Chapter 4. A historical overview of development paradigms

Early years of optimism, experimentation and multilateral approaches

At the outset of the Second World War, there was enthusiasm around the question of development and reconstruction and a desire to incorporate the lessons following the First World War. The divide between the extreme views of Manchester Liberalism and Soviet Communism also meant a wide policy space; experimentation on the role of the public and private sectors, as well as capital, was encouraged.

These early years saw many international institutions established to support development. The Bretton Woods Conference in 1944 created the International Bank for Reconstruction and Development (IBRD) – later the World Bank – to help with the reconstruction of Europe. Also discussed in Bretton Woods was the International Monetary Fund (IMF) as well as an organisation to deal with trade issues, to help restore rules-based international trade relations and support development policies. The conference agreed on the creation of the IBRD and IMF, while discussions on trade gave rise to the Havana Charter, which was not ratified. Two years later, with trade viewed as an important vector for development, the General Agreement on Tariffs and Trade (GATT) was established. Lots of development thinking, at this time, occurred within newly created UN organisations focused on a single sector, but not necessarily on development as a whole: for instance, the Food and Agriculture Organization (FAO, 1945), the United Nations Educational, Scientific and Cultural Organization (UNESCO, 1946) and the World Health Organization (WHO, 1948).

Development was viewed as a process of economic activity in which countries move from “traditional civilisations“, through a transition of industrialisation towards “tertiary civilisations” in which service sectors dominate (Fisher, (1939[16]); Clark, (1940[17]); Fourastié (1949[18])).

Two main schools of thought on development emerged, one focusing on industrialisation, the other on trade. There were conflicts about the mechanisms of development from the start, and an inherent dissonance between the two schools. Inspired by Keynes, the first school saw underdevelopment resulting from a series of market failures and lack of market reaction to incentives. It also took inspiration from Max Weber and Talcott Parsons on modernisation theory, viewing developing countries as simply needing to modernise their practices. The second school, inspired by neoclassical economics, saw the problem of development related mainly to lack of capital and believed that markets would ensure that capital would efficiently trickle down and alleviate poverty. This school also saw trade, through the lens of David Ricardo, as a fundamental driver of national wealth.

The industrialist school seeks to transform agrarian economies

The industrialist school, which enjoyed a short-lived prominence, sought to help “backwards” countries catch up to the developed world. Different countries had varying strategies on how to accomplish this goal.

German economist Friedrich List inspired the industrialist school in both the capitalist West and communist East. The evidence in List’s National System of Political Economy (1841[19]) inspired Continental Europe and Russia to follow Britain’s strategy – based on heavy protectionism already since the late 1400s – to economic wealth. List fell into a line of thought in which mainstream European policy posed an affront to Ricardo’s trade theory based on comparative advantage.

The logical starting point for both modern development theory and policy is Paul Rosenstein-Rodan’s 1943 article “Problems of Industrialisation of Eastern and South-Eastern Europe”. This questioned how to turn the newly created Balkan states – formerly part of an Empire – into independent economic entities. Buoyed by the ideas of List, the theoretical success of Keynesian economics and eventually the Marshall Plan (see Box 4.2), the first theories on development economics were focused on a strong single investment push for industrialisation.

In this school, the unequivocal answer to the question of development was industrialisation of primarily agrarian countries accompanied by surplus agricultural labour and, in general, export of raw materials. Most development theorists agreed with the principle, but differed somewhat in the form industrialisation should take. Some development economists – like Ragnar Nurkse – insisted that all important capital accumulation was domestic (Nurkse, 1953[20]).

The key idea during these years was simple: help “backward” countries catch up to the rich world. For this to happen, according to Rosenstein-Rodan (1943[21]) and Nurkse (1953[20]) for example, poor countries needed an initial “big push” in investment to gain from scale economies, as well as “balanced growth”, targeting the development of all sectors simultaneously. Both Rosenstein-Rodan and Nurske were “export-pessimistic” in the post Second World War economy and thus favoured domestic market development. The major concern was long-term economic growth. This was to be fostered through industrialisation (Chenery, 1955[22]) and broad-based societal modernisation (Ekbladh, (2010[23]); Lerner, (1958[24]), which would also have a “disciplinary effect” (Hirschman, (1977[25]); (1982[26])).

The vision of industrialisation was virtually everywhere in the 1940s and 1950s, but it was carried out differently in different countries. In China, the industrialising tradition had started with Sun Yat-Sen (Yat-Sen, 1920[27]). After the 1949 Revolution, China again embarked on a new strategy of industrialisation, initiating its first Five-Year Plan, 1953-57. India embarked on the same industrialisation strategy after independence in 1947. Indeed, the so-called Bombay Plan two years before sought nothing less than “a re-making of India”. It aimed at doubling the per capita income of India over three five-year plans through industrialisation (Thakurdas, 1944[28]). Puerto Rico, for example, also embarked on a successful industrialisation plan in the 1940s called Operation Bootstrap (Maldonado, 1997[29]).

In 1946, the United Nations created the Sub-Commission on Economic Development to study and advise members on development policy, focusing on industrialisation policy. The Keynesian approach was building on the experience of the New Deal, the large set of reforms enacted in the United States to help get the country out of the Great Depression in the mid-1930s. By creating jobs in the manufacturing sector and reducing disguised unemployment, labour productivity was expected to improve.

Belief in the benefits of trade prevails over the industrialist school

The industrialist school of thought was short-lived due to the success of the Marshall Plan, the prevalence of neoclassical economic theory and the fact that developing countries were capital-constrained (Box 4.1). Instead, the prevailing view centred on capital as the primary fundamental missing variable for development to take off.

Trade was considered the key instrument that could help that to happen. Joseph Schumpeter likened it to “the pedestrian view that it is capital per se that propels the capitalist engine” (Schumpeter, 1954, p. 468[31]). By the end of the 1950s, European reconstruction was complete and viewed as successful. As the OEEC’s role as an administrator of capital came to an end, those who argued for a new organisation with a new mandate prevailed.

Seen through a neoclassical lens, the main problem of development was mainly one of capital accumulation. Poor countries with little capital needed to borrow savings from developed countries or generate an external account surplus through foreign trade. The push against communism, of which the Marshall Plan also played a fundamental role, was a key ingredient.

The Cowles Foundation, a think tank created in the 1930s, initially ushered the move towards a more scientific approach to neoclassical economics. It eventually influenced the focus towards general equilibrium in development thinking. Economics was viewed as a perfect science, in which equations could be solved and countries allowed to grow. In the mid-1950s, for example, Arrow and Debreu (1954[32]) identified several conditions that must be satisfied if markets are to yield efficient outcomes, and their work became the backbone for the economics discipline in general.

