The Economics of Underdevelopment — a Tentative Appraisal Arun Bose

SPECIAL NUMBER JULY 1959 THE ECONOMIC WEEKLY

The Economics of Underdevelopment — A Tentative Appraisal Arun Bose

In the course of the past fifteen years or so, a separate branch of economic theory has emerged, which could roughly be labelled the economics of underdevelopment. The literature is already voluminous, still growing fast, and riddled with debate. But there is no "settled body of doctrine" yet in this field. Any "appraisal", therefore, needs must be tentative. It is the writers contention, however, that this new literature has discovered, as it were, a terrain neglected by explorers of the past and lighted up many dark corners. Moreover, by putting together these new ideas, after suitable reinterpretation, we can say that a useful conceptual frame-work is about to emerge.

I The second question requiring an derdevelopment equilibrium trap", answer is: compared to what desir in contrast to the advanced coun Underdevelopment Equilibrium able level of development are the tries which develop spontaneously THE point of departure is the con backward countries underdeveloped? automatically. The former are cept of "underdevelopment equi The answer explicit or implicit in caught in a "vicious circle" while librium" which, it is almost unani these writings is: compared to the the latter face no such problem. The mously recognised, afflicts a large level of development achieved by gap between the advanced and the number of contemporary societies. the most advanced countries. Of backward countries has been con course, semantically, even the most stantly widening. Consequently, The first idea that has emerged is advanced countries are "underde judged at any time by the level that all major countries have a po veloped" in the sense that they are reached by the advanced, the back tential for development: those that developing rapidly and have a fur ward countries remain "underdeve have not developed, but can, are ther potential for development. Mr loped". The usefulness of this idea "underdeveloped". Stated in this way, M H Dobb is perhaps the sole ex- is fairly clear, as far as the problem of course, the idea is imprecise, and ception, but even he has not built of the "widening gap" and "under begs two questions. in the implications of his declining development equilibrium" is concern- One question is: how is the "level rates of growth in advanced capital ed. More questionable is the impli of development" to be measured, at ist countries Into his framework of ed absence of "vicious circles" in least "ordinally", if not "cardi analysis of the economics of under advanced capitalist countries and nally"? There are difficult problems development (Maurice Dobb: 'Some the assumption that development here, encountered also in other Aspects of Economic Development', there is completely ''automatic", branches of economic theory, e g. First Lecture). The majority as requiring no deliberate, purposeful modern welfare economics and mo sumption is brought in without intervention by "non-market forces". dern academic theory of a socialist proof, evidently because it is con However, if we assume this merely economy. Some writers have laid sidered to be a reasonably safe ex to imply that deliberate "Keynesian remedies" have become almost an almost fatal stress on these pro trapolation of current trends. Even "automatic" in advanced capitalist blems (Bauer & Yamey: 'The Eco to sceptics this procedure may per countries in recent years, on ceteris nomics of Underdeveloped Re'gions'). haps be justified as a valid assump paribus principles mentioned above, One does, however, get the broad tion for the time period in which this assumption may perhaps be impression, that most writers work the problem of "internationally allowed to pass in the present con on the assumption that the stand backward areas" is expected to be text. ard of living (in terms of average solved, whatever may hold in the per capita income, however measur longer run. But a more satisfactory Contrast is also drawn often bet ed) and the average level of tech justification is perhaps the need for ween "underdevelopment equilibri nique is a useful rough-and-ready some kind of a "division of labour" um" in backward countries and measure of the level of development between the theories of development "self-sustained growth" in advanced for the kind of analysis required in of underdeveloped economies on the capitalist countries (W W Rostow: this branch of theory. Average per one hand, and of the development 'The Take-off into Self-sustained capita income is taken to be a good of developed economies on the other. Growth', The Economic Journal, indicator of the living standard of At the present stage of develop March 1956). This, too, is a little the masses, though Professor Viner ment of these theories, each can misleading. Even those who employ apparently strongly disagrees (Jacob perhaps better start with ceteris this term do not mean by it "autar Viner: 'International Trade and paribus assumptions concerning the kic growth" implying complete ab Economic Development' Ch VI). other (which is what is usually sence of international economic Most students would probably agree done). interactions (which would be utterly that such a rough measure is all 'Underdevelopment Equilibrium Trap' unrealistic, even for the Soviet that is needed. It would he a pity model). if the interesting results of this kind The point seems to be—and this of analysis were to be thrown on is methodologically extremely con Most writers do, however, tend to the scrap heap simply because of venient—that the underdeveloped ignore the role of interaction bet this initial hurdle, countries remain caught in an "un ween the advanced capitalist coun- 986 THE ECONOMIC WEEKLY SPECIAL NUMBER JULY 1959

