Theories of Development and Theories of Development and UnderdevelopmentUnderdevelopment

Heterodox TheoriesHeterodox Theories

StructuralismStructuralismInstitutionalismInstitutionalismMarxian Dependency SchoolMarxian Dependency School

Ch. 6 in Cypher & DietzCh. 6 in Cypher & Dietz

What is What is Heterodox Heterodox Economics?Economics?

• orthodox / mainstream / neoclassical economicsorthodox / mainstream / neoclassical economics• heterodox / non-mainstream / alternative economicsheterodox / non-mainstream / alternative economics

Heterodox / non-Mainstream / alternative economics such as:Heterodox / non-Mainstream / alternative economics such as:

• Keynesian economics / post-Keynesian economicsKeynesian economics / post-Keynesian economics• Marxian economics / neo-Marxian economicsMarxian economics / neo-Marxian economics• Structuralist economicsStructuralist economics• Institutionalist economicsInstitutionalist economics• Ricardian economicsRicardian economics• Feminist economicsFeminist economics

What is What is Heterodox Heterodox Economics?Economics?Heterodox economists as distinct from Neoclassical economics:Heterodox economists as distinct from Neoclassical economics:

• do not propose that “capitalism” (i.e. “the free market system”) do not propose that “capitalism” (i.e. “the free market system”) is an ultimately perfect system of organizing society; is an ultimately perfect system of organizing society;

• unlike neoclassical economists they criticize the shortcomings of unlike neoclassical economists they criticize the shortcomings of the market system to various degrees; the market system to various degrees;

• call for government intervention to overcome these call for government intervention to overcome these shortcomings;shortcomings;

• emphasize political, social, cultural, historical, structural and emphasize political, social, cultural, historical, structural and institutional factors that interplay with economic factors.institutional factors that interplay with economic factors.

Heterodox Theories of Heterodox Theories of DevelopmentDevelopment

• StructuralismStructuralism

• InstitutionalismInstitutionalism

• Neo-Marxian Underconsumptionist SchoolNeo-Marxian Underconsumptionist School

• Neo-Marxian Dependency SchoolNeo-Marxian Dependency School

• Classical Marxian SchoolClassical Marxian School

Latin American StructuralistsLatin American Structuralists(Furtado, Prebisch; Singer)(Furtado, Prebisch; Singer)

Emphasize structural and institutional differences between Emphasize structural and institutional differences between less-developed and developed nations.less-developed and developed nations.

1.1. Structural characteristics of underdeveloped economies:Structural characteristics of underdeveloped economies:2.2. Juxtaposition of traditional low-productivity agricultural Juxtaposition of traditional low-productivity agricultural

sector withsector with3.3. A mA modern sector usually dominated by foreodern sector usually dominated by foreiign capital gn capital

towards primary exportstowards primary exports4.4. No domestic design and production of K goods for modern No domestic design and production of K goods for modern

sectorsector5.5. Small employment in modern sectorSmall employment in modern sector6.6. Land tenure systems restrict increase in agricultural outputLand tenure systems restrict increase in agricultural output7.7. Domestic supply rigidity in key branches of the economy & Domestic supply rigidity in key branches of the economy &

low price elasticity of export demand low price elasticity of export demand → low growth of exports→ low growth of exports8.8. High income and low price elasticity of import demand in High income and low price elasticity of import demand in

the modern sector the modern sector → high growth of imports→ high growth of imports9.9. High population growthHigh population growth

The structuralism of Raul The structuralism of Raul PrebischPrebisch• Until early 1920s, ArgentinaUntil early 1920s, Argentinaan outstanding example of the an outstanding example of the

theory of comparative advantage.theory of comparative advantage.• Cost advantage for producers in the production of beef & Cost advantage for producers in the production of beef &

wheat for the world market.wheat for the world market.• Enormous growth of Enormous growth of the the Argentinian economy from 1980s Argentinian economy from 1980s

until the second decade of 20th century.until the second decade of 20th century.• In 1920sIn 1920s-30s, -30s, Argentina faced the adverse effects of Great Argentina faced the adverse effects of Great

Depression and the dominance of US in the world marketDepression and the dominance of US in the world market andand had difficulties with its primary trade partner; Britain. had difficulties with its primary trade partner; Britain.

• Both prices of and demand for its exports started to fall; it Both prices of and demand for its exports started to fall; it started to accummulate foreign debt.started to accummulate foreign debt.

• Prebisch’s work showed that during Great Depression: Prebisch’s work showed that during Great Depression: eexport prices of agricultural xport prices of agricultural primary primary goods fell much moregoods fell much more

and faster and faster than than prices of manufactured, prices of manufactured, secondary products.secondary products.• This observation lead This observation lead PrebischPrebisch to develop a critical to develop a critical

perspective on the static formulation of the perspective on the static formulation of the neoclassical neoclassical comparitive advantage theory of international trade; and comparitive advantage theory of international trade; and rather emphasize rather emphasize the dynamic effects of real economic the dynamic effects of real economic forces.forces.

