Chapter 4. A historical overview of development paradigms

Development economics, and more generally development thinking, has changed significantly since it was conceived as a sub-discipline of economics at the outset of the Second World War. Since that time, one element of the debate has remained contentious: could the policies that led to successful and sustainable development in the early industrialising countries be repurposed as gold standards to follow in developing countries, or are the paths of developing countries sufficiently different to warrant alternative approaches? This chapter attempts to answer this question by reviewing how economic development has changed since 1945 and the subsequent creation of influential global economic institutions. It looks at changing approaches to development, critically reviews various periods and describes a long and complex learning process. To that end, it examines mainstream development thinking from the industrialised world, as well as “alternative” approaches that came out of regional experience in developing countries.

    
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Ideas about economic development have evolved since the post-war period and the birth of the Organisation for European Economic Co-operation (OEEC) in 1948 (later the OECD). In the words of Innis (1951[1]), when mismatches between ideologies and accumulated experience become too large, econo-political paradigms, the values and systems of thought in a society that are most standard and widely held at a given time, tend to shift. This chapter looks at the changing approaches to development over this period of 70 years, and critically reviews their outcomes. It gives equal weight to the views of theorists in developed and developing countries, while also providing historical context.

The transformation of economic geography is redefining international co-operation on development

The nature of development, and the strategies to achieve economic growth, well-being and environmental sustainability simultaneously, are in question. The rise of major economies, such as the People’s Republic of China (hereafter “China”), has shifted economic geography. In so doing, it has redefined the flows, patterns and co-operation associated with economic growth in the developing world.

More developing countries than ever are on a converging path to economic development with the richest countries of the world. However, evidence suggests that development, defined more broadly, including aspects associated with well-being, human development and environmental sustainability, do not always follow economic growth in tandem. Nor have they done so in longer historical perspective. Furthermore, economic wealth is not always necessary to make substantial advancements in such outcomes.

The paths of such newly industrialising countries as Chile, China and Morocco have not necessarily followed the mainstream paradigms of earlier eras. Indeed, such reflection raises questions on what is understood by development and what type of strategy countries should pursue to reach better and sustainable levels of economic, social and environmental well-being.

Development has often been associated with gross domestic product (GDP). The idea that one could measure a country’s development using GDP is relatively recent. Although Simon Kuznets had defined GDP in 1934, it only became the main tool for measuring a country's economy at the Bretton Woods conference ten years later.

Using GDP as a measure of development made sense, but it had limitations as a measure of human welfare. If the goal of economic development, in its simplest form, is to provide the means to improve living standards, then GDP could adequately reflect it. And until the 1970s, GDP growth was viewed as a good proxy for more general development in a country. But even Kuznets, at the time of his report on GDP, had warned against using GDP as a measure of welfare (Costanza et al., 2009[2]). In the years following the SecondWorld War, material wealth would not unquestionably translate into better health care, education and housing for a country’s residents. In short, GDP did not capture individual well-being.

In the light of the transformation of economic geography and new institutions and challenges, this chapter reflects on how the thinking of the development community has evolved over time. Subsequently, it presents regional experiences that illustrate “alternative” views to orthodox thinking on development.

Its main messages are:

  • Development thinking has significantly broadened its discourse since the Second World War, increasingly including social and environmental factors of development.

  • Despite the broadening approach to development, the starting point for development thinking and co-operation continues to be based on economic principles and financial capital flows.

  • The plurality of developments taken by countries since the Second World War implies that seeking a single development paradigm should not be an objective.

There are multiple paths to development

Over time, broad strokes on development thinking can be deciphered. Theories, thinking and strategies applied broad assumptions and simplifications to harness resources, scale interventions and streamline policy.

This has had two major implications.

First, it has often implied a one-size-fits-all approach, and the understanding that the paths of others could be replicated elsewhere as development strategies. Counter thinking on this is evident from the alternative schools that emerged from Latin America and Southeast Asia, as well as the development path carved out by China; their success pushed development practitioners to think differently.

Second, it fostered a silo approach to policy and sectors in developing countries and created a dichotomous view of donors versus recipients in international co-operation. Mainstream development thinking has typically focused on individual sectors and on the divide between urban and rural regions. Development is much more complex and implies a much smoother continuum: it crosses sectors, involves a wide array of actors and evolves differently in various parts of a country’s territory.