tries of today and the backward level of prosperity". He rather re Ill countries at the time of the indus gretfully concedes, however, that trial revolution, which took place "where agriculture is prosperous The "Ego-Focused" Image of either directly, as in the case of not only do tertiary or service indus Western Industrialisation England or indirectly, as in the case tries tend spontaneously to grow, How exactly did the development of the USA. Apart from Marx, but there is a widespread tendency of the advanced capitalist countries important exceptions among mo to use disposable surplus income de arrest the development of the back derns are, of course, Mr Dobb (op rived from agricultural prosperity to ward? cit) and Mr M Bronfenbrenner subsidise uneconomic urban indus ('The Appeal of Confiscation in try". The result is that the overall The first is obviously by imposi Economic Development', Economic level of per capita income, while tion or imitation of Western ca Development and Cultural Change, still comparatively high, is lower pitalist institutions and private en April 1955). The excuse for ignor than it would he if urban industry terprise. Imposition was obviously ing these interactions is perhaps the were not artificially stimulated important wherever there was belief that the economics of the in (Jacob Viner, op cit). On this view, complete political control by Western dustrial revolutions of the nine the cause of underdevelopment is powers. But even where political teenth century really do not belong not the preponderance of non-agri- control was slack or indirect, there to the economics of underdevelop cultural activity, but the absence of was in operation a powerful "inter ment (which is concerned with the "prosperous*' agriculture, or perhaps national demonstration effect" of recent past and the present). And prosperous agriculture frustrated by what Professor Hirschman has re in recent times, the development of the "craze'' for industrialisation cently called the "ego-focused", the advanced capitalist countries (although the latter pattern is ad over simplified Schurnpeterian image has been "self-sustained" in the mitted to yield a ''comparatively of industrialisation in the advanced sense that mutual inter-dependence high level of per capita income"). capitalist countries, ( Albert O between the advanced capitalist Few writers, however, follow Pro Hirschman: 'The Strategy of Eco countries has been more important fessor Viner on this particular point, nomic Development".) This was na than their economic relations with and for reasons of space we shall tural because, neglecting variations the backward countries. Once again, omit a refutation of this view on which can be neglected as unim therefore, the ceteris paribus prin obvious realistic grounds, noting at portant for bringing out the special ciple can perhaps justify the .simpli the same time that, we have here a point now under consideration, until fied contrast between "underdeve salutary, though vague warning successful Soviet industrialisation lopment equilibrium" on the one against the dangers of "over-indus in the 1930s, the success of the hand and "self-sustained growth" trialisation" in the modern world. industrial leaders of the world, not on the other. excluding Japan, could very well be The proximate cause having been explained in terms of the efficacy Once the concept of "underdeve agreed upon, it is a question of spot of Western private enterprise as an lopment equilibrium" has been ac ting the "causes" of this cause. As engine of growth. cepted as useful, the question at once indicated above, it is possible to Now this is not quite the way in arises: what are its causes? It will present this part of the findings by which most writers who are really be argued in the sections following elaborating the central idea that making this point, put the matter. that explicitly or implicitly, the idea the very development of the ad The political factor of imposed emerges from most writings that vanced capitalist countries in the Western institutions is ignored by the very development of the advanc past century has pushed the others them. The term "international de ed capitalist countries in the past into "underdevelopment equilibri monstration effect" of Western century or so has kept the laggards um". No writer puts the entire achievements is also reserved for imprisoned in the coils of under question in this way. and all writers other purposes, as we .shall soon see. development. An attempt will be rightly mention the well-known cha Only Mr Dobb and Professor made to show that this is the heart racteristics of pre-capitalist societies Hirschman come very close to put of a comprehensive explanation among the obvious causes. But ting the matter in this way. Never which can be built up by suitably these are taken to be additional theless, a number of vigorous writers reinterpreting the various explana causes, at best, and the new dis theoretically analyse the failure of tions offered. covery is the central idea mentioned above. The emphasis on this cen the institutional framework of the II tral idea partly arises from impa West as "engines of growth" in to Causes of Underdevelopment tience with "tautological explana day's underdeveloped countries. And Equilibrium tions" ("a country is backward the obvious explanation of this Not without some dispute, the because it is backward"); partly inability to see this clearly earlier proximate cause is taken to be the because economic historians and is the "demonstration effect" of failure to industrialise and the pre sociologists have stressed these Western achievements, which not ponderance of non-industrial activi causes sufficiently strongly; partly only blinded theorists in the West, ty. Professor Viner makes the because in the past a number of but also, by the drawing in of the rather subtle point that although countries have relied on "normal" world into a single political and the ratio of non-agricultural to capitalist development to overcome economic network by means of im total population tends to be highly these causes, but today's under proved communications, blinded or correlated positively with per capita developed societies have not ( Gerald overpowered Eastern minds for a income, the degree of industrialisa M Meier: 'The Problem of Limited long time, tion may be and often is "a conse Economic Development', Economic Somewhat paradoxically, how quence rather than a cause of the Internazionale, Vol VI, No 4, 1953). ever, the theoretical elaboration of 987 SPECIAL NUMBER JULY 1959 THE ECONOMIC WEEKLY

