Embed Size (px)
Citation preview
MEANING OF DEVELOPMENT
There is no agreement on the meaning of development. It may mean different things to different people. The only thing on which everyone agrees is that development is necessary.
Traditional Economic Meaning/Measure of Development
In strictly economic terms, development has traditionally meant the capacity of a national economy to generate and sustain an annual income in its gross national product (GNP) at rates – 5% to 7% or more.
A common alternative economic index of development has been the use of rates of growth of income per capita or per capita GNP to take into account the ability of a nation to expand its output at a rate faster than the growth rates of its population.
Levels and rates of growth of “real” per capita GNP (monetary growth of GNP per capita minus the rate of inflation) are normally used to measure the overall economic well-being of a population – how much of real goods and services is available to the average citizen for consumption and investment.
Economic development in the past has also been typically seen in terms of the planned alternation of the structure of production and employment so that agriculture’s share of both declines and that of the manufacturing and service industries increases.
1
Finally, these principal economic measures of development
have often been supplemented by casual reference to non-
economic social indicators: gains in literacy schooling,
health conditions and services, and provision of housing, for
instance etc.
On the whole, therefore, prior to the 1970s, development
was nearly always seen as an economic phenomenon in
which rapid gains in overall and per capita GNP growth
would either “trickle down” to the masses in the form of
jobs and other economic opportunities or create the
necessary conditions for the wider distribution of the
economic and social benefits of growth.
The New Economic View of Development
Dethronement of GNP and the elevation of direct attacks on
widespread absolute poverty, increasingly inequitable
income distributions, and rising unemployment.
During the 1970s, economic development came to be
redefined in terms of the reduction or elimination of poverty,
inequality, and unemployment within the context of a
growing economy.
Development must therefore be conceived of as a
multidimensional process involving major changes in social
structures, popular attitudes, and national institutions, as
well as the acceleration of economic growth, the reduction
of inequality, and the eradication of poverty.
2
Development, in its essence, must represent the whole
gamut of change by which an entire social system, tuned to
the diverse basic needs and desires of individuals and social
groups within that system, moves away from a condition of
life widely perceived as unsatisfactory toward a situation or
condition of life regarded as materially and spiritually better.
Development May also Mean
Increase in material things which the society can afford.
Increase in services – education, health – which the society
can afford.
Increase in cultural activities which make human life rich –
rich family life, community feeling, art, music, etc.,
depending on individual interests and preferences.
Safety, freedom and opportunity; and also sense of
participation in local, regional and national affairs.
Amartya Sen on Development
“Economic growth cannot be sensibly treated as an end in
itself. Development has to be more concerned with
enhancing the lives we lead and the freedoms we enjoy.”
Sen argues that the “Capability to function” in what really
matters for status as a poor or non-poor.
3
Sustainable Development
Pattern of development that permits future generations to live at least as well as the current generation.
Human Development
National socioeconomic development, based on measures of life expectancy at birth, educational attainment, literacy, and adjusted real per capita income.
Three Core Values of Development
Sustenance: The Ability to Meet Basic Needs. Self-Esteem: To Be a Person. Freedom from Servitude: To Be Able to Choose
Three Objectives of Development
To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health, and protection.
To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better education, and greater attention to cultural and human values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem.
To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence not only in relation to other people and nation-states but also to the forces of ignorance and human misery.
4
Cross Country Comparison of Development
Cross country comparison of development is very
difficult.
Definitions of important concepts (such as literacy
and what constitutes a household) vary from country to
country, data collection and reporting methods and skills
differ, and government record keeping is not uniform.
Standardization of data across countries – a
necessary basis for comparisons – is extremely difficult,
especially when countries have different cultural values;
for example, literacy is hard to measure in countries with
strong oral and weak written educational traditions.
Most systematic index of measuring development,
perhaps, is the Human Development Index (HDI),
devised by the United Nations Development Programme.
The HDI is a summary measure of human
development. It measures the average achievements in a
country in three basic dimensions of human
development:
5
A long and healthy life, as measured by life
expectancy at birth.
Knowledge, as measured by the adult literacy rate
(with two-thirds weight) and the combined primary,
secondary and tertiary gross enrolment ratio (with
one-third weight).
A decent standard of living, as measured by GDP per
capita (PPP US$).
Although the components of HDI – income, health,
and education – are somewhat correlated, relations
among them re not uniquely defined: Achievements
along these dimensions do not necessarily move together.
The HDI does not capture all aspects of individual
and social welfare. China and India have nearly identical
per capita incomes ($350 and $340, respectively), but
after these are adjusted for purchasing power parity (per
capita real GDPs are $2656 and $910) and health and
education factors are considered, China’s HDI (.612) is
considerably higher than India’s (.297).
6
Further, the HDI does not measure political
freedom: India is the world’s most populous democracy;
China is the world’s most populous authoritarian regime.
7
1.0 Common Characteristics Of Developing Nations
i. Low levels of living, characterized by low incomes, inequality, poor health, and inadequate education.
ii. Low levels of productivity.
iii. High rates of population growth and dependency burdens.
iv. Substantial dependence on agricultural production and primary – product exports.
v. Prevalence of imperfect markets and limited information.
vi. Dominance, dependence, and vulnerability in international relations.
2.0 Classical and neo-classical theories of development
Post world war II literature on economic development has been dominated by four major and sometimes competing strands of thought as under:
A. The linear stage of growth model:
Theorists/economists of the 1950s and early 1960s viewed economic development as a series of successive stages of economic growth through which all countries must pass.
Primarily an economic theory of development – its requirements include:
8
- right quantity and mixture of savings, investment and foreign aid.
If the requirements were fulfilled, the developing countries could imitate the economic growth path that historically had been followed by the more developed countries.
