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The Wealth of Nations

Economic Development: Theory, Policy, and International Relations

by Ian M.D. Little
Basic Books, 452 pp., $22.95

The economics of “development” goes back hardly a generation. It emerged with the dissolution of the European empires following World War II, and was given stimulus by cold war politics and claims made for the Marshall Plan in reconstructing Western Europe. On the pattern of the Marshall Plan, relatively small amounts of aid over a short period, it was thought, would set the “newly emergent nations” firmly on a course toward material prosperity without the necessity for social and economic revolution. The task of development economics was to chart that course.

Ian M.D. Little describes his book as a “rather comprehensive, critical survey of development economics, including the main international economic issues that have given rise to North–South confrontation.” A fluent and clear writer, he identifies two basic approaches, one “structuralist,” the other “neoclassical.” “The structuralist,” according to Little, “sees the world as inflexible. Change is inhibited by obstacles, bottlenecks, and constraints. People find it hard to move or adapt, and resources tend to be stuck. In economic terms, the supply of most things is inelastic,” i.e., unresponsive to changes in price. The emphasis of this approach is on planning and controls. “The structuralist view of the world provides a reason for distrusting the price mechanism and for trying to bring about change in other ways…. It primarily seeks to provide a reason for managing change by administrative action.”

In contrast, “a neoclassical vision of the world is one of flexibility,…people adapt readily to changing opportunities…. Most markets usually tend to achieve an equilibrium without wild price fluctuations. In short, the price mechanism can be expected to work rather well.” Milton Friedman and his disciples could accuse Little of insufficient faith; one must, he cautions, “be on the watch for aberrations and ways of correcting them.” But for all his qualifications, Little is firmly in the neoclassical camp. In his judgment, development has been impeded where structuralist policies of planning and controls have superseded the market mechanism. His clarity on this point is one of the book’s virtues.

Much of Little’s book is taken up not with the actual economic conditions of the poor nations but with the rise and fall of structuralist theory and the subsequent rise of neoclassical theory. He attributes the success of structuralist diagnoses in dominating development economics until the 1960s to two factors. First was the general distrust of the market in the aftermath of the Great Depression and World War II. One might say that structuralism was to the developing world what Keynesian economics was to the developed. The second factor was the apparent success of the Soviet Union in transforming a backward agricultural country into a powerful industrial one; the quantitative deficiencies of Soviet growth were still in the future. (The elites of third-world countries who looked to the Soviet Union were probably not as blind to the human costs of the Soviet experience as Little suggests; they expected to avoid these costs while enjoying the benefits of planned growth.)

An early example of structuralist theorizing was the “big push” thesis, advanced by Paul Rosenstein-Rodan and Ragnar Nurkse. A coal mine, a steel plant, or an automobile factory could not be profitable in isolation because, in contrast with the situation in a developed capitalist nation, it would find no market for its product. But all three together had a potential for success that the components lacked individually. Coal could be used to make steel and steel to make automobiles. The wage earners in all three concerns would form a market for automobiles. The implication for policy was clear: the market could not do the job, for potential investors in one branch of industry could never be sure what investors would do in other branches. Planning would be necessary to provide the requisite coordination.

Little criticizes the “big push” thesis, emphasizing that pessimistic assessments of the possibilities for export led to misguided enthusiasm for this and other structuralist policies. If export is a relevant alternative, achieving a balance between complementary branches of industry becomes less important. If, for instance, steel can be exported, a profitable steel project need not be linked to automobile plants or other steel-using industries. At the same time the foreign exchange earned by selling steel can be used to pay for coal and other inputs.

Here Little is on solid ground. The actual historical record of the quarter century following World War II did not justify the pessimism of the early development economists, who were influenced by the gloomy trade experience of the period before World War II. The unprecedented growth in the capitalist economies of Europe, North America, and Japan that ended with the first oil shock of 1973 led to an equally unprecedented growth in world trade. Accordingly, the export possibilities of third-world countries were much greater during this period than economists whose expectations were formed by the pre–World War II period ever imagined. For countries like South Korea and Taiwan, exports formed the basis of a substantial increase in the standard of living. Like the proverbial general who is more proficient at fighting the last war than the next one, structuralist economists proved more skillful at predicting the previous cycle than the next one.