this point is conducted in terms of though, like him, he lays much rather than a supporter of the theo two opposing and contending stress on the feasibility of "balanc- ry, goes through the Rosenstein- 'doctrines": "the doctrine of balanc ed growth" in "wage "goods indus Rodan and Nurkse versions with ed growth" (Rosenstein-Rodan, tries" (and, as we shall note later, a fine tooth comb, He helps clarify Nurkse, Scitovsky) and the "doc- in his policy conclusions, envisages a number of points left obscure in trine of unbalanced growth" recent only the balanced growth of "light them, and receives the new theory ly advanced by Professor Hirsch- industries"), he does cite external with extreme caution, concluding man, economies of a "vertical" nature that unless stringent conditions IV (i e, between suppliers and users of are fulfilled, the superiority of plan "inputs" including "produced fac ned balanced growth over a private "Balanced Growth" tors of production" and vice versa). enterprise system as an engine of Put in a highly simplified manner, He points out that the training and growth cannot be proved (J Marcus the skeleton of the theories which "skilling" of labour—the "firtet task Fleming; 'External Economies and may be conveniently rather than of industrialisation"—cannot be done the Doctrine of Balanced Growth', accurately lumped together as "doc properly under laissez-faire, since The Economic Journal, June 1955). trines of balanced growth", emerges "there are no mortgages on workers He first argues that so long as fac as follows. Taken separately, a —an entrepreneur who invests in tors of production are in fixed number of industries may be unpro training workers may lose capital supply, synchronised investment in fitable, so that the private profit if these workers contract with ano consumer goods industries is more motive would not suffice to induce ther firm", although "it is the best likely to generate external diseco investment in these industries. investment for the State". Also, nomies than economies, making each However, undertaken together in a Professor Rosenstein-Rodan brings industry more unprofitable than if synchronised manner, a balanced into his analysis of external eco they were set up separately. He increase in production would 'gene nomies the phenomenon of agrarian then goes on to emphasise that rate external economies, and en surplus population in most under external economies of the "vertical" large the size of the market for developed countries to recast Pro type, especially when generated each firm or industry, so that the fessor Allyn Young's celebrated from earlier to later stages of pro external economies would be "inter Tube line example and erect a pow duction, are much more important nalised" and the "synchronised erful theoretical prop for his thesis. than the "horizontal" transmission undertaking" would become profit of external economies between able. In the Scitovsky version, the con industries at the same stage. In Professor Nurkse has expounded cept of external economies applic fact, even when enlarged output in the theory in a drastically over able to the problem of underdevelop one consumer goods industry gene simplified form which is now ed countries is carefully rates economies in another such fashionable. No newly set up disentangled from the concept as industry, the transmission is not industry in a poor country can cre employed in equilibrium theory. In direct but takes place indirectly, via ate its own demand. Suppose a this version, which has grown out economies generated at an earlier shoe industry is set up. People in of the Rosenstein-Rodan version, a stage of production with which both other industries in a poor country number of advances are made. the consumer goods industries are would not be willing to forego their Firstly, both horizontal and vertical vertically connected. Now the crux minimum necessary consumption of inter-dependence giving rise to ex of the matter is that such vertical essential food, clothing etc to cre ternal economies are comprehensive transmission of external economies ate a sufficient demand for shoes ly listed and the statement is made through enlargement of output of every year, The supply of shoes is that "profits in a market economy "produced" factors of production likely to outrun demand: the shoe are a bad guide to economic opti ultimately depends upon the possi industry is likely to be a failure. mum as far as investment and bility that the "original" factors of Most industries catering for mass industrial expansion are concerned; production are in elastic, not fixed supply. Mr Marcus Fleming con consumption are, however, comple and they are worse, the more cedes that on the assumption of mentary in the sense that they pro decentralised and differentiated the elastic supplies of the "original" vide a market for and thus support economy". Secondly, it is stated factors, the balanced growth doc each other. A synchronised appli that in an economy in which eco trine comes better out of the wash. cation of capital to a wide range of nomic decisions are decentralised, a But he holds that even then there is such industries and a balanced in system of communications is needed no guarantee that external econo crease in production would generate to enable each person to learn about mies would outweigh external external economies by enlarging the the other's economic decisions. Mar diseconomies of balanced growth. size of the market for each. "The ket prices, however, are an imper fect signalling device, as far as case for 'balanced growth' rests Analysing first the supply of investment decisions, which have a ultimately on the need for a 'bal labour, he departs from the practice anced diet" (Ragnar Nurkse: delayed effect, are concerned, because they reflect the economic of other writers who lump together American Economic Review, May all industries being expanded as 1952). situation as it is and not as it will be. (Tibor Scitovsky: 'Two Con one. In his model, "secondary" Professor Rosenstein-Rodan, who cepts of External Economies' The industry is divided into industry A, anticipated Professor Nurkse, does Journal of Political Economy, April which is being deliberately expand not restrict his analysis only to the 1954). ed, and "other" non-A industries "horizontal external economies" in which are not being deliberately ex mass consumption industries men Mr Marcus Fleming, who must panded. He finds that the availabi tioned by Professor Nurkse. Al on the whole be considered a critic lity of rural surplus labour (with 988 THE ECONOMIC WEEKLY SPECIAL NUMBER JULY 1959

zero or low marginal productivity) ing country. This will reduce the profits, can proceed more or less may assist the expansion of the profitability of balanced growth, rapidly, and a "state capitalist sec former, but there is no proof that making a "large scale programme tor", through supplementary tax the latter would also expand. This as unprofitable as the piecemeal revenues extracted from the non- will be the case whenever agricul approach". This criticism is rein capitalist sector, can accumulate tural "underemployment" is 'Volun forced by the "more fundamental even better than a private capita tary" in the sense that the real re criticism" that even where foreign list sector. He argues, secondly, wards to unskilled labour in indus capital is available in elastic sup that in practice capital can often be try are Insufficiently in excess of ply, it will not exploit economies of "created" by labour working with those in agriculture to equalize scale in home-market industries. the aid of the simplest tools, i e, marginal productivity in the two From the purely formal point of almost without withdrawing scarce sectors. Also, even if rural surplus view, this searching criticism does land and capital from other uses. labour desire's to move from agri uncover a number of defects in Surplus rural labour, therefore, not culture to industry, they may be un conventional "balanced growth" only ensures elastic labour supplies, able to obtain employment there models. It disposes of the purely but also elastic capital supplies (pro owing to artificially high wages "horizontal" version of the doctrine vided, of course, the problems of maintained by labour unions or put forward by Professor Nurkse mobilising the surplus labour refer Government legislation in industry. (although if the latter's separate red to above are solved). There is In practice, real wages are not analysis of the problem of mobilis a forced redistribution of consump likely to be raised so fast in res ing rural surplus labour in his book tion, but no reduction in the output ponse to rising demand for indus ('Problems of Capital Formation in of consumer goods, and no "forced trial labour as to prevent all move Underdeveloped Countries') is join savings". Inflationary pressures can ment from country to town. This ed with his doctrine of balanced be liquidated quickly if there is a may enable the labour force in in growth, even he cannot be con state capitalist sector as in the dustry A to expand, without that of victed of giving a purely "horizon- USSR, so that all the credit comes non-A industries having to contract tar' version. Secondly, in discuss back at once as profits and taxes. as much as it otherwise would, but ing the problem of mobilising rural It may take much longer if there is it will not permit the labour force surplus labour, Mr Marcus Fleming only a private capitalist sector. in non-A industries to expand as has assumed (a) that a part of Professor Arthur Lewis essentially well. rural underemployment may be solves the problem by making the Elasticity of Capital Supply "voluntary", (b) that only one in rural labour surplus do double-duty Taking capital to the other dustry A is being deliberately ex by ensuring elastic capital supply "original" factor, Mr Marcus Flem panded, while other non-A industries as well as elastic labour supply and ing makes the general point that if are being left alone, (c) labour by replacing the assumption of a capital were in infinitely elastic unions, by setting high real wages "steered economy" by a completely supply (so that capital expan in industry would hinder absorption planned economy. sion in A did not reduce capital of rural surplus labour in industry. Professor Lewis's solution was supplies in non-A industries), These are realistic points, and the anticipated by Mr Dobb, who gave then any expansion in A which other obvious problem of mobilising a less abstract analysis, though he either did not involve increased use a "marketed surplus" of food, so neglected the problem of creating of factors other than capital or it that food can move to the towns an export surplus for contemporary the other factors were also in elastic along with workers, so ably dis underdeveloped economies (op cit, supply, would generate expansion cussed by Mr Dobb (op cit pp 46- Second Lecture). Mr Dobb argues and external economies in non-A 48) and also by Professor Nurkse that the "crucial bottleneck" is not industries. He is, however, pessi (op cit) could have been added. But "a prior savings fund" but the mistic about the elasticity of capital these are not insoluble problems, as ''marketed surplus" which makes it supply obtained from domestic the above-mentioned writers have possible to put transferred surplus sources, "In the very long run" shown, once we drop the assumption rural workers to work in industry. expansion at A might, via rising real that only the growth of some in If this is overcome by suitable in income, induce increased capital dustries will be planned, that labour stitutional measures, a major part supplies large enough to meet its unions and the peasantry will not of capital scarcity is removed. In own needs and leave some over for be integrated into the planning practice, of course (and here Mr non-A industries. "Within the sort effort. Dobb's analysis is superior to Pro fessor Lewis's), workers in industry of time period which is of interest Surplus Labour as Source for purposes of economic policy/' will not largely work with the "sim however, capital-expansion in A As regards the problem of capi plest tools" so that food supplies would be at the expense of capital- tal supply, Professor Arthur Lewis, alone will not suffice, especially if expansion in other industries, unless in a much-quoted article, has offer rapid industrialisation is under con additional capital is available from ed a solution ('Economic Develop sideration. Specific capital goods abroad in highly elastic supply. ment with Unlimited Supplies of will be required, the shortage of This escape, however, is equally un Labour': The Manchester School. which can be removed by specific likely. The problem of export sur May 1954). He first argues that imports, which in turn can be plus will arise. In any case, foreign once a ''capitalist sector" (by which obtained by using rural surplus capital supplies, unlike domestic he explicitly means not only a pri labour to produce suitable export capital supplies, are responsive to vate capitalist sector but also what goods with the help of little capital high interest rates rather than to he calls the "state capitalist sector") equipment, Mr Marcus Fleming rising real incomes in the develop has emerged, accumulation out of argues that increased "savings" 989 SPECIAL NUMBER JULY 1959 THE ECONOMIC WEEKLY