Development, by these theories was equated with rapid, aggregate economic growth. More specifically, this approach to development relied on historical experiences of Marshall plan implemented after the second world war.
As the linear stage approach gave utmost importance on the central role of accelerated capital accumulation, it is often dubbed as ‘capital fundamentalism.’
This approach’s most influential and outspoken advocate was Walter W. Rostow who identified five stages as under:
a) the traditional society;
b) pre-conditions for take-off into self-sustaining growth;
c) the take-off;
d) the drive to maturity;
e) the age of mass consumption.
One of the principal strategies of development necessary for any take-off was the mobilization of domestic and foreign savings in order to generate sufficient investment to accelerate economic growth.
9
Countries that were able to save 15% to 20% of GNP could grow (develop) at a much faster rate than those that saved less.
To meet domestic savings gap/deficit, seek foreign aid or private foreign investment.
Note: The economic mechanism by which more investments leads to more growth can be described in terms of Harrod-Domar growth model; a functional economic relationship in which the growth rate of GDP (g) depends directly on the national savings rate (s) and inversely on the national capital-output ratio (k), that is g = s/k
Stages Theory
1.0 Adam Smith
a) Hunting
b) Pastoral
c) Agricultural
d) Commercial
e) Manufacturing
2.0 Marx
a) Primitive Communism
b) Feudalism
c) Capitalism
10
d) Socialism
e) Communism
3.0 Rostow
a) Traditional Society
b) Preconditions for take off into self-sustaining growth
c) Take-off
d) Drive to maturity
e) The age of high levels of mass consumption
Preconditions for Take-off
a) Abolition of an archaic framework in agricultural
organisation or an increase in agricultural productivity.
b) Creation of an influential modern elite which is materially or
ideally interested in economic change.
c) Provision of social-overhead capital in physical form.
d) Existence of a value system that favours progress.
e) Existence of effective entrepreneurial groups basking in the
sun of social approval.
Take-off
Requirements:
11
a) A rise in the rate of productive investment from, say, 5% or
less to over 10% of national income (or net national
product);
b) The development of one or more substantial manufacturing
sector, with a high rate of growth; and
c) The existence or quick emergence of a political, social and
institutional framework that exploits the impulses to
expansion in the modern sector and the potential external
economy effects of the take-off and gives to growth an
ongoing character.
Criticisms of the stages model.
- the mechanisms of development
embodied/stated in the theory of stages did not always
work.
Saving and investment is a necessary condition, but not
a sufficient condition.
Most developing countries lacked the sufficient
condition covering a wide range of things like managerial
competence skilled labour, ability to plan and administer a
large variety of projects.
12
More fundamentally, developing countries are caught
in a highly integrated and complex international system in
which even the best and most intelligent development
strategies can be frustrated/nullified by external forces
beyond their control.
B. Structural-Change Models:
The structural change theory focuses on the mechanism by which underdeveloped economies transform their economic structure from a heavy emphasis on traditional subsistence agriculture to a modern, more urbanized and more industrialially diverse manufacturing and service industry.
- Two well-known representative examples of structural changes are:
a) the two-sector surplus labour theoretical model of W. Arthur Lew, and
b) the patterns of development empirical analysis by Hollis B. Chenery and his co-anthers.
B.1 Lewis Theory: (Mid 1950s)
Lewis theory focused on the structural transformation of a primarily subsistence economy. Lewis theory was later modified, formalized and extended by John Fei and Gustav Rains.
Lewis two sector model became the general theory of the development in surplus labour third world nations during
13
most of the 1960s and early 1970s. It still has many adherents to-day, especially among American development economists.
In the Lewis model, the underdeveloped economy consists of two sectors:
i. A traditional sector, over populated rural subsistence sector characterized by Zero marginal labour productivity – a situation that permits Lewis to classify this as surplus labour, in the sense that it can be withdrawn from the agriculture sector without any loss of output.
ii. And a high productivity modern urban industrial sector into which labour from the subsistence is gradually transferred.
iii. The primary focus of the model is on both the process of labour transfer and the growth of output and employment in the modern sector.
iv.Both labor transfer and modern sector-employment growth are brought about by output expansion.
v. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector.
vi.Such investment is made possible by the excess of modern-sector profits over wages on the assumption that capitalists reinvest all their profits.
14
vii. Finally, the level of wages in the urban industrial sector is assumed to be constant and determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector.
viii. Lewis assumed that urban wages would have to be at least 30% higher than average rural income to induce workers to migrate from their home areas.
ix.Lewis assumes that in the traditional sector there is surplus labor in the sense that MPLA is zero, and all rural workers share equally in the output so that the rural real wage is determined by the average and not the marginal product of labour (as will be the case in the modern sector).
x. This process of modern-sector self-sustaining growth and employment expansion is assumed to continue until all surplus rural labour is absorbed in the new industrial sector.
xi.Thereafter, additional workers can be withdrawn from the agricultural sector only at a higher cost of lost food production because the declining labour-to-land ratio means that the marginal product of rural labour is no longer zero.
xii. The structural transformation of the economy will have taken place, with the balance of economic activity shifting from traditional rural agriculture to modern urban industry.
15
Criticisms of the Lewis Model
Although the Lewis two-sector development model is simple and roughly reflects the historical experience of economic growth in the West, four of its key assumptions do not fit the institutional and economic realities of most contemporary developing countries.
a) First, the model implicitly assumes that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern-sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of new job creation. But what if capitalist profits are reinvested in more sophisticated laboursaving capital equipment rather than just duplicating the existing capital as is implicitly assumed in the Lewis model?
b) The second questionable assumption of the Lewis model is the notion that surplus labor exists in rural areas while there is full employment in the urban areas. Most contemporary research indicates that there is little general surplus labour in rural locations.
c) The third unreal assumption is the notion of a competitive modern-sector labour market that guarantees the continued existence of constant real urban wages up to the point where the supply of rural surplus labor is exhausted. A striking feature of urban labour markets and wage determination in almost all developing countries was
16
the tendency for these wages to rise substantially over time, both in absolute terms and relative to average rural incomes, even in the presence of rising levels of open modern-sector unemployment and low or zero marginal productivity in agriculture.
d) A final concern with the Lewis model is its assumption of diminshing returns in the modern industrial sector. Yet there is much evidence that increasing returns prevail in that sector, posing special problems for development policymaking.
