Problems with development economics - Can labor-capital models predict the responses of agrarian societies to development?, part I

American Journal of Economics and Sociology, The,  Oct, 1995  by David H. Smiley

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In conclusion, it seems that five decades of development practice have been largely unsuccessful. Returns on massive investments have been good only in those countries which have, inter alia, vigorously addressed the land problem (Japan, China, Taiwan, South Korea, Singapore, Hong Kong). Elsewhere poverty and migration continue. Development practice has been unable to modify the third world institutions which restrain progress and maintain poverty. These realities must be incorporated into development theory.

III

Development Theory

Development Theory has its roots in classical economics, out of which grew Rostow's Stages of Growth and the Harrod-Domar savings investment models, and some neoclassical assumptions, all of which have been challenged ever since by the neo-Marxists, two-sector structuralists such as Lewis and Chenery, terms-of-trade critics such as Prebisch and Singer, free market re-structuralists epitomized by the World Bank and the International Monetary Fund's Conditionality Loans, and now by the New Institutionalists.

Smith's division of labor and capital accumulation, Malthus's prediction of rising populations and starvation, and Ricardo's law of rising rent formed the basis of the classical three-factor land-labor-capital model of economic development. For similar economic reasons but quite different political ones, neo-classical and Marxist economics derived and perceived two-factor labor-capital models as adequate for development planning.

In the 1970s, with development failure being explained in terms of the need for structural change, solutions were sought in Lewis's two-sector model and from Chenery's empirical studies of actual change. The role of institutions in facilitating or blocking structural change was not extensively addressed at a theoretical level in neoclassical economics at that time. But in neo-Marxist economics it has always been central to concepts of neocolonial dependence, inappropriate aid, and chronic divergence.

In the 1980s, development failure was being explained in terms of irrational resource pricing and hence poor resource allocation, solutions being sought in the replacement of state intervention by free markets.

In the 1990s, explanations of failure may yet emerge from initiatives collectively known as "The New Institutional Economics", though Solow (1994: 45) sees this as generating "its own alternation of questions and answers." The components of this debate appear to concern capital, property rights and institutions. Is the engine of growth capital accumulation (the Harrod-Domar model) or technological change (Solow, 1994) or human capital (Lucas, 1993)? Are internal, endogenous factors more important than external, exogenous factors (Romer, 1994)? Do these factors close or open income gaps between classes and between nations (Romer, 1994; Grossman and Helpman, 1994; Oshima, 1994)? What are the stimuli causing institutions to evolve (North, 1989, 1992, 1994)? Are changes in property rights a stimulus to progress or a response?