out of low real incomes will not range of industries, thus leading to contemporary underdeveloped socie- materialise in the relevant time balanced growth. In principle, this ties. period, and domestic capital sup is still possible in today's under It is a little unfortunate, however, plies will remain inelastic. Mr Dobb developed countries, but they may that Mr Dobb has hinted that agrees, and adds the telling point prefer "some degree of central Western development is, therefore, that attempts to increase (financial) direction to produce the desired to be regarded as some sort of an "savings' may have no other im effect, at any rate initially". "exception" or a "special case". In mediate or early effect than to put Professor Rosenstein-Rodan goes one sense, of course, this may be out of use equipment specialised in deeper into the problem and enu true. Since the majority of coun the production of consumer goods, merates some reasons for thinking tries have not been industrialised without augmenting the productive that nineteenth century Western under a free enterprise system, it capacity of capital goods industries. methods worked well enough in may well turn out that they will A solution can only be found by their own context but cannot work industrialise with the help of other dropping the assumption of a prior in the underdeveloped countries of systems: then we could say that in financial ''savings fund" as an "ori today. Technical progress was the the industrialisation of the world, ginal" factor essential for industria main driving force in nineteenth Western industrialisation was a lisation. century Western societies, whereas "special case". industrialisation of depressed areas To sum up this part of the dis today implies the application of Was Private Enterprise Avoidable? cussion: Mr Marcus Fleming has given technical knowledge. The in- But it can hardly be true in the essentially drawn attention to the crease in overhead costs and fixed sense that for Western countries fact that balanced growth may pro capital since the nineteenth century fat least for the pioneer England), duce external diseconomies as well has increased the risk of loss of the private enterprise system was as external economies, and the for capital, diminished the mobility of "avoidable" as an engine of growth. mer may outweigh the latter, un resources and the flexibility of the It is doubtful whether the techno less certain conditions are fulfilled. economic system, and vastly in logical, economic and political pre But as we have seen, these are not creased the average size of the firm. conditions which make the conclu impossible conditions; and even if Finally, social conscience today sions of the "balanced growth" doc they are not completely fulfilled, would not tolerate as much misery trine so plausible for contemporary there are no a priori reasons for in peace-time as was taken for underdeveloped societies, could have supposing that they will not be ful granted in the Darwinist nineteenth been historically created by any filled sufficiently to permit external century. other system. These include the economies to outweigh disecono large production unit or firm, mod- mies. Besides, his conclusion that, Mr Dobb must be considered an ern methods of management of the unless these conditions are fulfilled, exception. His work contains also firm as well as the economy, the the effect may be to render each an analysis of the driving forces instruments of such management of the integrated undertakings in Western capitalism (op cit First ranging from "planning techniques" "still more unprofitable than if it Lecture). In summary, his argu to labour unions and peasants' or had been set up by itself" appears ment is that certain unique, once ganisations providing the basis for to be a non sequitur, Where is the over, historically non-reproducible organising their participation in proof that the diseconomies of bal circumstances were responsible for planning. Without the capitalist anced growth will certainly be Western industrialisation under industrialisation of the West first, greater than those of "piecemeal" private enterprise. In his analysis, these pre-conditions would probably growth? these circumstances include: comple not have become available for V mentarity of technological innova humanity, as Marx appears to have tions in this period involving quan noted (Capital, Vol I, ch xxxii). A Digression into History titative expansion as well as quali It remains to examine one obvious tative improvement of capital goods Indeed, the development of the criticism of the doctrine of balanced production, making possible geo West under the private enterprise growth which, probably on the graphical expansion ( e g, the rail system was probably historically ceteris paribus principles mentioned ways), which also created outlets necessary to bring about the pos earlier, has received little attention for capital investments; elastic lab sibility of "socialisation of labour" at the hands of upholders and cri our supplies ensured by the process and the adoption of centralised tics alike. In their enthusiasm to of Marx's "primitive accumulation" planning as an engine of growth in stress the advantages of balanced in England and immigration of contemporary underdeveloped socie growth, have not its creators over cheap central European labour in ties. stated their case and made it un- America; unprecedented growth of VI historical? If the argument is so internal and external markets; conclusive, how is one to explain colonial plunder provided the basis "Planned Unbalanced Growth" the early development of the ad of large individual fortunes; the What may come to be known, vanced capitalist countries of today? trade cycle mechanism which perio for want of a better concise name, Professor Nurkse skirts round dically raised profit-rates; finally, as the "doctrine of planned un the problem by saying that in the the coincidence, in time, of all these balanced growth" is the second mo evolution of Western industrial favourable factors. The absence of dern doctrine which brings out the capitalism, creative Schumpeterian these factors, or most of them, retarding effect of the "interna entrepreneurs produced spurts of and still more the absence of their tional demonstration effect" of innovations, whose monetary effects coincidence in time, accounts for idealised nineteenth century West promoted each time a wave of new the failure of the private enterprise ern institutional patterns on con applications of capital over a whole system as an engine of growth in temporary underdeveloped societies. 990 THE ECONOMIC WEEKLY SPECIAL NUMBER JULY 1959