B.2 Structural Change and Patterns of Development
a) Like the earlier Lewis model, the patterns-of-development analysis of structural change focuses on the sequential process through which the economic, industrial, and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth.
b) However, in contrast to the Lewis model and the original stages view of development, increased savings and investment are perceived by patterns-of-development analysis as necessary but not sufficient conditions for economic growth.
c) In addition to the accumulation of capital, both physical and human, a set of interrelated changes in the economic structure of a country are required for the transition from a traditional economic system to a modern one.
17
d) These structural changes involve virtually all economic functions, including the transformation of production and changes in the composition of consumer demand, international trade, and resource use as well as changes in socioeconomic factors such as urbanization and the growth and distribution of a country’s population.
e) Empirical structural-change analysts emphasize both domestic and international constraints on development. The domestic ones include economic constraints such as a country’s resource endowment and its physical and population size as well as institutional constraints such as government policies and objectives. International constraints on development include access to external capital, technology, and international trade.
f) However, it is the international constraints that make the transition of currently developing countries differ from tat of now industrialized countries.
g) To the extent that developing countries have access to the opportunities presented by the industrial countries as sources of capital, technology, and manufactured imports as well as markets for exports, they can make the transition at an even faster rate than that achieved by the industrial countries during the early periods of their economic development.
h) Thus, unlike the earlier stages model, the structural-change model recognizes the fact that developing
18
countries are part of a highly integrated international system that can promote (as well as hinder) their development.
i) The best-known model of structural change is the one based largely on the empirical work of the late Harvard economist Hollis B. Chenery and his colleagues, who examined patterns of development for numerous developing countries during the postwar period.
j) Several characteristic features of development included:
- The shift from agricultural to industrial production;
- The steady accumulation of physical and human capital;
- The change in consumer demands from emphasis on food and basic necessities to desires for diverse manufactured goods and services;
- The growth of cities and urban industries as people migrate from farms and small towns;
- The decline in family size and overall population growth as children lose their economic value and parents substitute child quality (education) for quantity;
- With population growth first increasing, then decreasing in the process of development.
19
k) Proponents of this school often call for development specialists to “let the facts speak for themselves,” rather than get bogged done in the arcane of theories such as the stages of growth. This is a valuable counterbalance to empty theorizing, but it also has its own limits.
l) One limitation to keep in mind is that by emphasizing patterns rather than theory, this approach runs the risk of leading practitioners to draw the wrong conclusions about causality, in effect, to “put the cart before the horse.” Observing developed-country patterns such as the decline of the share of the labour force in agriculture over time, many developing-country policymakers have been inclined to neglect that vital sector.
Again observing the important role of higher education in developed countries, policymakers may be inclined to emphasize the development of an advanced university system even before a majority of the population has gained basic literacy, a policy that has led to gross inequities even in countries at least nominally committed to egalitarian outcomes, such as Tanzania.
The structural-change analysts are basically optimistic that the “correct” mix of economic policies will generate beneficial patterns of self-sustaining growth.
C. International-Dependence Revolution
a) During the 1970s, international-dependence models gained increasing support, especially among
20
developing-country intellectuals, as a result of growing disenchantment with both the stages and structural-change models.
b) Essentially, international-dependence models view developing countries as beset by institutional, political and economic rigidities, both domestic and international, and caught up in a dependence and dominance relationship with rich countries.
c) Within the above general approach are three major streams of thoughts:
- the neo-colonial dependence model;
- the false-paradigm model; and
- the dualistic development thesis.
C.1 The Neocolonial Dependence Model
a) It is an indirect outgrowth of Marxist thinking. It attributes the existence and continuance of underdevelopment primarily to the historical evolution of highly unequal international capitalist system of rich country-poor country relationships.
b) Whether because rich nations are intentionally exploitative or unintentionally neglectful, the coexistence of rich and poor nations in an international system dominated by such unequal power relationships between the center (the developed countries) and the periphery (the LDCs) renders attempts by poor nations to be
21
self-reliant and independent difficult and sometimes even impossible.
c) In short, the neo-Marxist, neocolonial view of underdevelopment attributes a large part of the developing world’s continuing and worsening poverty to the existence and policies of the industrial capitalist countries of the Northern Hemisphere and their extensions in the form of small but powerful elite or comprador groups in the less developed countries.
d) Underdevelopment is thus seen as an externally induced phenomenon, in contrast to the linear-stages and structural-change theories’ stress on internal constraints such as insufficient savings and investment or lack of education and skills.
e) Revolutionary struggles or at least major restructuring of the world capitalist system are therefore required to free dependent developing nations from the direct and indirect economic control of their developed-world and domestic oppressors.
C.2 The False-Paradigm Model
a) A second and a less radical international-dependence approach to development, which we might call the false-paradigm mode, attributes underdevelopment to faulty and inappropriate advice provided by well-meaning but often uninformed, biased, and ethnocentric international “expert’ advisers from developed-country assistance agencies and multinational donor organizations.