Three broader overarching discourses have influenced development thinking during these decades. The first discourse involves both the term and objectives of development. The second involves the role of states and markets, and the extent to which both contribute to development. And the third involves the importance of the international as opposed to the domestic environment – in short: the importance of “the degree of openness” – for national development (Figure 4.1). These three elements of the general development debate have oscillated and weaved back and forth over time, influenced by external (e.g. events) and internal (lessons) validity.

The ends are important for development paradigms, but so are the means. In fact, treatises on the means, and more specifically the value of the real economy and how to achieve economic development, go back at least to the 14th century (Box 4.1). Indeed, the ideological battle over whether aid should facilitate growth or provide programmes that directly meet basic needs has been ongoing for decades.

Figure 4.1. Main element of the overarching discourse in development thinking over time
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Box 4.1. Development thinking in a longer-term perspective

Thinking on economic development, the different paths taken by countries, and the principle of the real economy, go back far in time. But the understanding of both somewhat halted with a publication by David Ricardo in 1817. Principles of Economics effectively removed two key distinctions from the science of economics, both elevating the theory to a level of abstraction where classifications – that had previously been considered as extremely important – disappeared (Ricardo, 1817[3]). The first element was the difference between the financial economy and the real economy. This differentiated unproductive hoarding from productive investment. The second element was the view that trade was the barter of qualitatively identical hours of labour. This meant differences between economic activities subject to increasing and diminishing returns were left out.

However, prior to Ricardo, the discourse had been long, preceding the industrial revolution, on the means for development and the real economy. Nicola Oresme in De moneta in 1355 claimed that “it was a crime to leave hidden among the dead, and useless, what would keep the living alive”, in response to gold and silver deposited in tombs according to pagan customs (Schefold and Avril, 1995[4]). Later, the Spanish Minister of Finance Luiz Ortiz, admitted in 1558 that adding value in manufacturing was more important than the inflow of gold and silver (Ortiz, 1957[5]).

Giovanni Botero (1544-1617) offered the first theories as to why the Tudor Regents policy from Henry VII to Elizabeth I had been correct. Botero’s work, Reason of State – today virtually unknown – dominated the European economic discourse for more than a century (Botero, 1956[6]). Throughout his work, Botero argued for the superiority of industry in terms of synergies (linkages, clusters) from a diversity of economic activities. This would manifest itself in the greater possibility of innovation in urban activities, as well as of their ability to yield a larger profit than rural activities. Botero failed, however, to provide a convincing theoretical argument for why this was so.

Antonio Serra followed Botero’s lead in differentiating work in the agricultural and manufacturing sectors. He grounded the work in the theories of increasing and diminishing returns to scale – whether unit production costs would rise or fall if a nation specialised in a particular activity. In so doing, he produced the first coherent statement of this important economic law (De Luca, 1968[7]). Manufacturing is unique because the costs of labour proportionally go down with increasing volumes of production. Increasing and diminishing returns – more often separately than together – have played an important role in the history of economic thought.

A consensus is emerging on the importance of human development

There is no standard definition of development and no single paradigm can sum up how best to juggle these three elements. Different actors have continuously argued about societally preferred development objectives, such as economic growth, social welfare, political participation and freedom, national independence and environmental integrity. While theorists have favoured some objectives over others, and at different periods, development strategies have increasingly come to embrace all of them (De Janvry and Sadoulet, 2014[8]).

A consensus is emerging that development has to do with tangible improvements in people’s quality of life, and how satisfied they are with it. Over 70 years, economic and societal objectives have come and gone. Most have now been summarised in the 17 Sustainable Development Goals (SDGs) to end poverty, protect the planet, and ensure peace and prosperity for all.

The shift towards more focus on social aspects can be seen by observing the topics of discussion in the World Bank’s flagship World Development Report (WDR), which was first issued in 1978. In the 1980s for instance, the WDR focused on international capital (1985), trade (1987), public finance (1988) and financial systems (1989). More recently, the WDR has focused on gender (2012), jobs (2013), culture (2015) and education (2018). This evolution testifies to the change over time of what is deemed relevant for development.

Trade-offs are therefore necessary among some of the mentioned development objectives. Development thinking today is also about identifying trade-offs in country-specific contexts, and ensuring they become part of the overall policy dialogue in a given country. Once trade-offs are clear, experts should be able to better target their actions towards achieving the “best possible” outcomes for their defined goals and beneficiaries.