Varying development strategies were produced with this thinking in mind, focusing on attracting capital to achieve rapid growth. Rostow, a contemporary of Rosenstein-Rodan and Nurkse, introduced five stages for economic growth. They had capital accumulation in mind, built on the perceived experience of previous industrialising countries.

The five stages were a traditional society; gaining preconditions for take-off; take-off; a drive to maturity; and high mass consumption (Rostow, 1960[11]). Gerschenkron (1962[33]) would argue for a more active role for governments and large banks in providing the needed capital and entrepreneurship. In line with these views, the neoclassical Harrod-Domar model advocated an optimal savings rate to be targeted for the highest growth performance. This way of thinking nevertheless kept the state front and centre, as the planning school saw its role as accompanying the flow of resources and finance.

Financial capital was front and centre. Little thought was placed on how the system could change in light of new factors, for instance social or environmental, or even the role of technology (Ranis, 2004[34]). Indeed, the influential Swan-Solow model of growth brought the important role of technology to the forefront. However, it was viewed as exogenous, with the ability to adapt anywhere, regardless of institutions, cultures, capacity or location.

The dominant role of capital led to the emergence of development assistance and regional development banks. Foreign capital, it was believed, could make up for any lack of domestic capital, a view that eventually triggered the emergence of development aid. Aid donors were viewed as purveyors of much-needed capital, and many national aid organisations opted to work through multilateral organisations.

Regional development banks were created, starting with the Inter-American Development Bank (IADB) in 1959; the African Development Bank (AfDB) and the Asian Development Bank (ADB) would follow in 1964 and 1966, respectively. Moreover, the International Development Association (IDA) was created in 1960 within the World Bank Group to provide concessional loans and grants to the world’s poorest countries, in addition to the IBRD’s loans.

In 1961, in light of the success of the Marshall Plan, and in the aftermath of the Cuban Revolution, the United States launched a major aid programme for Latin America called “Alliance for Progress”. It offered loans of more than USD 20 million, often accompanied by technical assistance. In fact, the United Nations established the Special Fund in 1958 to enlarge the scope of the UN programme of technical assistance.

From the OEEC to the OECD

Once post-war Europe was set on a growth path, the OEEC’s role had ended. In 1960, the organisation was repurposed with policy discussion in mind into the more global OECD. A year later, the OECD Development Centre was created as an independent platform for knowledge sharing and policy dialogue between OECD member and non-member countries. In so doing, it allowed these countries to interact on an equal footing. Finally, and in line with the creation of the development banks and the rise of development aid and co-operation, the OECD expanded and provided a firm mandate to the OEEC’s Development Assistance Group (DAG), a forum for the largest aid donors, renaming it the Development Assistance Committee (DAC) in 1961. A primary motive for the creation of the DAG/DAC was to achieve accurate and comparable data reporting on aid flows to developing countries.

The search for economic growth induced policy makers and academic thinkers to pursue strategies and policies that could increase the country’s GDP as quickly as possible. This came at the expense of the environment, inequality and deteriorating social outcomes. The social and environmental trials of countries were missing from the equation.

The models were not necessarily wrong in that all societies need capital as means for growth. However, the models assumed a trickle-down to the rest of the economy, focusing on its supply-side. Furthermore, they simplified the mechanism as one where all countries work in the same way, with common histories, social ties, endowments and needs. They also assumed that such development, in that manner, would be sustainable. It became increasingly apparent that economic outcomes were but one dimension of development.

Critics propose protectionist measures to combat unfavourable terms of trade

Critics from Latin America (United Nations Economic Commission for Latin America, ECLA) – later the “dependency school”– stressed that international trade constantly disadvantaged the developing world (Bracarense, 2012[45]). They also emphasised this trade maintained and even caused underdevelopment (Frank, 1966[46]). This school of thought saw developing countries as dependent on advanced economies for market and capital. It was particularly visible in international trade where terms of trade seemed to favour rich countries. Thus, began a period of closed relations for developing countries and protectionist measures.

Consequently, critics favoured more inward-looking development strategies, South-South trade, a New International Economic Order, restrictions on multinational companies’ range of action and significantly more redistribution from North to South, some with strong anti-capitalist undertones (Laszlo et al., (1978[47]); Green and Singer (1975[48]); Cox (1979[49]); Amin (1977[50]). The Latin American version of these theories tends to be referred to as structuralism.

Conventional development thinkers focus on poverty and basic needs

Development thinking also began looking more closely at poverty. In 1971, the United Nations’ Committee on Development Planning established and approved a list of least developed countries (LDCs). These were based on a combination of per capita GDP, share of manufacturing in total GDP and adult literacy rate. Countries on the list would benefit from specific programmes of action determined by the United Nations.

Official development assistance (ODA) reacted to a “frustrated development decade” and shifted more resources to tackle the problem of mass poverty. During the early 1970s, World Bank President Robert McNamara highlighted the need to address poverty alleviation, and the first World Development Report addressed this topic as well (McNamara (1973[51]); World Bank (1978[52]); Kapur, Lewis and Webb (1997[53])). This had a profound influence on aid programmes, which began funding more micro-programmes to meet people's basic needs in health, education, water and sanitation.

Although the background for this shift was partly shaped by security concerns, support to small farmers and enterprises attempted to enhance a new pattern of growth, namely “growth with equity” (Chenery (1974[54]); Ahluwalia, Carter and Chenery, (1979[55]); Feder (1976[56]). Although industrialisation and modernisation efforts were not fully abandoned, critics suggested a stronger social policy orientation towards fulfilment of basic needs (ILO, 1976[57]). It was in the 1970s that Amartya Sen began advocating for greater focus on human development in national development strategies.

State involvement in development strategies continued in the 1970s, and more definite commitments on aid emerged. In 1970, the UN General Assembly adopted a resolution, fixing a target of 0.7% GDP for international aid.2 With this goal in place, the tendency turned to treating the symptoms of development – poverty – while industrialisation shifted into the background.

Throughout the decade, the IDA and UNDP received new funding. Similar to the previous phase, there were discussions on the proper role of state intervention and market-led development, as well as inward-looking and outward-oriented development strategies (Krueger (1985[58]), (1990[59]); Bhagwati, (1987[60]); World Bank, (1987[61]); Chenery et al. (1986[62])).

The increase in government involvement carried with it two important trends in development thinking. The first was a gradual focus shift from employment creation via industrialisation financed by domestic resources to development assistance based on foreign finance. The second was a shift towards ends rather than means, and consumption rather than production (Figure 4.3).

A crisis leads to demands for better terms of trade for developing countries

The 1973 oil crisis and the rise of the dependency school led to the proposal of a New International Economic Order. This was a set of proposals to improve the terms of trade for developing countries, based on the assumption of rising commodity prices and the weak negotiating position of developing countries.