22
b) Because of institutional factors such as the central and remarkably resilient role of traditional social structures (tribe, caste, class, etc.), the highly unequal ownership of land and other property rights, the disproportionate control by local elites over domestic and international financial assets, and the very unequal access to credit, these policies, based as they often are on mainstream, Lewis-type surplus labor or Chenery-type structural-change models, in many cases merely serve the vested interests of existing power groups, both domestic and international.
c) In addition, according to this argument, leading university intellectuals, trade unionists, high-level government economists, and other civil servants all get their training in developed-country institutions where they are unwittingly served an unhealthy dose of alien concepts and elegant but inapplicable theoretical models.
d) Proponents argue that desirable institutional and structural
reforms, many of which we have discussed, are neglected on
given only cursory attention.
C.3 Dualistic-Development Thesis
a) Dualism is a concept widely discussed in development
economics. It represents the existence and persistence of
increasing divergences between rich and poor nations and
rich and poor peoples on various levels.
23
i) Different sets of conditions, of which some are “superior”
and others “inferior,” can coexist in a given space.
ii) This coexistence is chronic and not merely transitional.
iii) Not only do the degrees of superiority or inferiority fail
to show any signs of diminishing, but they even have
an inherent tendency to increase.
iv) The interrelations between the superior and inferior
elements are such that the existence of the superior
elements does little or nothing to pull up the inferior
element, let alone “trickle down” to it. In fact, it may
actually serve to push it down – to “develop its
underdevelopment.
Implications
Dependence theories have two major weaknesses:
a) First, although they offer an appealing explanation of why many poor countries remain underdeveloped, they offer little formal or informal explanation of how countries initiate and sustain development.
b) Second and perhaps more important, the actual economic experience of LDCs that have pursued revolutionary campaigns of industrial nationalization and state-run production has been mostly negative.
D. The Neoclassical Counterrevolution: Market Fundamentalism
24
a) In the 1980s, the political ascendancy of conservative governments is the United States, Canada, Britain, and West Germany brought a neoclassical counterrevolution in economic theory and policy.
b) In developed nations, this counterrevolution favored supply-side macroeconomic policies, rational expectations theories, and the privatization of public corporations.
c) In developing countries it called for freer markets and the dismantling of public ownership, statist planning, and government regulation of economic activities.
d) The central argument of the neoclassical counterrevolution is that underdevelopment results from poor resource allocation due to incorrect pricing policies and too much state intervention by overly active developing-nation governments.
e) The neoliberals argue that by permitting competitive free markets to flourish, privatizing state-owned enterprises, promoting free trade and export expansion, welcoming investors from developed countries, and eliminating the plethora of government regulations and price distortions in factor, product, and financial markets, both economic efficiency and economic growth will be stimulated.
f) The neoclassical challenge to the prevailing development orthodoxy can be divided into three component approaches: the free-market approach, the public choice (or “new political economy”) approach, and the “market-friendly” approach.
25
g) Free-market analysis argues that markets alone are efficient – product markets provide the best signals for investments in new activities; labour markets respond to these new industries in appropriate ways; producers know best what to produce and how to produce it efficiently; and product and factor prices reflect accurate scarcity values of goods and resources now and in the future.
h) Public-choice theory , also known as the new political economy approach, goes even further to argue that governments can do nothing right. This is because public-choice theory assumes that politicians, bureaucrats, citizens, and states act solely from a self-interested perspective, using their power and the authority of government for their own selfish ends.
The net result is not only a misallocation of resources but also a general reduction in individual freedoms. The conclusion, therefore, is that minimal government is the best government.
i) The market-friendly approach is the most recent variant on the neoclassical counterrevolution. It is associated principally with the writings of the World Bank and its economists, many of whom were more in the free-market and public-choice camps during the 1980s. This approach recognizes that there are many imperfections in LDC product and factor markets and that governments do have a key role to play in facilitating the operation of markets through “nonselective” (market-friendly) interventions.
26
j) The market-friendly approach also differs from the free-market and public-choice schools of thought by accepting the notion that market failures are more widespread in developing countries in areas such as investment coordination and environmental outcomes.
In summary, each of these approaches to under standing of development has something to offer.
27
CONTEMPORARY MODELS OF DEVELOPMENT AND UNDERDEVELOPMENT
A. The New Growth Theory: Endogenous Growth
New growth theory
Also known as endogenous growth theory an extension and
modification of the traditional growth theory designed to explain
why long-run equilibrium growth can be positive and divergent
among countries and why capital tends to flow from poor to rich
countries despite the former’s low capital-labour ratios.
Models of endogenous growth discard the neoclassical
assumption of diminishing marginal returns to capital
investments, permitting increasing returns to scale in
aggregate production, and frequently focusing on the role of
externalities in determining the rate of return on capital
investments.
By assuming that public and private investments in
human capital generate external economies and productivity
improvements that offset the natural tendency for
diminishing returns, endogenous growth theory seeks to
explain the existence of increasing returns to scale and the
divergent long-term growth patterns among countries.
28
Whereas technology still plays an important role in
these models, it is no longer necessary to explain long-run
growth.
Romer endogenous growth model
An endogenous growth model in which technological spillovers
are present; the economy-wide capital stock positively affects
output at the industry level, so that there may be increasing
returns to scale at the economy-wide level.
Shortcomings of endogenous growth model
An important shortcoming of the new growth theory is
that it remains dependent on a number of traditional
neoclassical assumptions that are often inappropriate for
LDC economies. For example, it assumes that there is but a
single sector of production or that all sectors are
symmetrical. This does not permit the crucial growth-
generating reallocation of labor and capital among the
sectors that are transformed during the process of structural
change.
Moreover, economic growth in developing countries is
frequently impeded by inefficiencies arising from poor
infrastructure, inadequate institutional structures, and
imperfect capital and goods markets. Because endogenous
growth theory overlooks these very influential factors, its
applicability for the study of economic development is
29
limited, especially when country-to-country comparisons are
involved.
Finally, empirical studies of the predictive value of
endogenous growth theories have to date offered only
limited support.
