborforcetoworkinfactoriesand
mines,andonplantations.
3.Therecruitingofhighlyeducatedyouthstojuniorpostsinthecolo
nialadministrativeservice.
4.Themigrationofworkersfromthevillagestotheforeigndominated
urbancomplexes.
S.Theopeningoftheeconomytotradewithandinvestmentfromde
velopedcountries.
AccordingtoFrank,athirdwoddcountrycanonlydevelopbywithdrawing
fromtheworldcapitalistsystem.Perforce,suchawithdrawalmeansalarge
reductionintrade,aid,investment,andtechnologyfromthedevelopedcapi
talistcountries.'
A Critique
ManyeconomichistorianswouldagreewithFrankthatcoloniespaiddearly
asaresultofeconomicdependencyunderforeignrule.Theygrantthatdevel
opmentwasnotselfdirected.Productionwasdirectedtowardexternalrather
thandomesticneeds,economicpoliciesinhibitedlocal,industrialactivityand
ledtouneven,ethnicandregionaleconomicprogress;aneliteorientedtofor
eigninterestsarose.However,thesecostswereoffset,atleastinpart,bythe

developmentofschools,roads,railroads,andadministrativeserviceunderthe
colonialpowers.'
Moreover,itisunfairtocomparetheexperienceofthesecountriesunder