In 1976, the International Labour Organization published “Employment, Growth and Basic Needs. A One-World Problem”. This report proposed national economic development strategies (NEDS) formulated at the country level with the goal of meeting the basic needs of a country’s entire population. NEDS were defined as ensuring enough income to buy food, shelter, clothing and other essential requirements together with the provision of essential services to ensure basic education, health, safe drinking water and sanitation. This marked another step down the road from development economics (addressing the causes of poverty) to palliative economics (alleviating the symptoms of poverty)

Figure 4.3. The focus on the consumer rather than the producer spiked in the 1960s

N-gram showing references to “producer” and “consumer” (1800-2000)

Note: Graph shows how listed words (grams) have occurred in a corpus of books, written in English, over time. Results are normalised for number of books published each year. Smoothing is set to +/- 3 years.

Source: Google Research (2013[63]), Google Books Ngram Viewer (database), Consumer, Producer, http://books.google.com/ngrams (accessed in May 2018).

Fiscal and debt crises lead to the first rumblings of structural adjustment

A new round of development thinking was triggered by both fiscal crises in OECD member countries and debt crises in Latin America. By the late 1970s, many governments in the developing world had accumulated both domestic and international debt and were at the brink of financial collapse (IMF, (1980[64]). Hyperinflation in some countries – e.g. Argentina, Bolivia and Brazil – made matters worse.

With international private lenders moving out, international financial institutions stepped in with new instruments for “stabilisation and adjustment” and provided new development finance. Governments were asked in turn to reduce domestic debt creation and secure fiscal consolidation, largely through spending and government employment cuts and by dealing with debt-ridden state-owned enterprises (SOEs), either through “restructuration”, full privatisation or both.

Paradoxically, adjustment programmes, intended to downsize the state, also needed a competent public administration to manage fiscal and other public policy reforms (World Bank, 1983[65]). There are numerous debates on the effects of adjustment programmes on poverty. The effects on the ground seem to crucially depend on specific country conditions, in particular public sector performance, and broader governance issues (Morrisson, 1992[66]); (Collier and Gunning, 1999[67]); (Easterly,(n.d.)[68]); (Pastor, 1987[69]). Learning from practice, the United Nations International Children's Emergency Fund (UNICEF) stressed the need for an “adjustment with a human face” (Cornia, Jolly and Stewart, 1987[70]). Both the IMF and the World Bank designed specific programmes to mitigate the social costs of adjustment through safety nets and social funds (Gayi (1991[71]); Boughton (2012[72])).

Basic needs fall off the agenda in the 1980s

The 1980s saw recession and inflation in developed countries, and the Reagan and Thatcher governments reacted with liberal economic policies. Such policies were also applied to developing countries, yet often premature and with a quick-fix approach. Theories of economic development virtually disappeared, replaced by neoclassical economics.

The view that aid should target basic needs disappeared from the agenda. Critics regarded Keynesian macroeconomic management as having utterly failed. They recommended strengthening competitive markets, getting the prices right and fostering private sector development (Dorn et al. (1998[75]); Toye (1987[76])). Provided with the proper economic incentives, it was thought, people in the developing world would also act rationally, increase investment and production.3 Government was often regarded as more of a problem than a solution for economic and social progress, and state-led development came to an end (Adelman, 1999[77]).

With the same arguments, critics did away with the worries of the dependency school. Government-led, inward-looking development and self-reliance – all inefficient and costly (Bates (1981[78]); World Bank (1995[79]); Edwards (2009[80])) – were no longer in favour. Instead, critics recommended strong export-orientation by private enterprises to mobilise local resources and close the gap in foreign trade. Pointing to the success of several Southeast Asian economies, their recommendations received considerable traction in the development community. This was now, however, without a stream of counterarguments. Summarising a large set of country experiences, Chenery et al. (1986, p. 358[62]) suggested “there may be a necessary sequence from growth dominated by import substitution to a shift to manufacturing exports as the major engine. It appears that an economy must develop a certain industrial base and set of technical skills before it can pursue manufactured exports”.

Poverty reduction and social policy concerns were not abandoned during these years. However, critics warned these objectives could not be achieved unless key macro- and micro-economic imbalances were corrected properly. Addressing poverty and equity, as well as public management, also became issues in structural adjustment lending (Morrisson (1992[66]); Dornbusch (1982[81]); Diebold, Feinberg and Kallab (1984[82]); Pastor (1987[69])).

Outside the OECD, China and the Soviet Union took distinct paths. China’s government started to experiment in the late 1970s with market mechanisms for land and in the agricultural sector (Lardy (1986[83]); Lin (1992[84]). Deng Xiaoping, a major political figure in China’s growth story, asserted that China was “crossing the river by feeling the stones”. In other words, the country would feel its way forward slowly amid uncertainty. The 1980s ended with the collapse of state-led development and central planning in the Soviet Union and Eastern Europe.

In the wake of public management reforms in OECD member countries, bilateral and multilateral development co-operation came under scrutiny. Agencies were asked to review and (above all) document their activities more intensively. Measuring agency performance and development effectiveness became standard operating procedures in aid management (Knack and Rahman (2007[85]); Roodman (2008[86]); Easterly and Pfutze (2008[87]).

The fall of the Berlin Wall gave more credit to the Washington Consensus

With hindsight, the contrasts between the 1980s and 1990s were marked. The fall of communism came to be seen as the final triumph of “the market”, and 1989 as “the end of history” (Fukuyama, 1992[88]) and “the end of the nation state” (Ohmae, 1995[89]).

Market liberalism continued to triumph in development thinking for a long time. In fact, since the beginning of the 1990s, most developing countries experimented with “dual liberalisation”, namely from state-led to market-led development, and from authoritarian to democratic development. Moreover, the management of structural adjustment programmes (SAPs), transitions in Central and Eastern Europe, and the continued success of development in Southeast Asia indicated that government and its institutions played an important role in fostering markets.

Renewed discussions on the role that states and markets play evolved, now with an emphasis on their complementary roles (Israel (1990[90]); World Bank (1997[91]); Kuczynski and Williamson (2003[92])). “Getting the institutions right”, improving government management and the quality of “governance” became important ingredients for development thinking, and the New Institutional Economics school became increasingly important in development research (World Bank (1991[93]), (1997[91])).

The role of information and communications technology (ICT) expanded enormously in the 1990s. Many countries began thinking more about the benefits of better technology and knowledge for development. Technology continued to be viewed as the driving force for growth but endogenous to the local economy, with increasing returns to scale through externalities. Policy, and by extension aid programmes, also began paying more attention to encouraging and supporting research and development, introducing new capital goods and reducing the cost of manufactured goods. In addition, the importance of competencies to adopt and adapt new technologies became important (Romer (1986[94]); Lucas (1988[95]); Ranis (2004[34])).