At the same time that the possibilities for export-led growth were underestimated, so were the problems of planning and coordination. It is not surprising that during the 1960s the market would appear more and more attractive. But this is not the whole story. Economists, like most other people, are less swayed by immediate facts than by deep-seated prejudices, and the prejudice in favor of the market goes back to Adam Smith, whose Wealth of Nations had already answered the basic question of development economics—what policies would lead a nation to prosperity?—by arguing that in a market system the invisible hand would channel to socially beneficial ends the natural acquisitive instincts that all of us harbor.

There is a striking parallel between the eclipse of structuralism as the basis of development economics and the eclipse of Keynesian theory as the basis for economic policy in the industrialized countries. Like the failure of planning and controls to promote development, the failure of Keynesian fiscal policy to create a capitalist utopia of full employment, steady growth, and stable prices contributed to the resurgence of neoclassical economics. In both cases the failure of a rival school was part of the story, but the prejudices of the economics profession against government intervention were decisive.

In retrospect it is more puzzling that structuralist and Keynesian theories ever captured as much ground as they did than that they subsequently lost it. Their success, I believe, lies in the unique characteristics of the generation of economists trained between the late 1930s and early 1960s. During this period, no doubt because of the shock of the Great Depression, economics attracted people of unusually liberal persuasion, more skeptical of the market and more trusting of the government, than has been the case before or since.

Little briefly considers alternatives to both the structuralist and neoclassical approaches to development. He professes both sympathy and skepticism for what is called the “basic needs” approach, in which emphasis is put on directly providing adequate food, shelter, education, and medical care to the poorest of the poor. This came into prominence during the 1970s when it became generally accepted (even by the World Bank) that three decades of development had done almost nothing for the poorest groups in the third-world countries. I share both Little’s sympathy and his skepticism toward this approach, but I wish he had taken his skepticism a step further. Does the lack of commitment of third-world governments to fulfilling basic needs reflect technical and economic problems or social and political ones? Is the problem a lack of resources or is it the prevailing distribution of power?

The judicious answer of course is “both.” My own suspicion is that by far the larger part of the problem is that those who have power—landlords and businessmen, generals and technocrats, politicians and civil servants—have nothing to gain from following a policy of putting basic needs first. Those who would gain—the poorest 20 percent of the people—have little power. The problem with Little’s treatment of the subject is not that he disagrees with this view. It is that he doesn’t even pose the question.

Little is more hostile to what he calls neo-Marxian views on development; he puts misleading emphasis on dependency theories that stress the limitations and distortions imposed on third-world development by the rich capitalist countries. He begins by castigating Marxists for “the manner in which they manipulate language,” a fair judgment on its face. But if Little is implying that the language of other economic schools is free from such manipulation, he might recall his rebuke of 1950 to his neoclassical brethren for using the term “optimality” to describe situations in which, though nobody could be made better off except at someone else’s expense, the income distribution might be perfectly horrible.1 Neoclassical economists who use such words as “efficiency,” “welfare,” and even “Pareto optimality” (Little’s own substitute for “optimality”) are hardly in a position to complain of distortions of the neo-Marxist, who sees the world in terms of “exploitation,” “unequal exchange,” and the like.

Little characterizes the neo-Marxian view of development as “a tissue of truth, half-truth, and misleading insinuation.” Unfortunately, this is equally a description of his own account of the neo-Marxian perspective. One example must suffice: he dismisses the notion that multinational corporations exercise undue power in the third world with the observation that any less developed country, “however tiny, is sovereign over its own territory.” As Little himself recognizes, however, a multinational corporation is not without resources to fight back. It “can try to organize some punishment through the United States Government…or privately through its friends in the business world.” Little apparently fails to appreciate the force of this qualification. Salvador Allende did.

Little is less concerned with history than with doctrine, less with development itself than with the vagaries of the theories about it. Not that he ignores history, however. He gives an informative account of the post–World War II evolution of international trade and financial arrangements, although unfortunately this ends in 1980, too soon for the huge Latin American debt of recent years to be a major concern. By contrast, his historical treatment of the internal development process itself is spotty at best. Questions that seem to me central—land reform, income distribution, and ecology—get little attention, about as much space as the problems of shipping.

Little’s enthusiasm for Taiwan and South Korea makes the absence of serious treatment of land reform all the more surprising, for, along with Japan, these countries provide the only instances of successful land reform in the “free” world. (In all three of them the reforms were imposed by outsiders after World War II.) Is it pure coincidence that the growth rates of these countries have been among the highest in the capitalist world and their income distributions among the most egalitarian? Once again, Little does not pose the question, much less examine the relationship between growth and income distribution.

  1. 1

    I.M.D. Little, A Critique of Welfare Economics (Clarendon Press, 1950).

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