Economic Development Strategies 1950s - Essay Example

? (Assignment) ECONOMIC DEVELOPMENT STRATEGIES 1950s INTRODUCTION The Post World War II global economy, especially the downturn of European economy intensified the urge for some well-framed economic development strategies across the globe. Although many economists had introduced many economic policies for rebuilding the economy, none of them could vie with the adverse situations. Among those theories, ‘balanced growth’ (Nurkse 1953), ‘take-off into sustained growth’ (Rostow 1956), and ‘critical minimum effort thesis’ (Leibenstein 1957) are regarded as the three major strategies for economic development that were proposed in the 1950’s. 1 Balanced growth (1953) The theory of balanced growth was proposed by Ragnar Nurkse in 1953. This theory was framed on the fact that newly independent economies could not achieve faster economic development due to the rapidity in basic commodity exports. The imported industrial commodities were the only alternatives which could have expanded the destroyed economies. In other words, the balanced growth or simultaneous enlargement of all industries was the most appropriate way to stimulate the economic growth of underdeveloped economies. At the same time, this type of growth necessitated the accumulation of large resources at one time. According to Nurkse (1953), “poor developing economies were characterized by a large surplus of labour employed at zero marginal cost in the traditional sector” (cited in Hayami, Hayami and Godo, 135). Nurkse’s model failed to provide adequate alternatives for the development of newly independent economies. Take-off into sustained growth (1956) Rostow (1956) defines Take-off into sustained growth model as, “the interval during which the rate of investment increases in such a way that real output per capita rises” (cited in Crouzet, 153). He also proposes certain conditions for the application of this theory. Rostow says that the proportion of net investment to national income must rise from 5% to 10% in order to satisfy the terms of the theory. Although Rostow connected his theory with the events occurred in Great Britain and several other countries, the theorist could not get any support from the available quantitative data (153). Critical minimum effort thesis (1957) Harvey Leibenstein (1957 cited in Gupta, 176), in his Critical Minimum Effort thesis, says that initial stimulants to development must possess a critical minimum size in order to achieve sustained growth. He continues that change in the value of a set of variables causes the economic backwardness and it possesses a certain degree of steadiness. Since the economy is subjected to frequent shocks, the actual value of the variables will always be different from that of equilibrium values. Although these stimulants have the capacity to raise the per capita incomes, it is not possible in economically backward regions due to the weakness of the magnitude of these stimulants. 2 The export-oriented industrialization strategy was introduced as a technique to reframe the underdeveloped economies. The essence of the theory is that large scale production and thereby exports would enhance the economic growth of the country. Hence, developing countries too much depended on the exports of a few primary products in order to bridge the wider gap with advanced economies. Dijck, Linnemann and Verbruggen (3) tells that as a result of this strategy, more and more foreign investors were attracted towards the country so that these developing nations were compelled to arrange all favorable investment situations for the foreigners. It caused severe challenges to governments as they faced with huge difficulties in implementing the planned budgets and other policies. In addition, the governments lost huge amounts on possible receipts as a result of unfavorable incentive schemes. Similarly, the export-oriented industrialisation caused curtailment of labor wages and it led to political oppression. This strategy influenced the developing nations to depend too much on the foreign modes of trade and investment policies. Such a situation adversely affects the self-assurance of these countries. As a result of overdependence on foreign firms, the developing nations failed to design improved technologies in the field of manufacturing as well as agricultural sectors. Dijck et al (4) point out that export-oriented industrialization produced unskilled labours in the developing economies since their workers did not get any opportunity to engage in complex or varied job activities. At the same time, the agricultural labours did not get sufficient benefits from their cash crops since the foreign traders directly dealt with it. Similarly, the dominance of foreign firms had restricted the host countries from shifting toward more capital intensive sectors. The export-oriented industrialisation strategies caused the increase in export activities of manufactured goods and it forced the host countries to depend on the import of capital goods. This type of export regimes had no linkage with other sectors of the economy and hence it did not provide any assistance for the overall development of the host countries. In short, the export-oriented industrialisation strategies contributed to the further decline of domestic markets of developing economies. 