Development paradigms today are the result of external factors and accumulated knowledge. External factors have indeed played a major role in shifting paradigms. The era of the planning school in the 1960s, where economic development was treated as a precise science, demonstrated that development was more than just about the economy. Already in the 1970s, elements beyond GDP were brought to the fore of development thinking and practice (Seers, 1969[9]). In 1972, the Stockholm Conference on the Human Environment, for instance, signaled an important milestone in environmental policy making at the global level, which continued with the 1987 Brundtland Report and the 1992 Earth Summit.

Economic structure and its transformation matter. It was commonly thought that developing countries would have to take a different path from previous industrialising ones, as advocated by the dependency school, for example. But the oil crisis in 1973 and the debt crises in Latin America a few years later put an end to this thinking and placed macro-stability at the front and centre for the next two decades. The end of the Cold War would also usher another shift, as the environmental track was perhaps more prominent in the 1970s and 1980s, whereas the 1990s and 2000s saw a resurgence of the poverty eradication track.

Development thinkers have, however, not reinvented the wheel each time they have faced a misstep. During the past seven decades, development thinking has been more than just a lively exchange of ideas about development and how it can be achieved. It has also been more than a preferred set of ideas at any given time, only to be replaced by another set of ideas a couple of years later. Beyond constructivist interpretations, development thinking appears to have been a long learning process. Key stakeholders in interactions with real-world events and their challenges have come to define some consensus areas on what development is and what it should entail, and on how it can be achieved, i.e. what has worked better in terms of defined development outcomes and in what context (Figure 4.2).

Figure 4.2. Development thinking, viewed by source of the problem
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Today’s theorists, for good reasons have the advantage of building on a vast array of earlier development thinking. They can come up with more holistic approaches, including addressing environmental and climate issues, adapting them to local conditions and needs, thereby rendering them more realistic.

What works best in development – state-led versus market-led, and inward versus outward-orientation – is better known today. The capability to switch between possible strategies seems to be a key feature of developed market economies. It allows for swift action, and co-ordination among governments, particularly when an economic crisis looms. Moreover, some of the ultra-liberal arguments in favour of free markets and free trade have lost their traction. In a borderless world, regulatory frameworks and rule of law do not operate uniformly. The latter was a key factor in Adam Smith’s ideas about the workings of national economies (Herzog, 2016[10]).

Nevertheless, each shift of development thinking brought lessons learned on what works and what does not. Aid and capital are important, but not enough, since there needs to be sequencing and strategy on how best to deploy them. Unbalanced growth can work, but too much emphasis on one sector can backfire if the linkages between sectors are poor. Macro-stability is fundamental, but again it is not enough in itself: incentives for the private sector, ensuring better end outcomes for the poorest and enhanced roles in global value chains (GVCs) are also essential. Most importantly is that a country’s path must reflect its own endowments, institutions and culture.

Seven decades of development thinking and practice in developed countries

Development thinking and practice spans a turbulent 70 years of geo-political developments. It began with the influence of the Cold War’s struggle among superpowers, followed by decolonisation movements in Asia and Africa, the breakdown of the Soviet Union, and transformations in Central and Eastern Europe. In addition, there were famine and forced migration in several parts of the world, several financial crises, military conflicts and civil wars. But it has also been influenced by the spectacular rise of China and India as new superpowers, and the massive reduction in world poverty.

The Cold War framed much of modern development thinking. In a bipolar world, confronted with a massive nuclear arms race, both superpowers – the Soviet Union and the United States – closely watched each other’s foreign policy agenda (Rostow, (1960[11]); Katz, (1986[12]); Trofimenko, (1981[13]); Westad, (2005[14])).1 In fact, it was common to frame developing countries as “Third World” countries, designating them thereby as neither aligned with the United States nor the Soviet Union.

When decolonisation in Africa and Asia gained momentum in the 1960s, both sides reached out to the newly independent countries. Although the superpowers provided development aid during the Cold War for both political and strategic reasons, aid was not just a means to lure governments into alliances. Postcolonial elites and governments had also promised swift economic and social progress to their citizens, and their legitimacy depended on action. There was a need for strategies to attain economic and social development that would accompany political independence.

The following subsections provide a more detailed account of development thinking, primarily from the point of view of developed countries. They outline five general shifts on what was perceived to be the fundamental factor in kick-starting development:

  • Industrialisation, growth and modernisation (1940s-1950s)

  • Structural transformation (1960s)

  • More independence in developing economies (1970s)

  • Macroeconomic stability: The Washington Consensus (1980s-2000s)

  • Goal-based development (2000s-present).

Industrialisation, growth and modernisation (1940s-1950s)

Early thinking on development was characterised by optimism and experimentation (2013[15]). In the wake of creating international institutions to support development after the Second World War, two main “schools” emerged: one focused on industrialisation, the other on trade.