Case for Unbalanced Growth firms are likely to be taken into to ignore certain social costs, "in The name derives from the inci account in the course of growth. ternalizing" some of them at each sive attack on the doctrine of bal Internalization is likely to re step according to capacity. The anced growth by its author Profes sult in an overestimate of prospec innovation-inhibiting problem can sor Hirschman and his resounding tive losses of innovations, because be similarly tackled in a planned "espousal" of "unbalanced growth" it is in the nature of innovations manner. After all, in an under (op cit Chs 3 and 4). It is conve that its beneficiaries are anony developed economy the crucial nient, therefore, to clear the ground mous, inarticulate and unaware of task is to introduce 'entirely new first by examining Professor Hirsch- benefits to accrue, while those who products" and techniques which is man's critique of the balanced stand to lose are articulate vested the way to create variety; improve growth doctrine. interests entrenched in existing ments and substitutes are second firms (op cit, Ch 3, p 61). This ary. Recent Soviet experience, Professor Hirschman first makes will inhibit improvement in the though not conclusive as yet, shows the general point that if a country design and quality of current out that improvements do come into were ready physically (not intellec put and manufacture of substitutes the picture after a certain level of tually or institutionally) to apply the (though not entirely new products): development has been reached. As balanced growth doctrine, "then it "conclusions which fit rather well we shall see in a moment, Profes would not be underdeveloped in the the pattern of successes and failures sor Hirschman's real quarrel with first place" (op cit, Ch 3 pp 53-54). of the Soviet economy". the balanced growth doctrine is not This is because a centralised plan over its faults of commission, but ning authority's ability to establish Social Costs over its faults of omission: it con "complementary" industries at any Now this criticism does not real ceals the process—via "planned" one time is limited by the available ly damage the essentials of the unbalances, pressures and responses development skills which set a ceil balanced growth analysis very —by which a country overcomes the ing on the number of projects which much. At any one time, there is balance of underdevelopment equi can be undertaken simultaneously. of course a limited number of pro librium. Secondly, any growth-promotion jects which can be undertaken creates not only external economies simultaneously. Only a tortured Unlike other critics, Professor Hirschman does not conclude his but also external diseconomies. The interpretation of the doctrine criticism of the balanced growth balanced growth doctrine assumes makes it say that all possible doctrine by declaring his prefer that only external economies are industries must be started at once ence for the private enterprise "internalized" by the planning so that everything is balanced at system as a cure for contemporary authority, while all social costs and once. The doctrine merely says underdevelopment. Instead, he external diseconomies remain strict that out of the limited number of advocates what might be called ly external to it, or are negligible. possibilities, those should be select "planned unbalanced growth". For This is true only in the special cases ed which support one another over reasons of apace, it is necessary to of war-devastated economies or the definite time periods. By introduc short-circuit his interesting expo development of "undeveloped", ing "social costs" into the analysis. sition. unpopulated "open spaces" (op cit, Professor Hirschman fills out Mr Ch 3, p 56). The reality is that to Marcus Fleming's point about ex Competing Images day's underdeveloped economies are ternal diseconomies also arising Quite consciously, Professor Hirs not prepared to incur those social from growth. However, the point chman considers the stylised "ego- costs which were "so spectacularly that balanced growth planners can focused" institutional image of associated" with the process of promote growth only by copying Western development as well as the nineteenth century Western indus nineteenth century methods of ig tendency to imitate its sectoral and trialisation. They force their plan noring social costs, though inter technological patterns to be res ners to "internalize" a good por esting, is perhaps overstressed. ponsible for underdevelopment equi After all, unlike England, Bismarc- tion of these costs through advanc librium in backward countries. Deve kian Germany did "internalize" ed social security, minimum wage lopment in these countries depends some social costs at the time of and collective bargaining legisla not so much on finding optimal industrialization (being the inter tion and similar "welfare state" combinations for given resources as national pioneer in this field), measures (op cit, Ch 3. p 57). In on calling forth and utilising re without arresting growth. May be fact, centrally planned economies sources that are hidden, scattered this was deceptive: the "internal can achieve accelerated growth ization" of domestic social costs or badly utilised, including not only mainly by copying the nineteenth was certainly achieved partly by idle labour but also unutilised capa century private capitalists' method "externalizing" certain internation city to save, latent entrepreneur- of ignoring social costs, i e, by in al social costs which were borne by ship, etc. The need, therefore, is for ternalizing the external economies France in the form of indemnities a "binding agent" or the deliberate but ignoring the external disecono paid after the Franco-Prussian War. setting up of "inducement mecha mies (op cit, Ch 3, p 61). Inter This escape is certainly not open in nisms" to utilise hidden potentials nalization of both Is not likely the same form to contemporary The "visible reality" of Western de to lead to a general upward revi underdeveloped societies. velopment creates a "grand tension" sion of profitability estimates sim stemming from the "universal de ply because external economies are More important, however, is the sire to imitate" in underdeveloped may be exceeded by diseconomies or point that there is no reason why countries. But the desire to imitate social costs, a society should not voluntarily does not spontaneously make for Thirdly, in a centrally planned decide, for the period of rapid in development. Western achievement regime, the interests of existing dustrialisation to allow its planners itself creates difficulties which make 991 SPECIAL NUMBER JULY 1959 THE ECONOMIC WEEKLY