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

The Prebisch-Singer HypothesisThe Prebisch-Singer Hypothesis• The distinction between nations: the center and The distinction between nations: the center and

the periphery.the periphery.• The center gets all the benefits of international The center gets all the benefits of international

trade whereas the periphery gets nothing.trade whereas the periphery gets nothing.• Opposes to the Ricardian Theory of Comparative Opposes to the Ricardian Theory of Comparative

Advantage.Advantage.• Argues given the differences in the existing Argues given the differences in the existing

economic, productive and labor market structures economic, productive and labor market structures between the periphery and the center,between the periphery and the center,

-in the application of technology in traded goods.-in the application of technology in traded goods. -in the market structures; oligopoly vs. -in the market structures; oligopoly vs.

competitivecompetitiveCalls for implementation of specific developmental Calls for implementation of specific developmental

policies by governments of developing countries policies by governments of developing countries and the solution to the development problem can and the solution to the development problem can not be left to the market mechanism alone.not be left to the market mechanism alone.

Latin American StructuralistsLatin American Structuralists

Given these structural differences less-developed Given these structural differences less-developed countries can not replicate what developed countries can not replicate what developed economies have done in the past.economies have done in the past.

This is not a phase through which every growing This is not a phase through which every growing economy passes but a specific historical economy passes but a specific historical condition.condition.

Furtado:Furtado:Industrialized countries Industrialized countries → → supply-lead grosupply-lead growwth th

through technological change first in consumer through technological change first in consumer goods, then in capital goodsgoods, then in capital goods..

Industrializing countries Industrializing countries → → (export) (export) demand-lead demand-lead growth through external interaction with industrialized growth through external interaction with industrialized economieseconomies, which, which has resulted in hybrid structures. has resulted in hybrid structures.

Latin American Latin American StructuralistsStructuralistsBut external export demand cannot be relied on to sustain growth But external export demand cannot be relied on to sustain growth

indefinitely because:indefinitely because:• IIt’s susceptible to trade cyclest’s susceptible to trade cycles (transitory or permanent demand (transitory or permanent demand

shortages)shortages)• Risks of declining ToT (especially primary products)Risks of declining ToT (especially primary products)• Productivity increase is limited, hence wage increase is limitedProductivity increase is limited, hence wage increase is limited

when specilization is in labor-intensive export goodswhen specilization is in labor-intensive export goods..

Hence use exports to develop the domestic market, but Hence use exports to develop the domestic market, but this is dependent on:this is dependent on:

1.1. Employment scale of production and technologyEmployment scale of production and technology2.2. WagesWages, i.e., i.e. supply price of labor from traditional to supply price of labor from traditional to

modern sectormodern sector3.3. Tax paid by modern enterprises Tax paid by modern enterprises which in turn which in turn

determines public expendituredetermines public expenditure4.4. Demand for domestically produced K goods by the Demand for domestically produced K goods by the

modern sectormodern sector5.5. Extent of profits and salaries being spent domesticallyExtent of profits and salaries being spent domestically6.6. BoP constraints in an open economyBoP constraints in an open economy

Policy RecommendationsPolicy Recommendations• Import Substitution IndustrializationImport Substitution Industrialization (ISI) (ISI) particularly in particularly in

products that show high income elasticity of demandproducts that show high income elasticity of demand(begining with manufacturing of simple, consumer non-durables (begining with manufacturing of simple, consumer non-durables → → consumer durabconsumer durables les →→ intermediate K goods intermediate K goods →→ basic K goods) basic K goods)

• Take care of external factors such as Take care of external factors such as BoP constraintsBoP constraints– Cut nonessential importsCut nonessential imports– Expand primary product and manufactured products exportsExpand primary product and manufactured products exports– Guide investment into key import-substitutiong sectors in infant Guide investment into key import-substitutiong sectors in infant

industriesindustries– Advanced economies shold give trade preferences, foreign aid and Advanced economies shold give trade preferences, foreign aid and

finacefinace

• Form Form common regional marketscommon regional markets amongst developing economies amongst developing economies to enlarge market sizeto enlarge market size

• Active Gov’t policiesActive Gov’t policies to enact effective tariff barriers to protect to enact effective tariff barriers to protect the new ISI industries from foreign competition; also providing and the new ISI industries from foreign competition; also providing and allocating public expenditures to the areas where the highest rate allocating public expenditures to the areas where the highest rate of return could be anticipated.of return could be anticipated.