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.

Box 4.2. The Marshall Plan and the push for industrialisation

In the aftermath of the Second World War, the Morgenthau Plan and the Marshall Plan presented two starkly different visions of rebuilding war-torn Germany. The Marshall Plan – sparked by the need to produce welfare in Europe and to contain Soviet influence – came to overshadow other considerations.

According to the Morgenthau Plan, Germany was to be deindustrialised and made into an agricultural and pastoral nation (Morgenthau, 1945[30]). The Morgenthau Plan was abruptly stopped when George Marshall made his announcement at Harvard in 1947.

Marshall’s plan represented a complete turn-around in US foreign policy. It became a key element in the 30 “glorious years” of economic development that were to follow. Furthermore, it would influence development thinking at its core, despite being perceived as a plan for reconstruction rather than outright development.

There were both economic, humanitarian and political considerations behind adoption of the Marshall Plan. Unlike the Morgenthau Plan, the Marshall Plan recognised that an agricultural nation could not feed as many people as an industrialised one. Furthermore, the de-industrialising Morgenthau Plan was only to be carried out in the British, French and US zones of occupied West Germany, not in the Russian zone of the East. The Allies observed, in this case, a potentially and politically dangerous extreme poverty in West Germany. In countries benefiting from the Marshall Plan, free trade was put on hold. This was to last until industrialisation and productivity allowed them to compete not only in agriculture and raw materials, but also in industrial products on the world markets. The global dominating forces after the Second World War – at the birth of the OEEC (eventually the OECD) – unanimously saw industrialisation as the key to wealth.

The legacy of the Marshall Plan, and its perceived success, on development thinking was threefold:

  • First, it confirmed the idea of symmetrical trading – the notion that trade was best and should be encouraged between countries of similar development levels – as many European countries stood at similar levels of development.

  • Second, as the United States insisted that Europe move forward as a block, in effect protecting infant industries from trade, such industries were allowed to mature. In fact, the Havana Charter, the predecessor to GATT and the World Trade Organization (WTO), made the Marshall Plan operational. It allowed for protectionism if a country had an industrialisation plan and a certain level of unemployment.

  • Third, the large sums of capital transferred to Europe made it clear that capital would need to be part of the equation in development. This final legacy would dominate development thinking and deeply shift it back to neoclassical notions.

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.

Western thinking

High expectations, predominantly market-led, but with strong elements of (Keynesian) state interventionism; the state becomes a development agent within a broader process of industrialisation and modernisation; financial flows to developing countries and openness to trade were regarded beneficial (however, de-facto protectionism in many developing countries prevailed).

Structural transformation (1960s)

Throughout the 1960s and early 1970s, the development community increasingly believed the state needed a bigger role than simply the source of capital. As a result, development economics shifted again.

Enthusiasm returned to development thinking as the UN declared the 1960s as the decade of development, noting that progress on development so far had been far from adequate. Industrialisation returned to be the means of providing employment for disguised unemployment in agriculture. The source of increasing output per head due to economies of scale in manufacturing was viewed as inducing higher incomes that produced increasing demand for domestic manufacturing: a virtuous circle.

The 1960s was also a period of significant growth in funding to the UN development system. In 1964, the UN created the United Nations Conference for Trade and Development (UNCTAD). Industrialisation and the concept of “value added” to locally produced raw materials was central to UNCTAD’s development programmes. The problem originally posed by Rosenstein-Rodan on the industrialisation of the Balkan States through balanced growth was also repeated as former European colonies became independent states, from French Indochina and Ghana’s independence in the 1950s to that of Mozambique and Angola in 1975. In accordance with the larger role for the state, the UN created specialised agencies focused specifically on development, as the Special Fund became the United Nations Development Programme (UNDP) in 1965, and on industrialisation – UNIDO – in 1966.

Most developing countries had neither ensured longer periods of economic growth nor broad-based social development. Moreover, the transition towards modern forms of production, societies and statehood proved to be risky and lengthy, and replete with political protests and military interventions (Eisenstadt, (1967[35]); Huntington, (1965[36]), (1968[37]); Myrdal, (1968[38])). Poverty levels continued to stay high. Albert Hirschman argued that capital scarcity was less a problem than unfinished development plans that blocked entrepreneurship and ingenuity (Hirschman, 1963[39]).

