How does political and economic development occur? Why have some regions been able to develop while others remain stagnant? Different theories have been offered to explain the disparity, divergence and origins of development. This essay will demonstrate that all three theories (Modernisation, Dependency, Growth With Equity) offered to explain development have been inadequate. Modernisation theory states that a nation must develop in a linear sequential progression from an agricultural to an industrial society which follows Western Europe’s development path and adopts its institutions and values. The theory is partly correct in recognizing that particular political and economic institutions are critical to development but I argue it errs on how such institutions should be developed because it often adopts a top-down approach and places the West as the central agent responsible for bringing change. The Dependency Theory claims that development of First World countries is a result of the exploitation of Third World countries through the extraction of their raw materials. However the theory I will demonstrate ignores historical economic data showing that raw materials exported from Third World countries were a small fraction of total international trade, particularly trade. The theory also fails to explain why Western Europe was the first to industrialise which is a crucial part of modern economic development. The third theory is Growth with equity which I argue is not a theory but more of a description of how East Asian economically developed: it states that capitalism is used to generate surpluses which are distributed to other sectors and that the state plays a direct role in guiding industry. The theory is flawed in two ways because it fails in explaining how to firstly generate the needed capitalism and secondly I will argue that industrial policy of East Asian states has been shown not to have been a determinant of the success of their industries
Development in historical context
For most of human history, a vast majority of people (84%), lived in what we would define today as extreme poverty (less that $1/day) with very little economic growth over time (Roser & Ortiz-Ospina 2018). All that changed with the beginning of the industrial period which brought about structural economic changes never seen before in human history. From 1820 to 1990 percentage of people living in extreme poverty declined from 84% to 24% even though world population increased 7 fold (Ibid). In terms of economic growth: in 1820 GDP per capita – which measures the output per person over a year – was $1230; in 2015 GDP per capita was $14700 (Roser 2018). A more than ten fold increase in output per person occurred in the last 200 years which brought a radical change in the living standards of the world. However, economic growth and development throughout the world has not been equally distributed and has not occurred in a uniform pattern. Some countries (such as Western European and North American countries) developed exceptionally well while others (African and Latin American countries) remained behind and stagnated. The East Asian countries such as Japan, Singapore, South Korea managed to catch up and grow their economies substantially between 1960 and 1990; the highest economic growth rates occurred in the East Asian region during that time (World Bank 1993: 1).
The unequal pattern of development has led to scholars classifying the developed regions as First World countries and the underdeveloped or developing regions as Third World countries. Third World refers to countries in Africa, Asia, Middle East, Latin America and the Caribbean; First World refers to Japan, Western Europe and North American countries which industrialised and liberalised their states first (Handelman 2011: 3).
Third World countries are defined by a number of features that are considered underdeveloped relative to first world countries. These features can be categorised as political, economic and social. In the economic category, Third World countries have low per capita incomes and high poverty rates although in some Third World countries there have been significant changes over the past four decades. In Japan and the four East Asian Tigers (South Korea, Singapore, Hong Kong, Taiwan) poverty dropped from 58% in 1960 to 17% in 1990 (World Bank 1993:4).
Figure 1: Average real GDP per capita across regions (Roser 2018)
Figure 1 shows how big the disparities are in economic output (GDP per capita) between the various regions of the world. Africa is at the bottom and shows no signs of progressing to levels anywhere comparable to Europe. Low GDP per capita is correlated with low social outcomes. Third World countries will often have poor health outcomes and low life expectancies: USA has life expectancy of 79.6 years while Nigeria’s (A Third World country) is 46.5 years (Handelman 2011:10).
Such disparities and divergences between First World and Third World countries beg for an explanation and that is where various theories have been developed to account and explain development. There are three theories offered to explain development: Modernisation Theory; Dependency Theory; and Growth with Equity Theory.