992 THE ECONOMIC WEEKLY SPECIAL NUMBER JULY 1959

development of contemporary under ble by maximising "induced" or the "balanced growth doctrine" developed societies "a less sponta "routinised" decision-making. In makes this assumption. Neverthe neous and more deliberate process" this analysis, therefore, there are no less, there is much that is illuminat than in the Western pioneering conventional "scarce factors": they ing in Professor Hirschman's analy countries. These flow from miscon are all available hidden and scat sis of the "unbalancing" and "dis- ceptions about the process of tered or badly utilised. "All scarce equilibrating" character of planned change which must be deliberately factors are reduced to one basic growth. removed. Backward countries have scarcity; the scarcity of decision VII before them an "ego-focussed making" (See op cit Ch I for the entire analysis). Imitation of Western image" of Western development, in Consumption Patterns which development is inevitably Balanced Growth at Fault Applying Duesenberry's "demon said to proceed from the enrichment It; is here that the "balanced growth stration effect" in modern consump of a few individualistic "creative" doctrine" is found to be really at tion theory to the problem on hand, (in the Schumpeterian sense) entre fault (op cit Ch IV). In fact, Professor Nurkse has drawn atten preneurs at the expense of other balance is revealed only at two ter tion to a second major cause of un sections. While Professor Hirsch- minal points of the growth-process: derdevelopment equilibrium. man agrees that "temporarily pre the balance in underdevelopment With improved means of commu ferred treatment" of certain acti equilibrium, and the balance at the nication developed by Western coun vities and communities is inevitable higher-level equilibrium "when deve tries—-air traffic, the cinema, the in any economic development, the lopment has been all but achieved." radio, etc, plasticity of habits has "ego-focused image" distorts vision However, the passage to the latter increased enormously throughout the by neglecting the equally impor takes place via uneven advances of world. While this makes for imi tant "co-operative component of one sector followed by the catching tation of both production functions entrepreneurship". This is all the up of other sectors; when the as well as consumption patterns of more unfortunate because stagnat "catching-up" overreaches its goal, developed Western societies, the ing underdeveloped societies inherit as it often does, the stage is set for latter, being easier to imitate, are a "group-focused image" implying further advances elsewhere. The imitated more readily. As a result, that change must, benefit all mem advantage of this kind of "seesaw "savings potentials", which are in bers of society equally. Suspicions advance" over "balanced growth any case low in underdeveloped created by the "ego-focused" image where every activity expands countries due to pre-capitalist "con of Western change makes these so- perfectly in step with every other" spicuous consumption" and unpro cities even more tenaciously "group- is that it leaves considerable scope ductive expenditure by the rich, are focused". This destroys priorities for "induced investment decisions" further reduced. Export earnings, in planning available funds are and, therefore, economises the prin as well as earnings from internal thinly dispersed over the largest cipal scarce resource : genuine production, are squandered in this possible number of projects. decision-making. One of the prin way. The theory has been mainly The appeal of Communist plan cipal characteristics of this used as a partial explanation of the ning lies in the presentation of re 1 new approach is that a direct squandering of export surpluses by assuring long-term "group-focused ' connection is established between the underdeveloped countries upto goals, where all benefit, which justi investment of one period and the I930's (which will be more fully fies "temporarily preferred treat the next: the "complementary effect" discussed below). But it has a wider ment" of particular sections in the of each investment "calls forth" implication: even protection or pro "transition period". Development new investment. To the extent that hibition of consumer goods' imports requires some such modification of savings are determined by this pro by politically independent Govern the "exclusively" ego-focused image. cess, they play a "perfectly passive ments of underdeveloped countries This is all the more necessary in role". Professor Hirschman points will not suffice. The result would contemporary underdeveloped so out the similarity between this ap merely be home investment to dis cieties because "decision-making" as proach and the model put forward place such imports, hindering the regards priorities is far more diffi by the Soviet economist Feldman, establishment of those "interme cult for them than it was in early as recently interpreted by Professor diate" industries which are essential Western societies. The latter had Domar (Evsey D Domar 'Essays in for industrialisation. Unless this a limited number of new products Economic Growth'). The conclusion "international demonstration effect" and processes to choose from. Their is that we ought to "keep alive of Western consumption patterns is development, however, has placed rather than eliminate" disequilibria. politically and ideologically fought — before contemporary underdevelop The "judicious setting up of sequen of which Professor Nurkse finds the ed countries a "seemingly infinite" ces and repercussions" which lead only examples in Japanese isola range of possibilities. This pro away from equilibrium is the "ideal tionism and the Soviet "Iron Cur blem is further accentuated be pattern of development" (the accent tain"—we have another potent per- cause the "sudden appearance" of being on the word "judicious": un petuator of underdevelopment equi the idea of change leads to exag planned disequilibria may frustrate librium. gerated expectations of profits from development). tomorrow's ventures which postpone This theory, too, has not been al decision-making on to-day's projects. A minor flaw in the analysis may lowed to pass unchallenged. Nota Thus Western achievement is not be noted. It is doubtful whether a bly, Messrs Bauer and Yamey ('The an unmixed blessing. The task is to "developed" society ever reaches an Economics of Underdeveloped Coun planfully and deliberately call forth "equilibrium" of complete balance; tries', Ch 5) have criticised it on two as much "decision-making" as possi and it is still more doubtful whether counts. Firstly, far from being a 993 SPECIAL NUMBER JULY 1959 THE ECONOMIC WEEKLY