Development policy increasingly focused on economic structural transformation, specifically on the shift of labour and resources from low productive or traditional sectors (e.g. agriculture) to more advanced sectors (e.g. industrial ones). Policy emphasised modernising developing countries with the state as the central enabler.

Lewis (1954[40]), Chenery (1960[41]) and Harris and Todaro (1970[42]) made significant contributions to development theory and practice. In the Lewis model, for instance, workers shifted from a low productive sector to a higher productive one. Wages stayed at subsistence levels until the “reserve army of workers” was depleted in the lower productive sector and reservation wages increased. The reallocation of labour and capital from agriculture to industry was considered the engine of growth, and the state could help accelerate such a shift.

The role of technology in development was also shifting. Until the 1960s, development thinking viewed technology as something to be adopted, embodied in fixed capital and merely moved from its point of invention to its point of use in the global South (Evenson and Westphal, 1995[43]). Technological change was conceived as a prerequisite for growth rather than a part of growth itself, ideas that were theoretically underpinned by the exogenous growth models of Solow and Harrod-Domar. The context, skills levels and institutional capacity would adapt to technology afterwards. In the late 1960s and early 1970s, attention shifted to the process itself of technological transfer. It changed the view of technology from a physical artifact to a system of artifacts of “people, procedures and organisational arrangements” (Bell and Albu, 1999[44]).

Trade and comparative advantage continued to be central in this era, but producers in industrialised economies resisted the strategy of shifting focus back on industrialisation and comparative advantage in developing economies. They feared competition from low wage manufactured goods production in developing countries. They were also concerned about the pressure of external deficits on their exchange rates, which would result from a negative trade balance.

The emphasis on structural transformation and industrial development came at the expense of other sectors. Policy makers began investing solely in the industrial sector, and neglecting agriculture, whose linkages, up to that point, had not seemed important for economic growth. Neither large capital transfers nor state-led structural transformation had worked satisfactorily nor would be enough to kick-start development.

Western thinking

After initial development success, policy makers fail to accelerate development, enthusiasm returns to development thinking in the form of multilateral initiatives. Trade continues to be viewed as a vector of development, but with strong undertones of a state-led push for structural transformation.

More independence in developing economies (1970s)

In the late 1960s, development thinking further diversified. With the disappointment of the “Decade of Development”, many critics favoured more South-South strategies to combat what they saw as unfair terms of trade for developing countries. At the same time, mainstream development thinking began to address mass poverty and focus on basic needs.

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)
picture

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])).

Western thinking

Frustrated expectations, criticism and diversification; although market-friendly development remained unquestioned, poverty reduction and basic needs satisfaction became more prominent; in many developing countries public debt increases rapidly; although openness was regarded advantageous, ECLA and dependency critics rejected global integration as risky and favoured inward-looking development; demands for a New International Economic Order.

Macroeconomic stability: The Washington Consensus (1980s-2000s)

The second UN Development Decade over the 1970s was dominated by the oil crisis. Petrodollars were recycled and debt accumulated, followed by financial fragility and a financial crisis. In response, goods markets opened, potentially destroying domestic manufacturing in many poor countries (Palma and Stiglitz, 2016[73]). Coined as the Washington Consensus, a radical move in the development community had begun (Williamson, 1990[74]). Mainstream development strategy shifted back to being neoclassically grounded, co-ordinated by policy prescriptions from the Washington-based development institutions.

The so-called Washington Consensus of less government and more macroeconomic stability moved development away from its focus on basic needs. This view would hold at least until the Millennium Development Goals (MDGs) in the 2000s.

The Washington Consensus period has many shifting currents, and the beginning of the era was different from the end. In the 1980s, there was a radical move to markets and excessive market optimism. Around the fall of the Berlin Wall, a more balanced view of state and markets emerged. The role of the Washington-based institutions on development and their reliance on markets was predominant throughout, however, and held sway until the global financial crisis of 2008. In the 1990s, technology also came back as a main catalyst for development.

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.

Western thinking

During a first phase, solving the debt crises dominates development thinking, basic needs fall off the agenda and the focus shifts to macroeconomic stability and market fundamentals. During a second phase, better institutions and trade openness viewed as necessary starting points. Eventually, a more human focused approach to development is integrated.

Goal-based development (2000s)

By the late 1990s, economists such as Rodrik (1997[96]) and Stiglitz ( (1998[97]); (2002[98])) led mounting criticism about the type of globalisation the world was experiencing. Against this backdrop, the perceived problems of the last decades prompted the United Nations to adopt the Millennium Development Goals (MDGs) in 2000. This shift continued with the more inclusive Sustainable Development Goals (SDGs) in 2015.