Development slowly shows a human face again

Development was perceived to have taken a step back in the 1990s. The Havana Charter had been watered down to GATT, and eventually became the WTO in 1995. Initially positive developments in the world periphery slowly gave way to often premature free trade and deindustrialisation. Consequently, the UN Development Decades – especially in Latin America – gradually came to be perceived as lost decades.

The 1990s also saw the resurgence of the debate on the nature of the relationship between population growth and economic development. Issues of reproductive health, fertility, education, child and maternal mortality and family planning drew the considerable attention of the international policy community at the 1994 International Conference on Population and Development in Cairo.

In addition, the UNDP launched the Human Development Report (HDR) in 1990. It put people at the centre of development, highlighting the errors of the Washington Consensus SAPs. Importantly, these programmes were not criticised because they were inappropriate for development. Rather, they were critiqued because they produced socially unacceptable results and lacked attention to environmental issues and income redistribution as a basis for growth.

Human progress, environmental sustainability and security gain in importance

Near the turn of the millennium, new issues were added to the debate on more (or less) state intervention. These focused on the role of human development, entitlements and “freedoms”, and concerns about “human security” (O'Neill (1997[99]); Sen (1999[100]); Thomas and Wilkin (1999[101])).

Measuring human progress and not just economic development – for example via the UNDP’s Human Development Index (HDI) or the MDGs – became ever more important. Discussions also reemphasised the objectives of development, namely expanding the range of human freedoms (Sen, 1999[100]) and improving quality of life. Although contested as a Western concept, this included political freedoms and citizens’ participation and voice (Blunt (1995[102]); OECD (1995[103])).

Environmental and sustainability concerns came on to the development agenda (World Bank (1992[104]); (2002[105])). With the signing of the Kyoto Protocol in 1997, climate change issues rapidly gained importance. In addition, the 11 September 2001 attacks on the United States triggered a new focus on state fragility, violence and civil wars, ushering in new approaches to state-building.

The MDGs usher in more holistic thinking

The early 2000s marked the beginning of more holistic development thinking. This more holistic approach used multidisciplinary and multidimensional inputs from a broad range of stakeholders to look beyond growth and GDP.

The MDGs, set in 2000, called for countries to achieve certain rates of progress in key areas by 2015. These areas included reduction of extreme poverty, hunger, child and maternal mortality and disease transmission, and an increase in school enrolment and access to water and sanitation. These were addressed to the needs of the poorest people in the world, in the poorest countries in the world.

With the MDGs, the focus shifted from economic development to “poverty alleviation”.4 In other words, it moved attention from increasing the personal income of individuals towards alleviating the symptoms of poverty. The google n-gram in Figure 4.4 illustrates the shift in emphasis away from development towards poverty alleviation from 1950 to 2000.

Backcasting helps create plans to reach targets over time

The shift towards poverty alleviation was practical as well as ideological, as the goals were tied to quantified and time-bound objectives. This meant that policy makers could plan how to finance and implement them over an ex-ante agreed upon period. The main philosophy behind the MDGs was anchored on the concept of backcasting: identifying targets in the future, and making a plan on how to reach them over time (Sachs, 2015[106]).

Figure 4.4. Reference to poverty alleviation has grown quickly since the 1970s

N-gram for “development economics” and “poverty alleviation” (1950-2000)

Note: Graph shows how listed words (grams) have occurred in a corpus of books, written in English, over time. Results are normalised for number of books published each year. Smoothing is set to +/- 3 years.

Source: Google Research (2013[63]), Google Books Ngram Viewer (database), Poverty alleviation, development economics; http://books.google.com/ngrams (accessed in May 2018).

Backcasting made it clearer for all levels of government, cultures, disciplines and countries to latch on to the shift in development thinking. It allowed plans to mobilise resources to reach such goals, and it inspired a fresh global focus on fighting extreme poverty. Viewed in this way alone, the MDGs were indeed a success. In addition, the biggest success in reaching the targets came in health-related objectives, and it was argued that large funds were mobilised to get there, such as the Global Fund to Fight AIDS, TB and Malaria.

The economic crisis of 2007-08 ends optimism

The period of the MDGs was marked by the economic and financial crisis of 2007-08. Although the origins of the crisis were in OECD member countries, it had severe repercussions in the developing world (IMF (2009[107]); World Bank (2009[108]); Spence and Leipziger (2010[109])). It ended two decades of optimism and broad-based trust in the benefits of globalisation, multilateralism and global governance.

International co-operation and development were no exceptions. Despite heavy criticism from anti-globalisation movements, and post-colonial and post-development schools of thought, domestic development had worked quite well until 2008. Above all, and in line with the MDGs, poverty reduction – at least at the global level – seemed to be running on a good track.

The years that followed were marked by crisis management in OECD member countries. A public discourse emerged regarding the disadvantages of “unfettered markets”, particularly in international finance. There was renewed emphasis on national and international regulatory arrangements and the role of government.

However, there were surprisingly few spillovers into the development debate, at least initially. Market-led economic growth, social development, political participation and environmental integrity largely remained as cornerstones of development thinking and “good development practice”. Fiscal policy and fiscal consolidation, which remained contested in the development community, were the exception.

The MDGs ended in 2015 with mixed views on their success; many goals were not achieved. Critics argued the MDGs were viewed too much within silos, and not enough in a multisectoral, holistic way, as originally planned. They were too general, with the question too focused on how to achieve the MDGs overall, and not enough on what can and should be done so that country x can achieve goal y (Sachs, 2015[106]).

The SDGs offer a more holistic approach to development for everyone

In response to the shortcomings of the MDGs, the Sustainable Development Goals (SDGs) brought a broader holistic approach to goal-based development. The 193 countries of the UN General Assembly adopted the 2030 Development Agenda titled “Transforming our World: the 2030 Agenda for Sustainable Development” in September 2015. It outlined 17 SDGs and their associated 169 targets.

While the MDGs focused on reducing extreme poverty, the SDGs focus on sustainable development. This means they promote the holistic achievement of economic development, social inclusion and environmental sustainability. The SDGs also affirmed that all countries are developing and moved away from the bipolar donor-recipient discourse.

Unlike the MDGs, the SDGs apply to all countries; they are not only for the poor countries.5 Their multisectoral nature implies interdependencies between goals and targets. The SDGs are also more complex than the MDGs; they are broader than the challenge of poverty reduction, as they also promote social inclusion and environmental sustainability.

The idea of the sustainable development agenda can be traced back to the 1987 report “Our Common Future”, also known as the Brundtland Report, from the United Nations World Commission on Environment and Development. The report introduced environmental concerns to the formal political development sphere. “Our Common Future” placed environmental issues firmly on the political agenda; it aimed to discuss the environment and development as one single issue. Public engagement (and communication) became central to development thinking.

In the spirit of the Brundtland Report, the United Nations supported an independent campaign to communicate the new SDGs to a wider audience beginning in 2015. This campaign was called “Project Everyone”, and a team of communications specialists developed icons for every goal. They also shortened the title “The 17 Sustainable Development Goals” to “Global Goals”, then ran workshops and conferences to communicate the Global Goals to a global audience.