hindrance, this effect has actually cludes that Investment in industries It would appear that we meet here been favourable. These "induce which give the "final touches" on once again our old friend the "inter ment goods" have promoted the de almost-finished imported materials national demonstration effect" per velopment of industry, subjected the in assembly-plants, retard develop forming a third negative function. barter-minded rural population to ment (op cit, Ch VII). This is Indeed, Messrs Bauer and Yamey monetary incentives and attracted really a valuable extension of the have pointed this out as the only them to industry in the towns. 'Nurkse effect." sense in which the "international Secondly, it is argued, rather uncon- demonstration effect" has been re VIII vincingly on the evidence of the tarding the development of the un behaviour of immigrants from back Imitation of Western derdeveloped countries (op cit, Ch ward countries in advanced coun Technology V). tries (which is surely inconclusive), A further possible cause of under that imitation of the "Western way development equilibrium, neglected IX of life" implies prior assimilation of till very recently, has been uncover Alternative Programmes prudent saving habits in order to ed in the discussion of the "choice We have seen above that most of raise consumption levels, rather of techniques" for overcoming un the writers surveyed so far deny than spendthrift habits. As regards derdevelopment equilibrium. Both the possibility of overcoming under the first criticism, it is true in such for reasons of space and because it development equilibrium with the a broad sense as to be irrelevant already promises to become a rival help of a laissez faire system. They to the question on hand. In so far to the "economics of underdevelop advocate planned growth of some as Western consumption patterns ment" as a separate, independent kind or other. But with this, their advertise Western industrialisation branch of modern economic analysis, uniformity of approach ends. The itself and create a "grand tension" this intricate subject will only be different routes by which they reach they of course play a positive role. touched upon here in elementary this conclusion lead to different pro It has also been suggested above fashion. grammatic suggestions, which are that the demonstration effect of Mr Henry Bruton in an interest either implicit in their writings or modern western technology and ma ing article has argued that the are set forth explicitly. nagement methods have also been major innovations in British and Most explicit is Professor Rosen- a positive factor (for those who American industrialisation, those stein-Rodan. The first feature of were able to see it). But there can resulting in the most pronounced in his programmatic approach is that, be no doubt that, from the practical creases in output, were capital- in order to reach the ''optimum point of view, the demonstration using. They resulted in an increase size" of Industrial enterprises, the effect of Western consumption pat in the capital-output ratio. These area of industrialisation must be terns has worked much more spon major. capital-using innovations sufficiently large. In the case of taneously and powerfully than these were necessary before the minor, small countries, there has to be other effects (with the possible ex routine, capital-saving innovations supra-national planning. ception of the demonstration effect could come Into the picture. of Western institutional patterns, The second feature is his insis To the extent that underdeveloped tence that the "whole of the indus which has strengthened the effect countries import or imitate the on consumption). try to be created must be treated technology of the advanced coun and planned like one huge firm or It is curious that this now- tries, they tend to go through the trust". Having put forward this famous "effect" is not woven into same sequence. This means that "one firm' idea, however, Professor Professor Hirschman's and Mr initial imports of new techniques go Rosenstein-Hodan distinguishes three Dobb's analyses. Perhaps, this is counter to the relative factor-supply possible variants of this pattern of because in Professor Nurkse's ex situation in underdeveloped coun industrialisation. position of this effect, individual pro tries, which calls for capital-saving pensities to save are assumed to be and labour-using techniques. Also, No Automatic Follow Up active, independent, "having a life it is a much simpler matter to im One is what he calls the "Russian of their own" so to speak. In the port major capital-using processes model" or the ''autarkic model", Dobb and Hirschman models, how than it is to import capital-saving "aiming at self-sufficiency without ever, the limit to investment is not processes which are associated international investment". He em the ability or propensity to save, chiefly with organisation rather than phasises that "this does not mean but the productive capacity of the specific capital goods (Henry J Communism", apparently because investment goods sector, savings Bruton; 'Growth Models and Under non-Communist societies also could playing a passive role. Nevertheless, developed Economies, The Journal adopt such a model, and, conversely, a modified version of the Nurkse of Political Economy, August 1955), Communist societies may also adopt effect could be built into their analy The above argument is reinforced "non-autarkic" models. The essence ses. The Nurkse effect could frus when we remember that capital- of such a model is "the construction trate development by inducing pri saving techniques adapted to a high of all stages of industry, heavy vate entrepreneurs as well as cen level of development can seldom be industry, machine industry, as well tralised planners to direct invest transferred bodily to an underdeve as light industry, with the final re ment into producing domestic sub loped environment and that foreign sult of a national economy built like stitute for Western consumer goods. companies are the most important a vertical industrial concern". This Indeed, Professor Hirschman, while purveyors of Western techniques in way has several disadvantages. It perhaps overstressing the initial these countries (and naturally tend can only proceed "slowly", because "inducement effect" of consumer to import the "latest" capital-saving capital must be supplied at the ex goods imports from the West, con techniques). pense of a standard of consumption 994 THE ECONOMIC WEEKLY SPECIAL NUMBER JULY 1959