Neomarxist Schools of Development: Neomarxist Schools of Development: Underconsumptionists Underconsumptionists (Paul Baran and Paul Sweezy)(Paul Baran and Paul Sweezy)

Advanced capitalism emerged due to a long period of competitive Advanced capitalism emerged due to a long period of competitive capitalism which fostered K accummulation and technological capitalism which fostered K accummulation and technological breakthroughbreakthrough

• 3 conditions for emergence of capitalism3 conditions for emergence of capitalism1.1. increase in agricultural output and displacement of peasantsincrease in agricultural output and displacement of peasants2.2. growth of commodity production and division of laborgrowth of commodity production and division of labor3.3. accummulation of capital by emerging class of merchants and accummulation of capital by emerging class of merchants and

rich peasantsrich peasants1&2 occurred everywhere with similar pace; yet ‘3’ was 1&2 occurred everywhere with similar pace; yet ‘3’ was

hindered in the 3rd World becausehindered in the 3rd World because– Low surplus: European expansion siphoned off the surplus of Low surplus: European expansion siphoned off the surplus of

the Souththe South– Low investment incentives: Economic and social structures in Low investment incentives: Economic and social structures in

the South was unable to promote use of surplus for investment the South was unable to promote use of surplus for investment and Capital accummulationand Capital accummulation

Hence the world economy starting from a state of parity Hence the world economy starting from a state of parity got divided into rich and poor.got divided into rich and poor.

eg. India inhibited by British colonialism versus Japan independent eg. India inhibited by British colonialism versus Japan independent state support for industrializationstate support for industrialization

Neomarxist Schools of Development: Neomarxist Schools of Development: Underconsumptionists Underconsumptionists (Paul Baran and Paul Sweezy)(Paul Baran and Paul Sweezy)

• Development in industrialized market economies leads to ever Development in industrialized market economies leads to ever increasing concentration of capital in fewer hands, increasing concentration of capital in fewer hands, i.e.i.e. Capitalist system has a natural built-in tendency to Capitalist system has a natural built-in tendency to Monopoly Monopoly CapitalismCapitalism

• Monopoly eliminates the disciplining device of competition and Monopoly eliminates the disciplining device of competition and leads to a diversion of surplus away from productive investment leads to a diversion of surplus away from productive investment towards wasteful usestowards wasteful uses..

• As monoploies invest less they lead to chronic lack of demand, As monoploies invest less they lead to chronic lack of demand, i.e. Underconsumption.i.e. Underconsumption.

• Hence monopoly capital becomes the ultimate cause of stagnation Hence monopoly capital becomes the ultimate cause of stagnation in both advanced and underdeveloped countriesin both advanced and underdeveloped countries..

• In this process, uIn this process, underdeveloped countries are dominated by nderdeveloped countries are dominated by forforeeignign capital with its local hangers oncapital with its local hangers on, i.e. , i.e. mercantile and mercantile and landlord interestslandlord interests..

Neomarxist Schools of Development:Neomarxist Schools of Development:Dependency School Dependency School

(A. G. Frank, I. Wallerstein, S. Amin)(A. G. Frank, I. Wallerstein, S. Amin)

• Dependency theDependency theoory sees the world as divided into a ry sees the world as divided into a center/core/metropolis center/core/metropolis versus versus a a periphery/satellite.periphery/satellite.

• Capitalism is the main reason behind such a split; Capitalism is the main reason behind such a split; i.e. the cause of underdevelopment of the i.e. the cause of underdevelopment of the periphery.periphery.

• Incorporation into the World capitalist system leads Incorporation into the World capitalist system leads to development in a few areas and to development to development in a few areas and to development of underdevelopment elsewhereof underdevelopment elsewhere; a small core ; a small core surrounded by a large peripherysurrounded by a large periphery..

Neomarxist Schools of Development:Neomarxist Schools of Development:Dependency School Dependency School

(A. G. Frank, I. Wallerstein, S. Amin)(A. G. Frank, I. Wallerstein, S. Amin)

Metropolis/center uses the satellite/periphery forMetropolis/center uses the satellite/periphery for– Cheap laborCheap labor– Raw materialsRaw materials– Market outletsMarket outlets

The chain of metropolis-satellite (center-periphery) The chain of metropolis-satellite (center-periphery) relations and dichotomy is created as a necessary relations and dichotomy is created as a necessary part of capitalist development not only amongst part of capitalist development not only amongst different nations on a world scale but also within different nations on a world scale but also within single nations on a regional basis. single nations on a regional basis.

Heterodox Theories of Heterodox Theories of DevelopmentDevelopment

heterodox heterodox theorietheoriess of development as distinct from orthodox of development as distinct from orthodox

developmentalist theoriesdevelopmentalist theories do notdo not beli belieevevethat relatively minor changes in economic conditions would be that relatively minor changes in economic conditions would be sufficient to create the “big-push” or the “take-off” into sustained sufficient to create the “big-push” or the “take-off” into sustained growthgrowththat economic development is a linear, universal processthat economic development is a linear, universal processthat capitalism (market economy) is the ultimate goalthat capitalism (market economy) is the ultimate goal

Heterodox theories of development propose the following:Heterodox theories of development propose the following:• the process of development has geographically and historically the process of development has geographically and historically

unique features varying from one place to anotherunique features varying from one place to another• ccaution the possibility of adverse path dependenceaution the possibility of adverse path dependence• emphasize the unequal relations of power between South and North emphasize the unequal relations of power between South and North

and Capital and Laborand Capital and Labor• underline the importance of socioeconomic and political structures underline the importance of socioeconomic and political structures

and institutions in the development processand institutions in the development process