Mainstream development thinking has shifted many times, based on accumulated global experience and influence from major events. However, at a more regional level, ideas often diverged from the mainstream, stemming from more localised experience. In addition, developing countries began accumulating their own experience in relation to development and to richer countries. The following section provides details about shifts in development strategies, with specific attention to Latin America, Africa and Asia.

Technology gaps condemn the region to low-tech, unskilled activities

Prebisch’s central-periphery argument described the diffusion of technology at the international level as slow and irregular. Technological gaps between central (advanced) and peripheral (developing) economies gave rise to the emergence of different production structures. The centre’s production structure was viewed as typically diversified. Conversely, the “periphery” was specialised in only a few low-tech activities, mostly intensive in unskilled labour and/or natural resources. As innovation and increasing returns were strongly associated with the manufacturing sector (Kaldor, 1967[115]), Latin American focus generally turned to industrialisation.

Technological asymmetries were also viewed as related to growth and income distribution.

On economic growth, the typical low-tech sectors prominent in “the periphery” exhibited a low income-elasticity of exports, while its poorly integrated production mix entailed a high income-elasticity of imports, in effect reducing the equilibrium long-run rate of economic growth in the periphery as defined by the balance-of-payments constraint on growth (Thirlwall, 2000[116]).6

On income distribution, only a small share of the total labour force in the periphery was engaged in activities in which learning and productivity growth sustained rising real wages and strengthened their bargaining power. Technology in the production structure of the periphery was highly localised and partially diffused. This implied allocation of a large share of labour to lower productivity sectors, often in the form of subsistence employment or underemployment.

The “dual” nature of the labour market was defined as “structural heterogeneity”. This had a strong effect on income distribution, both in terms of functional and personal distribution. In addition, the reserve army of workers in the subsistence sector made it more difficult to organise workers, further compromising their bargaining power. As a result, the overall bargaining power of workers in the periphery was limited. Inequality was worsened only by the asymmetrical power between labour and capital, as reflected in low wage shares in national income. It was also made worse by a similar division between skilled and unskilled workers.

Labour fails to gain from productivity growth

The weakness of labour implied that workers could not benefit from technological change and productivity growth through higher real wages in the periphery. This was the case as well in the richer economies of the centre, at least until the mid-1970s. At that point, unions were able to capture at least part of the gains in productivity growth. Other forces contributed to creating an unequal relationship between the centre and the periphery. These included exports of undifferentiated commodities in competitive markets where there were no barriers to entry.

Productivity growth tended to translate into lower prices in these cases, instead of higher profit rates. There were differences in the income elasticity of demand between the goods produced by the centre and the periphery, the characteristics of the labour market in the periphery and the differences in the market structure in the goods markets (competitive versus oligopolistic). These are viewed as long-run factors in the deterioration of the terms of trade of the periphery (Ocampo and Parra-Lancourt, 2010[117]).

Latin America seeks to break out of the gridlock

Development strategy in Latin America was therefore dominated on unhinging the centre-periphery gridlock. It asserted the periphery must upgrade its technological capacity and diversify its productive structure. In this way, it could absorb low-productivity employment in new emerging industries with increasing technological content.

The view on how this can occur has itself shifted over time. In the 1950s, it was equated with industrialisation. In more recent years, the engine has been viewed as the ability to absorb new information technologies. More generally, the structuralist school stressed the importance of industrial and technological policies aimed at technological catching up and building capacity, in which the nature of the sectors and technology co-evolve (Katz (1987[118]); Cimoli and Katz (2003[119])).

In the early 1960s, Latin American structuralism began to consider institutional and political factors among the barriers to structural transformation and development. Among other things, this new phase of development thinking had concerns about agrarian reform, a more equal distribution of income and the need to curb protectionism by promoting manufacturing exports and advancing the process of regional economic integration.

In parallel, social and political forces were highlighted as barriers to development. The works of Medina Echavarría, Celso Furtado and Osvaldo Sunkel (Sunkel and Paz, 1970[120]); (Cardoso and Faletto, 1977[121]), among others, introduced political, sociological and historical variables more systematically into the analysis.

This “historic-structural” approach to development had little influence in actual policy. A stream of change of regimes in the 1960s and 1970s led to a decline of the structuralist clout in policy making in Latin America. However, the industrialisation drive of the 1950s was kept in place, at least in the largest economies of the region (Argentina, Brazil and Mexico) until the mid to late 1970s.7

Two new streams of thought expand the structuralist tradition

In parallel to the historic-structural approach, two complementary streams of thought emerged within the structuralist tradition. The first concerns the destabilising financial effects of open capital accounts, exchange rate appreciation and the need to preserve international competitiveness and external equilibrium (Ocampo, 2016[122]). The second relates to a more sophisticated understanding of the micro-dynamics of technical change, in which Fernando Fajnzyler (1983[123]) played a leading role.

In the second half of the 1980s, some structuralist economists began to rely increasingly on the evolutionary theory of technical change. In this way, they sought to understand the microeconomic reasons behind divergence in GDP and productivity with richer countries (Nelson and Winter, 1982[124]). Increasing returns, path dependency, hysteresis in structural change and technological learning were seen as reasons specialisation was so difficult to change, as well as why technologies persisted over time.

The “neostructuralist” school of the late 1980s in Latin America emerged from the combination of newfound macroeconomic concern with regards to international capital flows and the real exchange rate, along with a more open attitude to technological change. These were complemented by new views on the interaction between institutions and the production structure in technological policy.

These shifts led to the “National Systems of Innovation” concept, which focused on the role institutions play in fostering co-ordination between private and public actors. It was believed that firms should be able to learn and approach best practices faster than the velocity at which the international technological frontier moves. This was perceived as a race between leading firms at the frontier and followers attempting to catch up. Figure 4.5 represents this interplay between learning, capabilities, the technology gap and international specialisation.

Figure 4.5. Neostructuralism: The interplay between technological innovation, diffusion and selection in the global markets

The Washington Consensus prevails over neostructuralism

Neostructuralism’s influence in Latin America was limited, as pessimism was growing about the ability of the government to frame the development agenda. It faded as an influential intellectual paradigm in the 1990s. Neoliberal market reforms and the Washington Consensus emerged as the triumphant agenda.

The ideological gales from the fall of the Soviet Union did play a role in weakening the legitimacy of government intervention in the economy. However, other factors further depressed confidence in the possibility of launching a new phase of development and industrial policy. Many Latin American countries had contracted large external debts in the 1970s, which became impossible to service after the rise in US interest rates in 1979.8 In several Latin American countries, the debt problem drastically shifted the focus of economic policy from discussion of development towards the problems of financial stability, taming inflation and managing fiscal issues.