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)
picture

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.

Western thinking

Development becomes more holistic and multisectoral, human development becomes central. Production side of economy takes a backseat. Sustainability and environment take on a bigger role. Emphasis shifts on attaining specific goals rather than convergence to the richest economies.

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.

Regional experience as a catalyst for alternative development strategies

This section looks at development thinking across regions in a historical view from the outset of the Second World War or independence, up until the dawn of the broader overarching MDGs in the late 1990s.

In its earliest forms, development economics was borne out of experience in more developed and industrialised economies. While paradigms may have looked and seemed similar, they were often interpreted in a variety of ways. China, India, the Soviet Union and the West in general all shared the same development paradigm in 1950. They fared differently because different countries carried out the same vision of industrialisation and modernisation under different economic systems.

Remarkably, early ideas on industrialisation looked similar both in the West and in the East. Both superpowers opted for a state-induced process. While one favoured strengthening modern enterprises and markets, the other favoured state planning and a setting up of state-owned enterprises. Both models expected a swift modernisation of traditional agriculture, to promote modern industrial enterprises and to export raw materials. However, the aid community and economics departments in the West held different views on how best to combine state and market-led development (Adelman, 1999[77]), with a clear dominance of post-war Keynesian concepts.

India provided political and economic power to central planners, assured industrialists had monopolies and delivered cheap fertiliser to farmers. In the Soviet Union, an economy subject to detailed planning, planners could keep an eye on the output as long as products were relatively few. An important contribution to the collapse of the Soviet economic system was the diversity and complexity that was introduced with the digital, ICT revolution (Perez, (2004[110]), (1985[111])). A centralised system could not handle the flexible production systems that became state of the art with ICT.

For most of the 20th century, the two irrational twins – Western capitalism and Eastern communism – provided a broad policy space between them and shared a common view of industrialisation as the solution for economic development. Both West Germany and communist East Germany issued stamps with portraits of Friedrich List, the economist who became the main ideologist for the industrialisation of continental Europe.

As experience in developing countries accumulated, additional ideas began originating from various regions of the world, and especially from the United Nations’ regional offices.

Development thinking in Latin America

Latin America produced several new ideas on development over its tumultuous years following the Second World War. The regional UN commission, particularly the Economic Commission for Latin America and the Caribbean (ECLAC), played a large role in experimenting with alternative strategies for development. From this emerged the Latin American structuralist school of thought and what was labelled the “years of high theory” in economic development in the late 1940s and 1950s. Its foundational “manifesto”, written at ECLAC by Raúl Prebisch in 1949, set forth the basis of the centre-periphery theory. This is the backbone of structuralist thought, influencing much of the development strategies that followed in the region (Rodríguez, 2007[112]).

Momentum gained by the dependency school was lost, due to mounting debt issues in the region in the late 1970s and early 1980s. Eventually, structural adjustments, macroeconomic stability and the Washington Consensus dominated mainstream thinking. A counter stream of thinking emerged in the region, resisting the neoliberal economic agenda and questioning “First World bias” in development theory (Kay, 1991[113]). Since the 2000s, there has been an even stronger general shift in this direction in the region, in which individual country development pathways are reconsidered, and dependency theory back in mainstream (Munck and Delgado Wise, 2018[114]).

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
picture

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)
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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.

Development thinking in Africa

African post-independence development strategies can generally be broken down into three distinct phases: the reliance on import substitution and protectionism (1960s-80s), SAPs and the influence from the Washington Consensus (1980s-2000), and liberalisation and a return to planning (2000-present).

Early post-colonial development thinking in Africa largely relied on the inherited relationship between economic growth and material wealth as a means for development. For many African thinkers, the post-war development experience, however, diverged remarkably from this ideal of material prosperity through growth and despite objectives of deep socio-economic change, development did not yield discernible benefits to most Africans. Across the continent, African development thinkers such as Adebayo Adedeji, Julius Neyerere, Kwame Francis Nkrumah and Samir Amin embarked on increasingly “nationalistic” development paths, often aiming to unite African developing thinking with modern political thinking, and later on pan-African development trajectories.

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)
picture

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)
picture

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

Development thinking in Asia

Trade and export-led growth have been at the centre of the strategy of Asian and Pacific economies since the end of the Second World War. The region has been successful in leveraging the post-War globalisation hype to achieve economic development. Driven by rapid growth after the war, Asian countries focused their economic strategies on exports.