Modernisation as a theory emerged in the 1950s and 1960s and (Matunhu 2011:65) considers it to be rooted in capitalism. It emerged after European colonization had ended when questions about how newly independent states should develop their economies were asked (Handelman 2011: 18). Modernisation although consisting of various varieties has a core set of defining tenets: (1) Development is a linear sequential process whereby an economy undergoes structural changes from an agricultural state to an industrial state. (2) Third World countries must follow and replicate the development path that the Western countries took (Matunhu 2011:65). (3) Development means adopting modern cultural values as well as modern economic and political institutions (Handelman 2011:18). The first problem with Modernisation is with its assumption of a linear sequential progression in development because for most of human history high sustained economic growth was non-existent and in fact the modern period is a rarity and novelty. It could not have been predicted or seen as a natural linear progression occurring over thousands of years. Figure 2 illustrates how the change that occurred was simply unprecedented and far from a gradual, incremental and sequential progression.
Figure 2: GDP per capita of USA, UK and France (Roser 2018)
The second problem is – what are modern values? (Handelman 2011:18) lists modern values as: Judging others by universalistic standards rather than by ethnicity, class or gender; valuing science and technology; being aware of issues beyond the family, neighbourhood or village. Modernisation also suggests that the way in which a society changes its traditional values to modern values is through mass education, urbanization and mass media spreading modern values (Ibid). The assumption that these modern values when present in citizens will lead naturally lead to development is highly questionable at best and untenable at worst. Scholars such as (Model 1988:367) argue that the industrial-preindustrial dichotomy in values is overdrawn and that some traditional values have actually helped East Asian immigrants in America to thrive in capitalistic society. (Model 1988:368) also states that current research indicates that all immigrants drew from their pool of traditional values those which remained economically useful. This conclusion is consistent with what researchers found that there is no correlation between modern values and likelihood of economic and political development (Handelman, 2011). Another problematic feature of the modern values diffusion theory is that the particular modern values emerged out of particular historical and social contexts which led to those particular values. The values that came to define Europe during the 18th and 19th century took centuries to form, develop and be articulated. How feasible and sustainable will they be if they are simply imposed from the outside in rather than emerging organically? (Matunhu 2011:67) criticises modernisation for its oversimplified and deterministic model of change. Modernisation sees the west as a central intelligent agent with full and sufficient knowledge on how to bring about change in any society regardless of the internal complexity of that society.
What might be a plausible explanation for development is the existence of modern economic and political institutions. The important institutions are that of property rights and rule of law; and political rights (Dollar & Kraay 2000). (Dollar & Kraay 2000) found that: firstly, rule of law or property rights are highly correlated with per capita GDP growth. Secondly, Poor countries with property rights grow rapidly and that thirdly a positive impact in foreign aid is conditional on the quality of economic institutions present in the country. (Adelman 1995:201) also found that institutional readiness in the form of: well developed market institutions; functioning land and labour markets; capital markets was crucial to economic development. They also found that between 1950-1973 developing countries with highest rates of institutional development had high per capita GNP growth rates of 3.3% (Ibid).
The obvious question that arises once we have identified institutions that are correlated with economic growth is why and how do those institutions emerge? Should it be a top-down approach whereby expert agents design and implement the relevant institutions which will bring about the desired development? If that is the case then the same objection against modern values that Matunhu raised equally apply – how sustainable and effective will institutions imposed outside-in rather than emerging organically and socially from society itself be? The challenge raised by Matunhu has even more force once we ask -what is an institution? (Hillmann 2013:254) offers some definitions of institutions such as “rules of the game in society”; and “’the sets of working rules that are used to determine who is eligible to make decisions in some arena, what actions are allowed or constrained, what aggregation rules will be used, what procedures must be followed, what information must or must not be provided, and what payoffs will be assigned to individuals dependent on their actions’”. Institutions are the outcome of complex social interactions and negotiations largely determined by the society’s values over a long period of time– it is difficult to see how an imposed institution will be effective if it is not underpinned and determined by the people who live by the rules of the game in that society. It seems to be a contradiction in terms that the “rules of the game in society” can be imposed on people who must follow them without consenting or seeing the value of such rules.
Matunhu’s major argument against modernisation is that top-down approaches have failed and will continue to do so. Strategies used by well-intending agents such as IMF, World Bank and the United Nations, in the form of development aid have failed in bringing about economic growth and reducing poverty (Matunhu 2011:67). (Easterly 2008:25) surveyed the academic literature on the impact of foreign aid and found that it has “zero effects”. The particular case of foreign aid reflects the general case of other top down intervention strategies in Africa that they have largely failed to produce the intended results (Easterly 2008:105).