The economic costs of the “lost decade” of the 1980s were massive, particularly in light of the collapse of investments and its negative implications for technological change and productivity growth. However, the social costs were also significant. It took twice as much time to re-establish pre-debt crisis poverty rates than to return to the 1970s pre-crisis GDP per capita figures (Figure 4.6).

Figure 4.6. Poverty rates took twice as long to recover from the 1980s crisis compared to GDP

GDP per capita and poverty in Latin America and the Caribbean (1980 2016)

Note: The graph includes data for 19 countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Venezuela, Dominican Republic and Uruguay.

Source: ECLAC staff calculations based on ECLAC (2018[125]), CEPALSTAT (database), http://estadisticas.cepal.org/cepalstat/WEB_CEPALSTAT/estadisticasIndicadores.asp?idioma=i; and IMF (2018[126]), World Economic Outlook 2018 (database), GDP per capita, constant prices (PPP, 2011 international dollars), https://www.imf.org/external/pubs/ft/weo/2018/01/weodata/weoselgr.aspx.

 StatLink https://doi.org/10.1787/888933857822

The debate on growth and income distribution in Latin America nearly stopped completely in the 1980s. In its place, the challenge of short-term macroeconomic stability monopolised the agenda. When the region eventually overcame the debt problem in the 1990s, neither fiscal nor political space was available for re-launching the development agenda.

Increased role of government after independence

African independence came in the 1950s and 1960s, following the creation of the Organisation of African Unity (OAU, and later the Africa Union, AU). Initially, the OAU focused on Africa’s decolonisation, the struggle against apartheid and attainment of its political independence (AUC, 2015[127]). At this time, mainstream development strategy in Africa placed the state as the key player in kick-starting economic activity.

The first phase of the post-independence period was therefore characterised by an increase in the role of government in development, with planning at the centre of its policy agenda. Such thinking paralleled some of the mainstream and global thinking in development economics on the push for industrialisation. It implied more state activity than the colonial governments had undertaken previously. In agriculture, for instance, governments often relied on state marketing boards that allowed subsidies for industry (Bates, 1981[78]).

Countries, in many cases, had inherited basic revenue collection and public expenditure management systems, with extremely fragile public finance and narrow tax bases. Most countries depended heavily on customs duties. To a lesser extent, they also relied on export taxes for government revenue, as well as other indirect taxes such as excise and sales taxes (Siebrits and Calitz, 2007[128]). Governments initially emphasised building economic infrastructure. Eventually, an alternative consensus emerged that improvements in education and health services needed to complement economic growth.

Substitution and protectionist measures attempt to accelerate development

During this period, many African countries adopted import substitution and protectionist measures to accelerate development. They achieved relatively higher growth rates. Despite considerable volatility, the continent grew at an average rate of 4.2% over the period (World Bank, 2018[129]).

Sub-Saharan Africa’s manufacturing value added grew at an average of about 7% between 1960 and 1980 (Mendes, Bertella and Teixeira, 2014[130]). However, productivity lagged significantly behind. Growth in output per worker averaged 0.02% between 1960 and 1980 across the continent and was even negative in subsequent periods (UNECA , 2014[131]).

Furthermore, per capita income grew at an average growth rate of 2% per year. In many countries, high taxes on exports and overvalued exchange rates lowered export growth and diminished diversification efforts into new areas. They also reduced incentives to invest in new technologies (Romer, 1986[132]).

Most governments, concerned with the political power of urban workers to organise anti-government protests, maintained high minimum wages for workers in the formal sector, while exercising price controls on basic foodstuffs. They also controlled interest rates to reduce the cost of investment. Finally, they maintained overvalued exchange rates reducing export revenues in local currency compared to what exporters could earn in an open market.

The combined effect of high wages, low interest rates and overvalued exchange rates encouraged intensive investment in capital rather than labour. This reduced employment opportunities, in effect confining the benefits of industrialisation to a small group of urban workers, middle-class traders and capitalists.

Furthermore, the emphasis on urban and industrialising parts of the economy came at the expense of rural and agricultural sectors. Specifically, controlled and low food prices reduced both farm production and farmers’ earnings. At the same time, overvalued exchange rates, combined with high export taxes, discouraged exports. Also, low interest rates discouraged savings and led to inefficient investment. This, in turn, jeopardised growth on both counts and further undermined industrialisation efforts in Africa.

On the social development front, education and health systems of the vast majority of African countries were severely underdeveloped. However, at least part of the population experienced progress in health and education outcomes. Life expectancy increased from about 39 to 47 years, and net primary school enrolment grew by 75% from 1960 to 1980. Moreover, despite remaining relatively high, the ratio of individuals per physician decreased over the period (Ferguson, 1999[133]).

African development thinking became increasingly focused on creating an African economic identity. Adededji (Adedeji, 1977[134]) became disillusioned with economic progress and advocated economic decolonialisation involving the “indigenisation” of Africa, putting economic development on an increasingly self-sustained footing. For Nkrumah (1963[135]), removing the yoke of colonialism consisted first in reinstating what he believed to be the African personality, humanist principles enshrined in traditional African societies, and once political independence had been won, Africa and its leaders would embark on the task of continental unity. Neyerere (1966[136]) centred his strategy on the African traditional family, yet despite being also a traditionalist, he quickly understood the limitations of this concept and considered gender inequality and poverty prevalence as the limiting factors – the latter arising from the lack of scale in operations of the family units. In contrast to his traditional views, modern knowledge and technology would bring economic development. 

Because the essence and purpose of capitalism were thought to be alien to African societies, their worldview theories rooted in socialism became the answer in which the task of social and industrial reconstruction were left to the national state. In Ghana under Nkrumah and in Tanzania under Nyerere, who was deeply impressed by China after meetings with Deng Xiaoping, development states were formed around centralised governments, which invested heavily in both human and physical capital, constructing schools and universities, highways and harbours. In order to retain control, political monopoly of the ruling party was key to the strategy. For Amin (1974[137]), the answer to dependence on the world capitalist system and underdevelopment in African economies, relying on the assumption of a centre-periphery structure, was delinking from the capitalist centre which dominated economically, socially and culturally. In contrast to Nyerere or Nkrumah, who favoured some kind of economic withdrawal, Amin rather subjected mutual relations across the world to varying constraints of internal development.

African countries struggle with urbanisation and rising debt in the 1970s

The heavy role by the state was losing fervour by the early 1970s, however. Africa’s development was negatively affected by rising oil prices and lower growth in its main trading partners. Internal factors also exacerbated the decline in growth in Africa. These included high and rising population growth rates – at 2.7% per year compared to 2.2% across all low-income countries.