B. Underdevelopment as a Coordination Failure
Put simply, a coordination failure is a state of affairs in which
agents’ inability to coordinate their behavior (choices) leads to an
outcome (equilibrium) that leaves all agents worse off than in an
alternative situation that is also an equilibrium. This may occur
even when all agents are fully informed about the preferred
alternative equilibrium: They simply cannot get there because of
difficulties of coordination, sometimes because people hold
different expectations, sometimes because everyone is better off
waiting for someone else to make the first move.
C. Multiple Equilibria:
Multiple equilibria
A condition in which more than one equilibrium exists. These
equilibria may be ranked, in the sense that one is preferred to
another, but the unaided market will not move the economy to the
preferred outcome.
D. Starting Economic Development: The Big Push
30
Big push
A concerted, economy-wide, and probably public policy-led,
effort to initiate or accelerate economic development across a
broad spectrum of new industries and skills.
Perhaps the most famous coordination failure model in
the development literature is that of the “big push,”
pioneered by Paul Rosenstein-Rodan, who first raised some
of the basic coordination issues.
The big push is a model of how the presence of market
failures can lead to a need for a concerted economy-wide
and probably public policy-led effort to get the long process
of economic development underway, or to accelerate it. Put
differently, coordination failure problems work against
successful industrialization, a counterweight to the push for
development. A big push may not always be needed, but it is
helpful to find ways to characterize cases in which it will be.
31
Foreign Aid: Definition
– In principle all governmental resource transfers from one
country to another country should be included in the
definition of foreign aid.
– However, there is problem in this definition: this may
include real resource transfers from developed to
developing countries in the form of implicit
capital/resource transfer:
through, e.g. the granting of preferential tariffs.
Such transfers are not considered as foreign aid.
further, private capital inflow should not also
be included in the foreign aid. Commercial
flows of private capital are not a form of foreign
assistance, even though they may benefit the
developing countries.
– Economists therefore, define foreign aid as any flow of
capital to LDCs that meets two criteria:
32
its objective should be non-commercial from
the point of view of the donor.
it should be characterized by concessional
terms – that is , the interest and repayment
period should be softer.
– Even the above definition can be inappropriate because it
could include military aid, (which is both non-
commercial and concessional) which is normally
excluded from international economic measurements of
foreign aid flows.
– The concept of foreign aid that is now widely used and
accepted, therefore, is one that encompasses all official
grants and concessional loans, in currency or in kind, that
are broadly aimed at transferring resources from
developed to less developed nations on development or
income distribution grounds.
– Unfortunately, there often is a thin line separating purely
developmental grants and loans from sources ultimately
motivated by security or commercial interests.
33
Problems in Measuring Foreign Aid
Three problems are –
First, we cannot simply add together the dollar values of grants
and loans; each has a different significance to both donor and
recipient countries. Loans must be repaid and therefore cost the
donor and benefit the recipient less than the nominal value of the
loan itself. Conceptually, we should deflate or discount the dollar
value of interest-bearing loans before adding them to the value of
outright grants.
Second, aid can be tied either by source (loans or grants have to
be spent on the purchase of donor-country goods and services) or
by project (funds can only be used for a specific project, such as a
road or a steel mill). In either case, the real value of the aid is
reduced because the specified source is likely to be an expensive
supplier or the project is not of the highest priority (otherwise,
there would be no need to tie the aid).
Finally, we always need to distinguish between the nominal and
real value of foreign assistance, especially during periods of rapid
inflation. Aid flows are usually calculated at nominal levels and
34
tend to show a steady rise over time. However, when deflated for
rising prices, the actual real volume of aid from most donor
countries has declined substantially during the past decade. For
example, during the period 1960-1990, the nominal outflow of
foreign aid from the United States increased by 130%, but the real
value actually declined by nearly 30%.
Why Donors Give Aid
Two broad Categories of motivations:
– Political
– Economic
Political Motivations:
Containing international spread of communism
Contain Islamic insurgencies
Economic Motivations: Two-gap models and other criteria
Savings investment gap
Foreign exchange gap
Growth and savings
Technical assistance
Economic Motivations and Self-Interest
35
Some development assistance may be motivated by moral and
humanitarian desires to assist the less fortunate (e.g.,
emergency food relief program), but there is no historical
evidence to suggest that over long periods of time, donor
nations assist others without expecting some corresponding
benefits in return.
Why LDCs Accept Aid
First, for economic reason it is believed that aid is a crucial
and essential ingredient in the development process. It
supplements scarce domestic resources, it helps transform the
economy structurally, and it contributes to the achievement of
LDC takeoffs into self-sustaining economic growth. Thus the
economic rationale for aid in LDCs is based largely on their
acceptance of the donor’s perceptions of what the poor
countries require to promote their economic development.
Second, in some countries, aid is seen by both donor and
recipient as providing greater political leverage to the existing
leadership to suppress opposition and maintain itself in power.
The problem is that once aid is accepted, the ability of
recipient governments to extricate themselves from implied
political or economic obligations to donors and prevent donor
governments from interfering in their internal affairs can be
greatly diminished.
36
Finally, whether on grounds of basic humanitarian
responsibilities of the rich toward the welfare of the poor or
because of a belief that the rich nations owe the poor nations
conscience money for past exploitation, many proponents of
foreign aid in both developed and developing countries
believe that rich nations have an obligation to support LDC
economic and social development.
37
Technological Transfer and Technical Assistance
A) Technology
1. Very simply defined it is way of doing things;
2. Broader definition: all skills, knowledge and procedures for making, using and doing useful things;
3. It includes the nature and specification of what is produced – the product design, as well how it is produced;
4. Technology extends to services – administration, education, banking, law – as well to manufacturing and agriculture – it includes both hardware: mechanical process: and software: managerial techniques and infrastructural services;
5. Technology consists of a series of techniques;
B) Inappropriate Technology
1. The actual technology is decided/limited/circumscribe by –
a) Nature of world technology;
b) Availability to the country;
c) Choice made among those.