The Dependency theory emerged in the 1960s and 70s from Latin American and North American Scholars as a response to what they perceived as inadequacies and untenable presuppositions in Modernisation theory (Handelman 2011:21). Dependency theory consists of the following tenets. Firstly, it states it is impossible for the Third World to follow the same development path that the First World followed because their development altered conditions for others (Ibid). When Britain industrialised, it faced no competition from other nations and therefore nations today when industrialising face stiff competition which can harm them. This reasoning might underlie why nations have protected their industries with tariffs and import quotas during their early periods of formation; Latin America during its Import Substituting Industrialisation protected its industries with those policies (Handelman 2011:290). (Adelman 1995:192) found no correlation between tariffs and industrialisation. Germany and Russian had high tariffs during their industrialisation, but Russia failed to achieve what Germany did. Japan on the contrary had low tariffs but successfully industrialised in a period where First World countries were already well developed. In addition to Japan the East Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) successfully managed to industrialise between 1940 and 1970 when the First world was already well developed (Handelman 2011:292). Thus the first tenet of dependency theory is already implausible leaving unexplained why development post western industrialisation was at all possible for certain countries.
The second premise of dependency theory is that Third World countries, particularly African countries, are poor because of the actions of European expansion, colonization and industrialisation (Matunhu 2011:68). Colonization’s aim was to exploit African resources (the periphery) and use the surplus value and profits from African raw materials to grow the crown land (core). Therefore, the theory holds that Europe’s development was dependent on Africa’s underdevelopment and therefore Africa cannot follow the same development path. There are several problems that make this premise untenable. Firstly, looking at Africa’s total contribution to the volume of world exports during 1876-1880 it was only 2.2% and increased to 3.7% by 1913 (Graff, et al. 2014:84).
Figure 3: The Great Divergence: income per capita gaps 1775-1913 (Williamson 2008:359)
Figure 3 shows how the divergence in economic output between Africa and Western Europe by 1775 was already wide and continued increasing over time and yet the raw materials exported from Africa were only 2.2% of total world exports by 1870. Another fact undermining dependency theorists is that by 1880 the colonization of Africa was very limited with about 80% of it under the rulership of her own polities (Boahen 1985:1). Therefore, the exploitation of Africa’s raw materials does not explain Western Europe’s development; Europe’s uneven development and why non-colonized regions like Asia also remained undeveloped. What the dependency theorists also ignore is that most of the primary products (62%) exported to industrialising countries by 1876 came from Europe and North America with 38% coming from the rest of the world. Secondly, within Europe itself there were countries that were never colonized that remained at the same level of development and income per capita as African countries; Greece, Russia, Romania (Graff, et al. 2014:126) and therefore their underdevelopment cannot be explained by dependency on the periphery.
In addition to that the dependency theory also cannot explain why the Industrial Revolution occurred in England and not in other places. We know that at the end of the 18th century the UK had the highest productivity in the agricultural sector which then allowed it to sustain an industrial sector with the surplus from agriculture (Lewis 1977: 7). When the Industrial Revolution it did not build an industrial sector from scratch but rather transformed and radically improved the existing industrial sector- it is almost as if a critical mass had been reached which then led to the revolution.
A further point to note is that within Europe itself in the centuries preceding the Industrial Revolution (1300-1800) the real incomes and GDP levels of the UK saw continuous growth. While the real incomes and GDP levels of countries such as Italy, Holland, and Portugal declined over the long run (De Pleit and Van Zanden 2016: 390). Therefore the Industrial revolution in the UK was the culmination of a process that was already occurring for centuries before. The reasons for the growth during this time according to (De Pleit and Van Zanden 2016: 406) are increases in human capital formation in countries such as the UK which were not present in other countries.
Dependency theory has also claimed that economic growth increases concentration of wealth and income into the minority and doing little for the poor (Handelman 2011:24). However, such claims do not take into account actual historical data. Extreme poverty (living on $1 per day) was a pervasive and general feature of human history: 84% of the world in 1820 was in extreme poverty and that number declined to 24% in 1990 as a result of the modern growth period and industrialisation (Roser & Ortiz-Ospina 2018). Economic growth has been able to significantly alter the living standards of the majority of the world although much still remains to be done.