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)
picture

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
picture

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)
picture

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)
picture

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

Development thinking towards the 2020s

After 70 years of development theories, practices and discourses about how to reduce poverty, achieve broader societal development and improve well-being, the international development community appears to have reached a broader consensus. First, the 17 SDGs have been largely accepted as overarching global and national development goals that should be accomplished by all countries, irrespective of their income levels. The SDGs will be regularly monitored with the objective of holding governments around the world accountable. Second, policy makers need flexibility when it comes to designing country strategies and choosing specific arrangements regarding the role of states and markets, as well as the role of international trade and co-operation for their national development. Third, such policy choices – and their acceptance – can strongly benefit from local participatory processes and consultation. They can also benefit from tapping international experience and “translating” and adjusting practices to local contexts. In other words, there is no single best developmental path. However, countries can make use of lessons learned by other policy makers around the world, with multilateral organisations helping to facilitate such exchange.

The transformation of economic geography, populism and climate change provoke new thinking

Apart from the crisis, three additional factors gradually pushed development thinking in new directions:

  • sustained economic growth and development in China and other developing countries and its global implications, particularly for developing countries

  • the emerging crisis on climate change and environmental degradation

  • rising anti-globalist tendencies and populism in OECD countries.

In retrospect, few development experts could have imagined that mass poverty would decrease significantly. Nor could they have predicted that income (and productivity) conversion between OECD and non-OECD countries would happen any time soon. But both occurred in a surprising number of developing countries, particularly in Asia and Latin America, and most significantly in China and India (see Rodrik (2011[150]); Spence (2011[151])).

Many experts agree that successful catch-up development did not result from one single development recipe, but a combination of several development approaches. The latter led by a country-specific, market-oriented, heterodox mix of economic policy reforms. These included deeper integration into the global economy, investing in human capital, and improving government management and public services, as well as some trial and error, and good luck (Rodrik (2007[152]); Fosu (2013[153])).

China’s state-led model and economic success continues to challenge traditional Western thinking about the role of free markets, political participation, human rights and press freedom (Kurlantzick, 2016[154]).

The transformation of economic geography and rising emissions lead to focus on the green economy

Increasing wealth in the non-OECD world also came at a high cost. Energy-intensive growth caused global carbon emissions to rise significantly. Two-thirds of global CO2 emissions now originate in non-OECD countries, largely in India and China.13

It appears unlikely that the 2015 Paris Agreement can be maintained and global warming kept below 2°C without massive emission cuts in the developing world. For obvious reasons, reaching the SDGs and improving well-being around the world requires another dedicated shift in our thinking: from high-carbon to low-carbon (“green”) development (UNEP (2011[155]); World Bank (2012[156]); OECD (2013[157])).

The promise of globalisation falls short

Since about 2015, development thinking has lost some of the lustre of its most promising storyline: liberal globalisation. Promoted by most development experts for the last 25 years, globalisation is being attacked from different corners, including from developing countries (Deudney and Ikenberry, 2018[158]).

Since the 2008 financial crisis, citizen dissatisfaction, nationalism and populism have been rising, particularly in OECD member countries. This mounting dissatisfaction is related not only to the global liberal trade regime, Europeanisation and multilateralism, but also to large-scale migration and increasing income inequality.14 It has put OECD governments under enormous pressures. Paradoxically, de-legitimation of the liberal welfare state and re-legitimation of state-led development seem to go hand in hand.

Development thinking must also be matched by effective implementation

Since the 1950s, development thinking has been intricately linked to both a continuous flow of ideas about improving human welfare and real-world events. This included economic and financial crises, wars and conflicts, and societal transformations, in particular. It has also received inputs from development practice (Chenery, 1983[159]) from a perspective of both failures and successes.

Development thinking is not about technocratic fixes. Once it becomes thinking about development practice, it gets closer to, and becomes part of, an eminently political process. Local conditions must be thoroughly analysed and developmental objectives defined in a participatory process. But even then, the shift to development practice enters a contested territory of politics and power. What will come out of real development policy is likely to remain uncertain, despite a policy maker’s best intentions – or because of a policy maker’s own hidden agenda. In addition, some of the policy descriptions are of a higher order and not operational as stated (Rodrik, 2007[152]). They need to be translated into local realities, and operationalised in practical steps. There is an older debate on the political economy of development policy making and rent-seeking by policy makers on the difficulties of management of policy reforms and “reform-mongering” (Bhagwati (1986[160]); Hirschman (1963[39])).