2. A technology is inappropriate: because –
a) The world technology is inappropriate;
b) Because an inappropriate sub-set is available;
c) Or an inappropriate selection is made;
d) Or some combination of the above three.
38
C) Characteristics of Technology
(Associated with set of activities)
a) The nature of the product;
b) The resource use (machinery, skilled and unskilled
manpower, management, material and energy inputs);
c) Scale of production;
d) Complementary products and services involved.
D) Country Applicability
1. Any or all of these characteristics may be important in determining
whether it is possible/or desirable to adopt a particular technique
in a particular country, and the implications of so doing.
E.1) Determinants of new technology (for a country):
a) Income levels;
b) Resource availability and costs;
c) System of organization of production;
d) The nature of technology in use.
E.2) In each of these aspects, advanced countries differ from the
poor countries.
E.3) So technology designed for developed countries tends to be
ill-adapted (or inappropriate) to the conditions of poor countries.
39
F) Techniques designed for modern countries:
a) Tend to produce high income products;
b) High-capital intensity;
c) High level of education and skills;
d) Large scale production requiring sophisticated management skill;
e) Linked with, through inputs and outputs, with the rest of the advanced technology.
G) If they are transferred unmodified to LDCs, the consequence will be:
a) A concentration of resources, of savings, and expenditure on human resources and infrastructure of a small part of the economy;
b) Income will tend to be concentrated in this area leading to high income products the system produces;
c) Resources of the LDCs will be underutilized, including raw materials as well as labour;
d) Dual economy characteristics will emerge:
1. Capital intensity of production techniques;
2. Heavy reliance on imported managers;
3. Skill deficiency;
4. Und-and-underemployment;
5. A relative deprivation of the economy outside the modern sector;
H.1) Rapidly growing economies and which are selective can avoid these consequence (Taiwan, South Korea).
H.2) Others like China have avoided dualistic tendencies by protecting the non-modern sector.
This is known as “Walking on two legs”.
40
I.1) This argument is challenged as simplistic Technological Deterministic Argument.
I.2) It is argued that in many industries there is a wide choice of efficient technologies.
Pack (an Economist) argues choosing the most appropriate technology, countries can make significant gains at the macro-level in terms of:
a) Employment;b) Output;c) Saving.
J) Factors limiting the choice of labour intensive technology:
a) Products standard characteristics may rule out labour intensive technology;
b) Lab. intrusive techniques are only economic at small scale;
c) Lack of information about the full range of technology available may bias choice;
d) Not only relative price of capital and labour determines choices other factors such as market, income distribution, trading strategy etc. also influence choice;
e) Choices are not static – because shelf is moving/changing as technical change proceeds.
K) Two types of appropriate technology:
a) Appropriate for modern sector – advanced country technology adapted to LDCs’ situation;
b) Appropriate technology for traditional sector – upgrading and improving traditional technology.
L) Innovation assimilation – innovating on the top of imported technology in the direction of using relatively more abundant unskilled labour supply.
41
AID Conditionality
Aid is conditional.
When aid is given for strategic reasons, the
conditionality is self-evident
When the ostensible purpose is to help economical
development especially the issue of conditionality is
considerably more delicate.
In the 1950’s the conditionality was, to have large-scale
industrial development plans and inward looking import
substitution strategies.
In the 1960’s and 1970’s this remained intact, but
additional conditionality introduced to ensure adequate
expansion of the social sectors and of agriculture,
especially small-farmer agriculture.
In the 1980’s the conditionality swung to insist on
“market-friendly” reforms, including opening up the
economy to imports and foreign direct investment,
privatization of state owned enterprises, opening up of
the international capital account, and maintaining fiscal
balance through austerity in public expenditures.
42
In the 1990s the debate on conditionality focused on which of these elements could form part of a successful development strategy, which would include a broader set of conditions, for example on public expenditure restructuring, governance, etc.
Conditionality does not seem to work because:
The steady flow of aid is a source of income to many interest groups in the donor country. Their dominant concern is their income, not necessarily the well being of the aid recipients. If conditionality is violated, the short term interest of these groups is for the aid to flow in any case (at least, that part of the aid which flows back to them).
There is a triadic relationship between the company in the donor country which depends on contract payments from the developing country, the developing country government, and the donor government or agency.
Another line of argument focuses on the incentives facing bureaucrats in aid agencies.
Enforcing conditionality will inflict short term pain on the very people the aid is meant to help. Of course such “tough love” may be best in the long run, but this does not mitigate the short term temptation to overlook the violation of conditionality.
43
DEBT RELIEF
A: The Need for Debt Relief
There is growing consensus around the world that debt is a major obstacle to the sustainable development of poor countries.
Some countries spend more than 75% of their budget on debt payments, leaving them with little money for developing the economy, or for social expenditures, like education and health.
The cost of debt payments, or servicing the debt, can also suck up much of the foreign currency a country earns with its exports, leaving little foreign currency to buy vital imports.
B: Why Some Countries are in Debt Crises
In the last 1970s and early 1980s, interest rates soared, to unprecedented levels. With those increases in interest rates, what were serviceable debt levels, suddenly became unsustainable. In the late 1990s, interest rates to emerging markets soared again. Even when countries do not have short term debt, there is a constant need to roll over debt, and when it is rolled over, they face higher interest rates.
44
Most debt is denominated in dollars or other hard currencies, and accordingly, what is a manageable debt level becomes unmanageable when poor countries’ currencies are devalued or depreciate in relation to hard currencies.
Many developing countries are dependent on exporting commodities such as agricultural products, minerals or metals, to earn money to pay off their debts. When export prices collapse, the debt burden becomes unsustainable.
