7.4: Four Theories of Development

Modernization theorists like Rostow basically recommend capitalist industrial and technological development and believe that the benefits will trickle down to the poor. The problem is that most people stay poor under this system.

In contrast, Dependency Theory and World Systems Theory writers like Wallerstein criticize the increasing North-South gap, which comes from the ‘core countries’ in the North exploiting cheap natural resources and cheap labor in the ‘peripheral countries’ in the South.

Trade figures show that the rich countries do indeed export a lot of high-value items like manufactured goods and chemicals, while importing energy (oil, gas and coal), agricultural products, minerals, and textiles (made with cheap labor). In contrast, poor countries mostly export cheap raw materials (crops, minerals and energy) and textiles, falling farther and farther behind (confirming Nkruma’s observation that it takes more and more tons of cocoa to buy a tractor). Oil exporting countries make money, but it rarely trickles down to the people – look at Nigeria or Angola.

Neoliberalism (also known as the Washington Consensus), which has been pushed by the World Bank and the IMF for the last 40 years, says that lack of economic development arises from excessive government intervention in the economy. So, they recommend deregulation, privatization and unrestricted foreign investment, free trade and unlimited currency exchange. Some of the countries following this path experienced growth, but most of the benefits went to elites and western corporations. In addition, increased imports and privatizations often resulted in more unemployment. Overall, most poor countries, e.g. in Africa and Latin America, experienced slower growth and continued poverty under Washington Consensus policies.

An extreme example: After the end of the Cold War, Russia took the advice of neoliberal western economists to privatize quickly. (A so-called Big Bang.). The result was that Russia defaulted on its loans and its money became worthless. Well-connected businessmen, bureaucrats and party officials bought huge state companies cheaply, often with government bank loans, looted the assets, fired workers and terminated their pensions. The result was a 40% drop in overall production and a big increase in poverty and crime.

Mercantilism. Critics of neoliberal theory point out that all the countries that developed successfully, including Britain and the U.S. in their early stages, and Japan, South Korea and China, followed a mercantilist policy, which is the opposite of the Washington Consensus. For instance, for decades Britain only allowed imports via British ships. Under this policy of economic nationalism, governments increase exports with subsidies and low currency exchange rates, set up tariffs and other barriers to protect their domestic industries from imports, use large-scale government intervention (cheap loans, free land and infrastructure, government contracts) to nurture new industries, and control foreign trade and currency exchange. All this enables a country to build up trade surpluses and foreign exchange reserves. The money can then be used to build infrastructure, upgrade education, and do research and development to improve the economy, in order to climb the export ladder from textiles to light manufactured goods to consumer electronics to heavy manufacturing, cars, computer chips and software.

Historically, this is the strategy that has worked, although the western countries still try to convince the rising countries to engage in privatization, free trade, foreign investment and other Washington Consensus policies which will benefit western corporations, banks and their investors.