A fourth source of problems for dependency theory is that it has been too pessimistic in proposing that until countries isolate and completely cut their ties with the core First world countries then development is not possible. (Handelman 2011:25) states that East Asian Tigers were able to industrialise while remaining linked to the First World countries. Thus, dependency theory offers no viable explanation on how development has actually occurred throughout history.
Growth with Equity Theory
The third paradigm which has attempted to explain how development occurs is called growth with equity. It is unclear to me whether Growth with Equity (GE) is really a coherent theory with a set of core premises rather than a description of what occurred in East Asia during its development. Growth with equity as a development strategy states that capitalism is used to generate economic growth which is then redistributed to less developed areas in a country. This allows urban and rural areas to grow relatively equally or at least without large income gaps (Labuschagne 2004:23). The question left unaddressed by GE is how to get capitalism generating economic growth in the first place because you need growth to be able to distribute it equitably. GE does not then seem to have any advantage over modernisation in explaining how to get development going in the first place.
(Handelman 2011:293) discussing GE focuses on explaining how East Asian countries were able to achieve equitable distribution: they had equitable farmland distribution; and they had no subsidies for basic crops. He also thinks that their industrial policy was responsible for more equitable income distribution. Labour intensive industries used cheap labour and as the exports increased the demand for labour also increased resulting in higher wages. The higher wages attracted workers from rural areas which drove up wages in rural areas because of falling supply (Ibid).
There does not seem to be consensus on how big a role industrial policy played in the development of East Asia. (World Bank 1993:21) argues that little evidence can be found that industrial policy influenced the structure of industry and productivity. They found also that the promotion of specific industries did not work; however policy focusing on export industries was more successful (Ibid). Another problem with industrial policy as an explanation for development is the assumption that there is one single East Asian model when eight of the high performing countries used different and changing policy instruments over time. The East Asian Tigers used industrial policy as an incentive to promote export industries which seemed to help develop their export industries. However, the newly industrialised countries of South Asia came later and also developed export industries without the same industrial policy and export promotion but rather by reducing import protection (World Bank 1993:359). (Lee 1996:402) in their study on the effects of tax incentives, industrial policy, and trade protection in South Korea during the period 1963-1983 found the following. Firstly trade protection did not increase productivity in protected industries. Secondly industrial policy did bring structural changes however these were not correlated with productivity growth. Therefore empirical results do not demonstrate that industrial policy and intervention led to the growth of export economies of East Asian tigers and therefore cannot be put forward as an explanation for their economic development.
All three theories offered to explain how regions originate and sustain political and economic development have been inadequate, although some fare worse than others. Modernisation theory suffers from its top down approach whereby the First World is the agent that will be able to rescue Third World countries from their poor conditions either by introducing the right institutions, values, policies or foreign aid. The institutions, values, policies it has identified indeed have been correlated with economic growth and development but the problem remains in whether a top down intervention over the long run is sustainable. This is illustrated by the fact that the First World’s own industrialisation was not centrally planned by experts who monitored the economy and implemented the right policy mix – rather it emerged spontaneously and was unprecedented in history. Dependency theory fares the worst because it simply ignores crucial data that completely undermine its premises. The great divergence in income per capita between First and Third World countries was already in place by 1775 and cannot be explained by the exploitation of the Third World by First World countries. The premise that poverty is a product of capitalism ignores the prevalence and persistence of high poverty rate in pre-industrial phases which only came down during the last 200 years. As a theory it offers no plausible explanation. Growth with equity I argued is more a description of how development occurred in East Asian countries rather than a theory. The idea that capitalism in one region generates surplus and growth redistributed to other areas thereby lifting up the entire region still leaves unexplained how to get the initial capitalism going in the first place. So where to from here? I honestly do not know but my thinking is that the right institutions are needed and that topic on its own is a fascination and complex one that would require a bit more digging into. A quote from developmental economist (Banerjee 2008 cited in Easterly 2008:8) eloquently expresses my current sentiments:
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