Many of the very poor countries borrowed extensively throughout the 1980s, hoping their economies would start to grow by more than enough to repay the debt. But for one reason or another, the growth did not materialize.
C: Debt Relief Negotiations
To negotiate official debt Paris Club, a group rich countries, needed to be consulted.
To negotiate commercial debt, deal with London Club.
45
D: Process of Debt Relief
Stage – 1: Three Year Phase: At the end of this period a country
reaches its decision point, and have to carry out some
reforms to get partial debt relief.
Stage – 2: Three Year Phase: At this stage, the country will reach completion point, it will carry out further reform, and complete reforms to qualify for full debt relief.
E: Criticism of World Bank & IMF Position
Reluctant to go for debt relief on the pretext of moral hazard.
This is not fair. These official institutions, with their greater sophistication, should be able to perform a full risk analysis better than the borrowing countries, and should be able to refuse to lend to countries that are overstretched.
Officials at the Bank talk ominously of the damage debt write-offs would cause to its credit AAA rating. Debt write-offs would imply an acknowledgment that the Bank had made mistakes in lending. This is position is also not acceptable.
46
F: Things to Watch for Debt Relief
1. Pace of Debt Relief
By mid-2001, only (2) of 41 HIPC (Bolivia and Uganda) had reached completion point, and (23) Decision pout.
Why so small numbers of countries get debt relief: Because they cannot meet the requirement.
2. PRSP
3. Government Expenditure
4. Growth Rate
5. The Case for Non-HIPCs
47
G: Debt Relief Status
70 countries renegotiated debt
Traditional mechanism of debt relief
Delayed payments
Reduced interest rate
Extended repayment period
Since late 1970, 50 countries got debt relief of US $6.5 billion under traditional debt relief mechanism.
This is too small in relation to total aid between US $1.6 trillion to US $2.3 trillion.
Under pressure IMF and World Bank in 1996 announced a new debt relief program known as Heavily Indebted Poor Countries (HIPC) initiative.
Jubilee 2000, an international civil society and religions organization, advocated wholesale debt relief as a gesture of debt relief to mark the new millennium.
HIPC initiative not very successful.
48
DOFS AID WORK?
Both right and left political spectrum commentators
criticize foreign aid.
Right criticisms include, among, others:
It delays self-reliance on the part of the recipient
country.
It substitutes for domestic savings.
It fosters dirigisme: Economic control and planning
by state/also state control of social matters.
Encourages/allows the postponement of policy
reform.
It leads to north-south confrontation, not its
solution.
It promotes or exacerbate the politicization of life in
aid-receiving counties. Aid increases money,
patronage, and power of the recipient governments,
and thereby their grip over the rest of society. It thus
promotes the disastrous politicization of life in the
third world.
49
Largely appropriated by corrupt bureaucrats, stalls
initiatives.
Given birth to welfare mentality among recipients
Left criticisms – include:
Aid perpetuates dependence
Creates urban-rural/Modern-traditional sector disparity
It props up authoritarian and repressive regimes
It perverts domestic development
It retards growth, it is anti-development
It increases rich-poor gap.
Empirical Evidence
A: A Former Director of DAC Notes:
Record of performance is mixed.
There have been major and spreading achievements. Aid worked as catalyst, not the main force – to boost food production in South Asia. In other cases – South Korea and Taiwan, very heavy concentrations of economic aid (in both cases, interestingly, for strategic reasons) have helped lay the base for burgeoning economic expansion.
Aid has helped build such key development-promoting institutions as agricultural universities,
50
technical institutes, and enterprise management training establishments in many countries.
Directly and indirectly aid has contributed to the downward trend in birthrate that has begun to appear in certain countries, especially in Asia.
A number of econometric studies have attempted to estimate the effects of aid on domestic saving rates.
A study by Weisskopf reached the most negative conclusion: an estimate that about 23 percent of foreign-capital inflows were offset by declines in domestic savings.
Other studies, however, show different results, generally suggesting a positive marginal propensity to save.
The most extensive study of the contribution of aid concludes that most aid does indeed “work.” It succeeds in achieving its developmental objectives (where those are primary), contributing positively to the recipient countries’ economic performance, and not substituting for activities which would have occurred anyway. That is not to say that aid works on every count. Its performance varies by country and by sector.
Aid agencies have also evaluated the effects of their aid to projects. A Development Advisory Committee report concluded that about 33 percent of aid’s capital projects are highly successful, 33 percent “can be judged satisfactory,” and 33 percent are disappointing. Of these last, about 10 percent of the total have to be regarded as “a total loss.”
51
Evaluations of World Bank projects completed in the 1970s (130 projects representing $10 billion of total investment) showed that 94 percent achieved their major objectives, including the minimum required economic rate of return of 10 percent.
The 49 agricultural projects evaluated averaged an economic rate of return of 19.5 percent.
Even for the soft loans of the International Development Association (IDA), 80 percent of the projects achieved a rate of return of 10 percent or more.
The Asian Development Bank and the Inter-American Development Banks (IDB) have also concluded that 60 percent of samples of their loans fully met their objectives, 30 percent partially did so, and less than 10 percent were marginal or unsatisfactory.
52
Table – Schematic overview of main developments in the history of foreign aid
Dominant or rising institutions Donor ideology Donor focus Types of aid
1940s Marshall Plan and UN System (including World Bank)
Planning Reconstruction Marshall Plan was largely programme aid
1950s United States, with Soviet Union gaining importance from 1956
Anti-communist, but with role for the state
Community Development Movement
Food aid and projects
1960s Establishment of bilateral programmes
As for the 1950s with support for state in productive sectors
Productive sectors (e.g. support to the green revolution) and infrastructure.