Careful experimentation with different development strategies and guided improvisation have been key in today’s emerging economies (Ang (2016[161]); Lee (2018[162])). Development policy and projects are essentially policy experiments in which governments have bounded knowledge and difficulties anticipating the outcomes of their actions (Hirschman (1967[163]); Rondinelli (1993[164])). Problem-driven iterative adaptation (PDIA) in policy reforms has been a major recent contribution to this stream of research (Andrews, Prtichett and Woolcock, 2017[165]); Kirsch, Siehl and Stockmayer (2017[166]); Ang (2016[161]); Chung (2017[167]).

Instead, government officials need to zigzag to reach desirable outputs and outcomes via a series of reviewing, learning and adjustment cycles. Occasionally, as Hirschman (1967[163]) pointed out, a “hiding hand” helps to “beneficially hide difficulties” from them. In addition, the policymaking process needs to be more participatory, to overcome such bounded knowledge.

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Notes

← 1. Rostow’s 1960 study on the “Stages of Economic Growth” is subtitled “A Non-Communist Manifesto”.

← 2. The target of 0.7% of GNP was based on earlier work by economist Jan Tinbergen estimating the inflows required for developing economies to achieve desirable growth rates, and later proposed by the Pearson Commission’s Partners in Development Report in 1969.

← 3. See, for example, the World Bank’s World Development Report (1982[171]) “All farmers – small, medium, and large – respond to economic incentives. Far from being tradition-bound peasants, “farmers have shown that they share a rationality that far outweighs differences in their social and ecological conditions”.

← 4. Poverty reduction is meant in a very broad sense here, including health and education outcomes, in relation to poverty.

← 5. It should be noted that the MDGs included a goal for coherent policies in the form of MDG8 (on a global partnership for development), which implied a role for richer countries.

← 6. The income elasticity of exports measures the change in the growth of exports to the rest of the world when growth in the international economy increases in one percentage point; the income elasticity of imports measures the increase in the rate of growth of imports when the domestic economy increases its rate of growth in one percentage point.

← 7. The influence of structuralist reformist ideas drastically declined in several countries with the rise of military dictatorships, such as in Argentina (coups deposed Presidents Frondizi in 1962 and Illia in 1966), Brazil (1964), Uruguay (1973) and Chile (1973).

← 8. Many Latin American countries were heavily indebted by the end of the 1970s, in spite of the different economic policies they had adopted in the second half of the 1970s, one of rapid trade and financial liberalisation in Argentina, Chile and Uruguay, or one aimed at furthering industrialisation in Mexico and, particularly, in Brazil. The debt in Latin America was triggered by the Mexican default in 1982 and would heavily burden growth and investment in the region until the late 1980s–early 1990s.

← 9. Before the 2008 global financial and economic crisis, trade accounted for more than 60% of the region’s GDP. However, dependence on trade has declined to about 52% of GDP as a result of the slowdown in global demand and repositioning of the growth strategy for many countries towards domestic consumption.

← 10. During 2000-08, this growth was even more impressive with GDP accelerating at 7.5% and exports by 16% per year.

← 11. Hong Kong, China; Indonesia; Japan; Korea; Malaysia; Singapore; Chinese Taipei and Thailand.

← 12. Poverty data for Pacific economies (SIDS) are not fully available. Therefore, the data are an estimation, which may deviate from the real situation.

← 13. In 2014, global carbon dioxide (CO2) emissions totaled 36 Gigatonnes (Gt) out of which 24 Gt were emitted by non-OECD countries and 12 Mt CO2 by OECD countries (World Bank, 2018[129]). With some 10.3 Gt CO2, China emitted more than the United States (5.3 Gt CO2) and the European Union (EU) (3.4 Gt CO2) together. While production-based CO2 emissions in OECD countries have oscillated between 11-12 Gt since 1990, emissions in non-OECD member countries have tripled from 8 Gt to 24 Gt CO2. In 2012, some 70% of total greenhouse gas emissions (including e.g. emissions from land-use changes and deforestation) have originated in non-OECD countries. There is a difference between production-based and consumption-based CO2 emissions (i.e. emissions incorporated in international trade). In the case of China, CO2 consumption-based emissions are some 15% lower than the production-based figures; US and EU consumption figures are some 10-15% higher than the production-based figures (Peters et al. (2011[172])).

← 14. See, for example, the case of the United Kingdom: Hopkin (2017[170]); also Kriesi (Kriesi, 2014[169]) and Inglehart and Norris (2016[168]).

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