Another factor in declining growth was urbanisation, with urban population in sub-Saharan Africa rising from 11% to 21% over 1960-80 (Romer, 1986[132]). Protectionist measures were also not delivering promised results. As argued by United Nations Economic Commission for Africa’s former executive secretary, Adebayo Adedeji, African industrialisation consisted of importing capital goods and professional labour. Manufacturing plants had therefore become merely places for assembly and for that matter, highly vulnerable to external factors (Mutume, 2002[138]).

Due to the monetary and financial challenges experienced in the 1970s, governments resorted to deficit financing. This, in turn, led to monetary expansion, inflationary pressures, and in an era of controlled prices, increasing distortions, particularly in foreign exchange markets. Overvalued currencies reduced the incentives to export.

At the same time, the newly acquired debt increased servicing due to a sudden increase in global interest rates, draining foreign-exchange reserves. African countries therefore had to strengthen their import and exchange controls. This led to further distortions, primarily for the imported raw material and capital desperately needed to continue industrialising their economies (Wolgin, 1997[139]). The manufacturing sector, as it was highly import-dependent for its intermediate inputs and certain skills, suffered as foreign-exchange rationing became increasingly severe (Addison and Baliamoune-Lutz, 2017[140]).

Structural adjustment shifts economies towards market-based growth in the 1980s

By the early 1980s, the global paradigm shift towards the Washington Consensus had reached African development policy. As growth performance started severely declining, countries deemed it necessary rather than optional to turn to the Washington-based institutions for help through adoption of SAPs (Figure 4.7).

These policies focused on reducing government spending and increasing greater fiscal discipline to control inflation and crowd in private-sector investment. They also targeted removing import controls and restrictions on foreign investment; privatising state-owned enterprises; devaluing and removing controls on currencies, interest rates and price of commodities; and making labour more flexible by reducing legal protection, food subsidies and minimum wages. Underlying such a market-oriented shift was the aim of refocusing African economies towards export- and private-sector led growth.

Figure 4.7. GDP per capita began declining in the 1980s in Africa

GDP per capita growth compared to GDP growth (1960-2016)

Source: World Bank (2018[129]), World Development Indicators (database), http://databank.worldbank.org/data/source/world-development-indicators (accessed in August 2018).

 StatLink https://doi.org/10.1787/888933857841

Market-based approaches fail to reignite economic growth

Contrary to the intended objectives of the SAPs, economic growth declined during the 1980s. It fell to an average rate of 2.7%, down from an average growth rate of 4.7% over the previous period from 1961 to 1979. Per capita income growth also declined to an average rate of 0.6% over 1981-90 from an average of 2% over 1961-79. The situation was exacerbated by capital flight.

Deregulation and the opening of economies to the global market did not ignite the manufacturing sector’s growth as intended. In Zimbabwe, for instance, premature financial liberalisation led to increased interest rates that contributed to a surge in the cost of servicing public debt. This compounded the problem of restoring fiscal sustainability and crowded out development spending. Rising interest rates combined with rapid import liberalisation led to the closure of the country’s clothing and textile industries (Addison and Baliamoune-Lutz, 2017[140]).

African economies experienced a partial recovery starting in the mid-1990s. They grew at an average rate of 3.7% between 1995 and 1999. This was mainly due to improved terms of trade.

Weakened states cannot protect people from rising poverty

The effects of the economic downturn in the 1980s had a human face, as poverty soared and the devastating effect of HIV/AIDS exacerbated the issues. Real wages and household incomes fell, while food production declined relative to the population. At the same time, the quality and quantity of health and education services deteriorated (Olamosu and Wynne, 2015[141]).

Weakening state capacity was deemed the main culprit, as the public sector and public bureaucracy became major targets for budget cuts. The state was expected to lead the process of economic reforms, stabilisation and transformation prescribed by the SAPs and the Washington Consensus. However, its capacity to do so effectively was weakened. This held back economic growth and social progress, negating construction of the developmental states in Africa (Mkandawire and Olukoshi (1995[142]); Mkandawire (2001[143])).

Between 1980 and 2000, primary (net), secondary (gross) and tertiary (gross) school enrolment rates increased at rates of 6.0%, 7.3% and 2.4%, respectively (Figure 4.8). Those rates were lower than their counterparts in other regions, as the enforcement of SAP strategies restrained overall spending, including for education. Per capita spending on education increased between 1980 and 1992, but not as much as it did in developing countries worldwide (UNESCO, 1995[144]). In the 1990s, life expectancy declined by 0.1 years among women, while rising by 0.8 years among men.

Figure 4.8. Africa experienced improvements in enrolment rates at all levels in the 2000s

Enrolment rates across education levels (1980-2015)

Source: World Bank (2018[129]), World Development Indicators (database), http://databank.worldbank.org/data/source/world-development-indicators (accessed in March 2018).

 StatLink https://doi.org/10.1787/888933857860

Asia builds growth through exports and integration into global value chains

Asian countries benefited from the gradual opening of advanced economies in the West to "the Third World" in two ways. First, buoyed and influenced by the early paradigms pushing for industrialisation, the region rapidly expanded and diversified its exports in labour-intensive manufacturing products. Second, multinational companies (MNCs) from Japan, the United States and European countries gradually unbundled their production processes. In so doing, they relocated selected production stages to lower-cost countries around the world. Selected countries within the region were able to integrate early into global value chains (GVCs) and develop regional production networks in manufacturing industries of consumer goods.

The expansion of trade and investment in the region directly contributed to the substantial gains witnessed in the catching up between developing Asia-Pacific and the richer countries of the world. From the 1960s to 1980s, there was a clear divide between the rich regions, dominated by economies in Europe and North America, and the poor regions covering most of the Asia-Pacific region and Africa. The rising incomes of developing Asia-Pacific populations over the following three decades caused a convergence in the income distributions of world regions from a two-humped to one-humped distribution.

Regardless of shifts in paradigms, the region has rarely wavered from trade-led growth. As the region increasingly integrated into the global market through participation in GVC-trade and production networks, trade became a major driver of growth. The region’s ratio between trade and GDP grew consistently until the global financial crisis in 2008-09. Trade increased from 33% of regional GDP in 1990 to more than 50% in 2016 (Figure 4.9).9

Asia-Pacific economies have collectively grown from contributing a mere 7-8% of global trade in the 1970s to becoming the largest trading region. In 2016, they accounted for 38% of global exports and 34% of global imports. Expanding trade has sustained growth for the region and especially for the poorest economies in the region for nearly three decades. On average, GDP and exports grew annually at almost 6% and 13%, respectively, from 1990 to 2008.10

Figure 4.9. Exports have grown quickly in Asia-Pacific

Openness and share of global trade and GDP, Asia-Pacific (1990-2016)

Note: The indicator for openness is a trade-to-GDP ratio

Source: ESCAP’s calculation based on World Bank (2018[129]), World Development Indicators (database), http://databank.worldbank.org/data/source/world-development-indicators (accessed in March 2018).