which is already low, Implying heavy Professor Rosenstein-Rodan him easy). In any case, internal buoy and unnecessary sacrifice. Secondly, self points out, this is not really a ancy factors operating in advanced since there are appropriate natural model that fits actual Russian ex countries in the post-war years resources in the area, it will lead to perience. It includes only one, the have, perhaps, made even advanced an "independent" or "autarkic" unit so-called "autarkic" aspect of the countries worry less about excess in the world economy, implying a model and excludes other institu capacity in heavy industry. reduction in the internal division tional implications of that model. of labour. The world output of These are: the collective farm Rosenstein-Rodan "material goods" would be reduced, machinery for mobilising the mark Professor Rosenstein-Rodan's own while world excess capacity of heavy eted surplus in agriculture (whose importance has been underlined by model follows logically from his re industry would be increased point jection of the so-called autarkic lessly. both Mr Dobb and Professor Nur- kse); the political ability to justify model. It has two main features. A second model, also rejected, stagnating or even reduced con First, the balanced growth visual could be based on the idea that if sumption levels for a period; the ised is partial, limited to light in "basic industries" (meaning only ability to enlist the support of dustries only, based on the unten public utilities like railways) are at least the industrial workers, if able "horizontal" version of the built "the rest will follow automati not always of the entire peasantry, balanced growth doctrine. Second: cally ". This is a fallacy for two in the planning effort which Com there is the unreal assumption of reasons, Firstly, there is no great munism implies, and even an all- advanced countries subscribing fifty deficiency in railroads in many un powerful giant trust does not. If per cent of the capital to be in derdeveloped regions and comple we have a proper Russian model, vested by the giant, trust, apparent mentarity makes all industries to which takes account of all these ly accepting repayment and service some extent 'basic". Secondly, in- features and is also "corrected" to charges in the form of "more leis vestment in public utilities will not include a machinery for mobilising ure" (which at least the private- "naturally" lead, via the multiplier rural surplus labour the extent of profit-motivated public opinion of process, to cumulative industrialisa- "sacrifice" or postponed satisfaction the U S A is unlikely to do readily), lion. This is chiefly because equip could at least be less than visualis The chief advantage claimed for ment will have to be imported and ed by Professor Rodenstein-Rodan. this model from the viewpoint of paid for. and to the extent that it underdeveloped countries, that this is paid for in the first instance by On the other hand, in an assum is a quicker way, with less hard loans, service charges have to be ed "autarkic" model, the degree of ships, is therefore extremely hypo paid, This will require the plan- "autarky" could well be assumed to thetical. ned establishment of export indus be less than in the actual Soviet tries also. Moreover, the develop model (since at least to some ex No other writer ties together pro ment of synthetic substitutes for tent, the high degree of autarky grammatic suggestions as neatly as primary commodities in recent de was due to specific international Professor Rosenstein-Rodan. and cades has removed the secular ex political factors and the pioneer's their ideas can be discussed briefly. pansion of demand for exports of inexperience). As regards the point Professor Nurkse's "programme" backward countries, which was a about "autarkic" development re (although he does not explicitly put feature of the nineteenth century. ducing the world output of mate forward one) is fuller. In line with This, together with the rich coun rial goods, this is surely not so his fuller analysis of the causes of tries' low income elasticities of de self-evident as to be decisive in underdevelopment, it includes the mand for imports, and the "politi policy decisions. Adopting a more need for some planned effort, com cal risks" (of "frozen" profits or or less self-sufficient economy as a parable to the Soviet, for fighting repudiation of debts) of granting goal does not imply cessation of the international demonstration eff loans to underdeveloped countries, foreign trade or international in ect of Western consumption patterns. makes the problem of paying for vestment during the process of con It also includes the need for some imported equipment extremely struction, or even after the goal is kind of machinery like the collective acute. The placing of suitable ex reached. A certain international farms in the USSR, for moving ports in sufficient quantity will have specialisation in particular branches rural surplus labour, along with to be jointly planned by the indus of heavy industry is quite compati their food-packets, to the towns. trialising and creditor countries. In ble with "self-sufficiency", as Mr Although, unlike Professor Rosen deed, the rich countries may have Dobb has pointed out (op cit, stein-Rodan, he does not explicitly to accept a part of the payment in Second Lecture). As regards the oppose the establishment of heavy the form of more leisure (i e, by alleged wastage of resources aris industries, his preoccupation with planned reduction in their own out ing from world excess capacity in external economies of the "horizon puts), which requires a high degree heavy industry, its causes are surely tal" variety suggests that, he too of joint planning. not likely to be automatically cured thinks balanced growth of light in Autarkic Model Rejected by rising exports to underdeveloped dustries will suffice. Unlike Profes The rejection of the second model countries. Professor Rosenstein- sor Rosenstein Rodan, however, he is theoretically sound, even if we Rodan himself refers to the intrac does not seem to assign a major restrict theoretical analysis to the table problem of payments. the role to international investment, balanced growth doctrine and ignore solution of which will probably de though he "keeps the door open" the other causes of underdevelop pend upon advanced countries ac for international investment of the ment discussed by other writers. cepting payment in terms of unemp "autonomous" sort (i e, investment loyment or more leisure for the by public authorities financed from Rejection of the first model is, private or public foreign funds). however, on a different footing. As employed (which is by no means 995 SPECIAL NUMBER JULY 1959 THE ECONOMIC WEEKLY

Professor Hirschman discusses rather than with road-making (op A conceptual framework is emerg- "the strategy of economic develop cit, Chs V, XI). Instead of confin ing in the modern economics of ment" rather than programmes. At ing themselves to the creation of underdevelopment. It is more ela the end of his book, he speaks for social overheads (as private entre borate than the neo-classical frame his "third way", to be distinguished preneurs would like them to do), work for development (which denied from the sterile laissez-faire way they should induce maximum grow the problem of underdevelopment and also from the idea that "the th by creating shortage rather than equilibrium). It is also more ela elusive goal must be seized through excess capacity of social overheads, borate than the simpler conceptual one convulsive investment effort, one (op cit, Ch 5). "Intermediate" or framework with which the socialist large-scale expropriation, or one "basic" industries should be given countries overcame their underdeve "short" term of dictatorial rule" preference over "last" industries lopment equilibrium. It incorporates (which is evidently his description of producing consumer goods or assem into economic analysis the results the "inevitable" Communist way). bly plants giving "final touches" to of much practical experience which Nevertheless, scattered throughout almost-finished imported industrial have not been properly digested by his book are various program products (op cit, Ch VI). Pressure theory. Time alone, can prove its matic conclusions, which do not on these governments to learn to value in facilitating the develop differ so very much from a number master "administration tasks" be of conclusions drawn from Commu fore taking up directly productive ment of underdevelopd countries. It nist experience. We have already activities should be resisted. The will be generally admitted that to seen that he wants 'planned unbal best way governments can master date only the socialist countries anced growth". He also makes seve administration tasks is to first have undeniably overcome their ral specific suggestions. Govern handle production tasks (op cit, Ch underdevelopment equilibrium. And ments in underdeveloped countries VIII). they have done so with the help of should provide active leadership in X political-cum-economic conceptual industrialisation, by engaging in Conclusion frameworks whose political part has directly productive activities, by The conclusion to be drawn from been more developed than the starting with steel production this appraisal may be briefly put, economic.

996