Bilaterals gave technical assistance (TA) and budget support; multilaterals supported projects
1970s Expansion of multilaterals especially World Bank, IMF and Arab-funded agencies
Continued support for state activities in productive activities and meeting basic needs
Poverty, taken as agriculture and basic needs (social sectors).
Fall in food aid and start of import support
1980s Rise of NGOs from mid-1980s Market-based adjustment (rolling back the state)
Macroeconomic reform. Financial programme aid and debt relief
1990s Eastern Europe and FSU become recipients rather than donors; emergence of corresponding institutions
Move back to the state toward end of the decade
Poverty and then governance (environment and gender passed more quickly)
Move toward sector support at end of the decade.
Note: Entries are main features or main changes, there are of course exceptions
53
Source: Reproduced from Hjertholm and White (2000), P 81, Table 3.1
54
Seven Deadly Sins:Reflections on Donors’ Failings
– Nancy Birdsall 1
1.0 Growing need for increased aid to meet the continuing development challenges of the world’s poorest countries.
2.0 Equal attention is needed to reform of the aid business itself, that is, the practices, processes, procedures and politics of aid.
3.0 Seven of the worst failings or sin of the donors are:
Sin-1 Impatience (with institution building):
First several postwar decades the aid emphasized physical capital or hardware.
Emphasis now has been shifted to software: the institutions, customs, laws, social cohesion governance.
Dev. now seen as a process of creating and sustaining the economic and political institutions that support equitable and sustainable growth.
Dev. assistance is more likely to be effective in settings where there is evidence that the process has started already.
1 President of the Centre for Global Development, Washington.
55
However, over the last three or more decades, the
donors achieved limited success in supporting
institutional development.
Donor impatience avoids and even undermines the
challenge of building institutions.
The important impatience’s include:
Impatience for results
Impatience to disburse money
Impatience for project implementation (create
special project management unit avoiding
institutional changes).
Impatience for policy change
Sin-2 Pride (failure to exit):
By exit is meant discontinuing new large grants and
loans, and not withdrawing from continuing
engagement through dialogue, technical advice and
even small transfers for training and technical
assistance.
Impatience is accompanied by an inability and
unwillingness to exit from programs and countries
where their aid is not helping.
56
Sin-3 Ignorance (failure to evaluate):
In 50 years of postwar foreign aid systematic evaluation has been rare.
Questions that research findings raise:
Does the existence of an alternative source of revenue make it difficult for citizen, voters, parliaments, civil society groups, to hold central governments accountable?
Do aid inflows undermine local governments, by making them more dependent on transfers from the centre?
Does aid create some of the same problems of concentration of unchecked power that result from oil and other mineral resources?
From cross country studies it is concluded that aid increases growth in countries with a good policy environment (and presumably reasonably sound political and economic institutions to manage good policy.
Sin-4 Sloth (pretending “participation” is sufficient for “ownership”):
In principle the logic of widespread participation in setting reform agenda makes sense.
But it would be wrong to delude oneself that participation creates or indicates ownership.
57
Sin-5 Envy (collusion and coordination failure):
The donors are neither competing nor collaborating. They are in effect colluding – something easy to do for supplies in the absence of a competitive market.
The proliferation of colluding donors (i.e. the tendency of donors to operate in many countries and in many sector of within countries) creates what is now called donor fragmentation, the flip-side of donor proliferation, with the measure of fragmentation rising with the number of donors and the smaller their aid shares.
Sin-6 Greed (stingy, and worse, unreliable transfers):
It is odd to accuse donors of stinginess, since by definition they are providing resources voluntarily, and any amount might be viewed as generous.
On the other hand, given the claims of “partnership” (for example in the context of the Millennium Development Goals), the donors as a group are “stingy” relative to their commitments, and worse are so unreliable and unpredictable that the value of their transfers is greatly reduced.
Sin-7 Foolishness (underfunding of regional public goods):
Donors direct almost all of their resources to individual recipient countries, as opposed to regional groupings and global public goods.
58
What to Do (Fixes)
1.0 Impatience (with institution building) : A first step would
be for the donor community to acknowledge its overall
past failure, and undertake a collective assessment of
how to address that failure, in close and constant
consultation with wise people from the developing
countries.
2.0 Pride (failure to exit) : Exit should be established as the
norm, not as punishment or judgment, but as a natural
response to signs that investments being financed will
not yield adequate returns.
3.0 Ignorance (failure to evaluate) : A minimum number of
major donors could make a collective agreement to self-
finance a fully independent evaluation entity, which
would in turn contract third-party evaluations of selected
donor-financed projects and programs, and of donor
behaviours and modalities.
4.0 S loth (pretending participation is sufficient for ownership) :
Donors need to end their apolitical approach to
ownership, and engage instead in assessment to the
interests of politically powerful stakeholders, the record
of existing governments on difficult reforms, and
governments vulnerability to an ouster if it takes certain
steps.
59
Ultimately, it may be that only when developing country
recipients have more voice (and votes) in the major
institutions will they assume real “ownership” of pro-
poor economic and political reforms altruistic donors
wish to support.
5.0 Envy (collusion and coordination failures) : Minor fixes
could include agreement to the bilateral donor
governments to increase the portion of their total
assistance spending that goes to multilateral institutions
and programs; agreement to the concept of lead donors in
highly aid-dependent countries, and the financing
through DAC of grants to developing country policy
groups to report on in-country performance of the
individual donors.
6.0 Greed (inadequate and unreliable transfers) : Instruments
that build in less volatile and more predictable financing
are needed, as well as larger aid budgets.
7.0 Foolishness (underfunding of regional public goods) :
Financing of regional public goods, especially in Africa,
needs a champion – probably the British or the France,
who would push for a revamping of the singular country
focus that now prevails.
60
East West University of DhakaEconomics for Development
Course ID-501
61