 StatLink https://doi.org/10.1787/888933857879

The region dominates exports of information technologies

Once trade had the desired effect of fuelling growth, the strategy moved towards the expansion and diversification of trade and transitioned into more complex GVCs. Indeed, trade liberalisation and integration into GVCs of technologically-intensive products further stimulated the process of the region’s structural transformation.

Manufacturing, which comprises 60% of merchandise exports of developing Asia-Pacific economies, has generally increased its technological complexity over time. The shares of high-tech exports rose from 6% in 1988 to 32% in 2000 (Figure 4.10). Driven by the 1996 WTO Information Technologies Agreement, trade began to open. As a result, Asia-Pacific became a dominant exporter of information technologies products, raising its global export share from 10% in 1996 to 61% in 2015.

Figure 4.10. The share of high-tech exports has increased in Asia

High-technology exports as a share in manufactured exports

Note: High-technology exports are products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments and electrical machinery. The group of 36 economies with special needs in Asia and the Pacific is comprised of least developed countries (LDCs), landlocked developing countries (LLDCs) and small island developing states (SIDS).

Source: World Bank (2018[129]), World Development Indicators (database), http://databank.worldbank.org/data/source/world-development-indicators (accessed in March 2018).

 StatLink https://doi.org/10.1787/888933857898

A trade-oriented focus helps the region flourish into the 1990s

The success of its trade-oriented strategy and its positive impact on reducing poverty reinforced the need for the region to continue rethinking development through a trade lens, especially into the 1990s. Amid rising participation in global trade and production, the region saw rising national income, shrinking absolute poverty, flourishing innovation, improved well-being and life expectancy, and better education outcomes. Falling barriers to trade, transport and communication across borders contributed to the integration and the development of the region, especially in East Asia and Southeast Asia.

The proportion of people living in extreme poverty decreased drastically. Nearly half of the Asia-Pacific population was living under extreme poverty (USD 1.90 a day) in 1990. By 2015, poverty had decreased to less than 12% (Figure 4.11).

In addition, aggregate living standards improved. Life expectancy increased from 69 years to 75 years during the same period, and the mortality rate from all major causes of death decreased by 15%. More than 70% of Asia-Pacific countries have higher literacy rates compared to the world average. Hence, the human development index has increased steadily for the entire region over recent decades. For East Asia and the Pacific, it surpassed the global average in 2014.

The rapid economic growth of eight East Asian economies in particular11 has been dubbed an “East Asian miracle”. Their success deeply informed and influenced export-led development as a viable strategy. Often bucking the trend of increasing or decreasing state intervention, government began promoting economic growth (Stiglitz, 1996[145]).

Figure 4.11. The share of the people living in extreme poverty in Asia has decreased

Poverty headcount ratio at USD 1.90 a day (1981-2015) (2011 PPP, percentage of population)

Note: Aggregates weighted using respective year population data from the World Bank.

Source: World Bank (2018[129]), World Development Indicators (database), http://databank.worldbank.org/data/source/world-development-indicators (accessed in March 2018).

 StatLink https://doi.org/10.1787/888933857917

Fast growth, dependent on foreign capital, ends in 1997

The question of whether government plays a role in economic growth and development was never really asked – the question was rather what role should it take? Governments did not necessarily ask whether they should plan the economy in detail. However, in practice, they ensured macroeconomic stability, regulated financial markets, created markets, helped direct investments and generated a business-friendly climate.

As underlined by Stiglitz (1996[145]), rather than replace markets, governments promoted and used them. To that end, they developed technological capabilities, promoted exports and built domestic capacity to manufacture a range of intermediate goods. They encouraged industries that could most successfully compete in world markets to grow (Glick and Moreno, 1997[146]). Fast growth came to an end in 1997, however, and with that a major lesson. Such a fast-growth strategy depended highly on foreign capital, which increased external vulnerability.

Trade strategy, focused on manufacturing rather than services, lacks diversity

Despite successful entry into GVCs, most developing Asia-Pacific economies face challenges in diversifying out of low-value segments of GVCs. The region’s GVC participation has remained in the manufacturing sector, dominated by MNCs based in advanced economies. Apart from the dynamos of Singapore and Hong Kong, China, service sectors have typically yielded lower productivity than manufacturing sectors (OECD, 2016[147]).

Even success stories in the development of service sectors in India and the Philippines, especially in the business process outsourcing sector, have caveats. Much of their focus is on low value-added tasks, such as call centres. The focus of services exports by Asia-Pacific economies remains generally in traditional areas, including tourism and transport.

For the biggest part of the region, the pace of structural transformation from secondary to high-value tertiary sectors remains slow. This has pushed most of the previously fast-growing developing Asia-Pacific economies to experience challenges related to economic convergence and inequality. These have been lumped into the catch-all term of the middle-income trap.

Inequality spreads between and within countries

Fast growth has also come with increasing inequality – between and within countries. Openness to trade and foreign direct investment have been important enablers for the region’s rapid economic development. However, not all countries and economic groups benefited equally from globalisation.

In fact, countries in the region have experienced unequal opportunities to participate in GVCs. For example, countries that play a part in relatively high-tech GVCs are mostly high- and middle-income countries. Low-income economies have generally been left out.

As a result, least developed countries (LDCs), small-island developing states (SIDS)12 and the countries in the South, Southwest, North and Central Asian sub-regions have reduced extreme poverty at a slower pace than the rest of the region. As a percentage of their total populations, poverty has been stagnant for these countries since 2010.

In addition, in the region’s most populous and rapidly growing economies, such as Bangladesh, China, India and Indonesia, within-country income inequality has significantly increased since 1990 (Figure 4.12). This is partly due to unequal opportunities for producers to integrate into global markets.

In general, the proliferation of GVCs tended to favour large firms over small firms. For example, small and medium-sized enterprises (SMEs) participate in GVCs more through an indirect contribution to exports than direct exports (OECD/The World Bank, 2017[148]). In developing countries, SME participation in GVCs is particularly concentrated in low value-added sectors. In low-income developing economies, SMEs have hardly taken part in GVCs because they predominantly operate in the informal economy (OECD/The World Bank, 2017[148]). The proliferation of GVCs in relatively technologically-intensive industries has tended to favour skilled over unskilled labour, helping to widen wage inequalities in a country.

Figure 4.12. In some Asian economies, income inequality has increased

Changes in income inequality by country (1990 and 2014)

Note: Labels next to each bar show the average market income Gini coefficient for the 2010-14 period, for each country. The blue bars show the change in the average of available Gini coefficients over the two five-year periods of 1990-94 and 2010-14, for each country.

Source: UNESCAP (2018[149]), https://www.unescap.org/sites/default/files/publications/ThemeStudyOnInequality.pdf.

 StatLink https://doi.org/10.1787/888933857936