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Thursday, June 1, 2006

The History of “Underdevelopment”

Underdevelopment Theories Have Generated Disastrous Policies

Perhaps the most important feature of the modern world is its sustained, intensive economic growth. This produces most of the other distinctive features of modernity. Although there were earlier episodes of such economic efflorescence (to use Jack Goldstone’s term), it was only with the “industrial revolution” of late eighteenth-century Britain that it became a permanent and prominent feature of the world economy. Following the advent of this transformative process, questions soon arose elsewhere. The first was that of how to achieve the same kind of growth and dynamism. Soon this led to further questions: why other parts of the world did not show these qualities and why their attempts to do so ended in failure.

The debate engendered by these questions and the answers given has been one of the most important of the last 200 years. Known as the “development debate,” it consists of such topics as the nature and causes of economic development and the reasons it occurs at some times and places but not others. This is not simply an academic debate. It has obvious implications for public policy and, through its impact on policy, for the lives and circumstances of ordinary people.

Since the early 1950s much of this debate has been dominated by “dependency theory” and its offshoot “world system theory.” Developed by several people, this was a theory that explained the economic success or failure of different parts of the world by the nature and structure of the economic relations among them. The argument is that the relations of trade between different parts of the world are inherently exploitative and inevitably create inequality and lack of development in certain places. Certain parts of the world (the “core”) dominate high technology and high profit activity such as manufacturing. The rest (the “periphery”) is left to produce raw materials and primary products.

This means that while some parts are “developed” and experience economic modernization, other parts are unable to do so and thus remain “undeveloped.” They may even experience “underdevelopment” in which their level of prosperity and economic organization actually goes into decline. The advantage of this theory is that it leads to a focus on the world as a whole, rather than concentrating on “national” economies that have no real existence. Its disadvantages are that it misunderstands much of what it tries to explain and, even more serious, that it generates policy proposals that are disastrous. It leads to a series of policy proposals—including import substitution, a ban on foreign investment, and protectionism combined with extensive state ownership—that have failed wherever they have been tried.

Why though did this analysis prove so popular? It identified and offered an explanation for something that conventional theory either ignored or had problems explaining: the way in which the diffusion of economic modernization, which had been going on steadily up to the early twentieth century, suddenly stopped and even went into reverse. Following the appearance of economic modernity in Britain, other parts of the world also underwent a similar transformation. By 1910 these included Belgium, the Netherlands, northern Italy, Germany, the United States, Japan, France, Sweden, Denmark, Russia, Argentina, and Uruguay. Not all these cases involved industrialization and a shift toward manufacturing: this had not been the case in France, nor in places such as Denmark or Argentina, which had become highly efficient producers of agricultural products.

However, after 1914 the process came to a stop. As Peter Drucker pointed out, between 1910 and 1970 no new country joined the list of “developed” nations and some (notably Argentina) fell off it. Instead a large part of the world appeared unable to start the process of sustained growth. Dependency theory offered both an explanation for this and a prescription for resolving the problem. In fact, there was a much simpler explanation, which history provided. This was that the check to the spread of modernization was caused by a combination of two factors. The first was mistaken economic policy by governments, particularly those actually intended to promote growth. The other was macro-level disruption of the world economy during the central decades of the twentieth century, which slowed down the processes that had led to the spread of modernization in the nineteenth century and affected even those countries that had not adopted wrongheaded policy themselves.

During the nineteenth century not every attempt at modernization succeeded. Besides the “hits” mentioned earlier, there were a number of “misses.” These typically involved attempts at precisely the program of state-led and autarkic industrialization advocated by the dependency theorists. Examples of this included Paraguay (under Dr. Francia) and Egypt (under Mehmet Ali).The growth of the world economy as a whole at this time and the spread of economic modernity were driven by interlinked processes, all of which operated on a global scale. These were a rise in the volume of trade, both absolutely and as a relative proportion of total activity; a growth in investment outside the area of capital formation; a sharp increase in the geographical mobility of labor; increased economic integration and specialization; and rapid technological innovation and diffusion of new technology—interestingly, the last was marked by a weakening of the status of intellectual property rather than the reverse.

These processes both stimulated and were in turn driven by the economic and social transformation of ever larger areas of the planet. So dynamic had the world economy become by the 1900s that some fortunate parts of the world were “developed” despite mistaken policies by their ruling elites.

Stopped by War

However, this dynamic and benign process was stopped by World War I and did not subsequently resume. The war seriously disrupted the international monetary and trade system. Even worse were the political effects. Everywhere there was a move in the direction of state control and economic nationalism. This reflected both the influence of mistaken ideas and the interests of elites whose position was threatened by economic change. A series of policy errors brought about an unprecedentedly severe slump and then prolonged it, with disastrous effects on worldwide growth and trade. This was felt most severely in parts of the world that had just started the process of modernization before 1914. The two classic cases were China and India. Recent research shows that both China and India were experiencing rapid economic development between 1870 and 1914. Had this continued, both would have joined Japan in the “developed” club by the 1930s at the latest. However their development was cut short by the disasters of 1914 to 1945.

The paradox is that the prescriptions for resolving “underdevelopment” actually made the problem worse. India is the classic example, with the policy of successive administrations from Nehru onward proving completely unsuccessful in reigniting the rapid growth India had enjoyed during the “Belle Epoque.” However, today the arguments of the dependency school are discredited.The reason is simple: since the late 1980s the process described above has resumed and several governments, above all those of China and India, are no longer obstructing it. Consequently the last 16 years have seen the largest decline in absolute poverty ever. For economic historians the years between 1914 and 1990 increasingly look like a tragic detour or diversion from the path of development. However, some still see the process as undesirable, and many elite groups still frantically try to control it in their own interests.

  • Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.