3 Capital accumulation is the process of acquiring additional capital in order to promote productive activities. Capital accumulation is necessary for any organization so as to meet additional funds for further expansion. The rate of capital accumulation for developing nations becomes the hot topic for debates in international conferences. Although capital accumulation is considered as the best method for further growth, some economists are of the opinion that extensive rate of capital accumulation will destroy the balance of developing nations’ economies. The opponents argue that economic growth is basically depended on the trends in population growth and technological progress. The Solow’s economic growth model or Solow-Swan neo-classical growth model strongly supports the opponents of intensive capital accumulation theory. The Solow’s model suggests that the economic growth must be separated from increase in inputs such as humans and capital. In order to defend himself, based on his model, Solow computed and pointed out that four-fifth of the US growth per work were attributed to high-quality technological applications rather than mere accumulation of abundant capital resources. Therefore he argues that excessive capital stock diminishes the rate of returns. On the other hand, endogenous growth models hold the view that augmented capital acquisition will assist the economic growth of the countries in its long run. The supporters of this model argue that capital is a necessary factor which is capable of stimulating productive activities in an economy. Naturally, the developing nations need large resources of new capital so as to meet the national economic interests. In my opinion, it would be better to promote consumption-based strategies in order to bring forth greater growths. The excessive production toward capital goods might not contribute to the nation’s economy if the produced goods did not get adequate markets. However, too much concentration on production causes will certainly decline the trade activities. Similarly, if the nation is driven to face any unforeseen contingency, they will meet huge losses on the ground of excessive production. It will be of no use if the produced goods are not adequately consumed. On the other hand, the consumption-based strategies would rebuild the traditional concepts of spending and debt and thereby support the new levels of production. 4 Jacob Viner was the famous Canadian born economist who has contributed a lot to the field of economics. Viner strongly criticised the Keynesian Revolution theory that was proposed by John Maynard Keynes. The Keynesian theory was proposed to explain the various factors that affect the employment levels in the nations’ economy. From Keynes’ point of view, demand is the economic catalyst which fixes the levels of employment within an economy. Hence, he argued that government must take necessary actions to increase demand and thereby promote employment opportunities. The theory of Keynesian Revolution had brought as a substitute to neoclassical economics. Viner criticised that Keynesian theory had only an effect in the “short run” whereas the neoclassical theory would produce good results in the long run. It is opined that Viner’s criticism toward Keynesian model of development seems thoughtless. Keynes argued that employment was a function of demand but not supply and this concept had considerable importance in his ages. It is a clear fact that there would be large employment opportunities if and only the prevailing market conditions has an increased demand for goods. When the demand of commodities becomes higher, the manufactures wish to produce more and gradually it will lead to the increase of employment opportunities. The crises associated with high development theory were a major feature of 1950’s. These crises were emerged as a result of methodological failures of the model. Since there was a ‘specified framework’ for the formulation of development theories in 1950’s, economists failed to bring their innovative views. Te Import Substituting Industrialisation (ISI) was another policy came up in 1950’s, which emphasised on the local production of industrialised goods in order to reduce the dependence on foreign countries. This policy caused the loss of large employment opportunities arising from foreign ventures. Similarly, the developing and underdeveloped economies had faced huge losses on the ground of foreign currency investment. Moreover, this strategy prevented the developing economies from getting improved technical assistance. Anyhow, many of the thoughtless policies emerged in 1950’s were failed to meet their ultimate objectives. Works Cited Crouzet, Francois. Britain Ascendant: Comparative studies in Franco-British economic history. New York. Cambridge University Press. 1990. Dijck, Pitou van., Linnemann, Hans and Verbruggen, Harmen. Export–Oriented Industrialization in Developing Countries. Manila. NUS Press. 1987. Gupta, K.R. Economics of Development and Planning. New Delhi. Atlantic Publishers & Distributors. 2009. 4th Edn. Hayami, Yujiro and Godo, Yoshihisa. Development Economics: From the poverty to the wealth of nations. New York. Oxford University Press. 2005. 3rd Edn. Read More