MDS 501

Development Theories and Perspectives

Westernizing Third World

Shuchita Sharmin, Ph.D.
Associate Professor
University of Dhaka, Bangladesh
Adjunct faculty: BUP

Group Presentation-1
Group 1

Date: 31 Mar 2017

 Group 1 Members and Topics

Sl
Name Class ID Topics
No
D
1 Faria Islam New agenda, new terminology: two axis worldview
1703101
D
2 Nilufa Yesmin The bipolar worldview: redefining us and them
1703103
D
3 Md Al Amin Modernization and national leadership
1703105
D
4 Mehnaz Alam The new macroeconomics
1703107
Sharmila Rani D
5 The golden age of modelling
Chakrovarty 1703109
Muhammad Shahinur D
6 Vicious circles of poverty and the population trap
Islam 1703111
D
7 Md Shahidul Alam The big push theory of industrialization
1703113
D
8 Rafiya Islam Mohuya The rostowian stages theory
1703115
Khadiza Mustary D
9 Balanced versus unbalanced growth
Maheen 1703117
D
10 Syed Md Tafim Economic Dualism: The Lewis Two Sector Model
1703119
D Import substitution industrialization, Export promotion and The
11 Md. Mamunur Rashid
1703121 infant industry argument
D
12 Enamul Haque Nayeem Neo classical growth and distribution theories
 New Agenda, New Terminology and The Two
Axis Worldview
After the Second World War the nature of development economics
and development assistance changed dramatically.
The desire to increase development became part of the cold war
between the two superpowers, as well as increasingly seen as a
responsibility of the developed world towards the developing
world.
The post war (1945) came up with new agenda and terminology
based on-
 Bipolar worldview

The earth-shaking aftermath of the Second World War led to the

emergence of a bi-polar world dominated by the superpowers of
the United States and the Soviet Union.
This increase of superpower hostility began to dictate global policy
as early as 1946, and this affected the perceptions of the
superpowers towards the poor of the world.
This conflict has also created some of the most known (and now
largely defunct) terminology in describing and categorizing the
world, by dividing it into three parts: the first, second and third
world.
 Modernization
At that time, the attempt to stimulate development both in the
capitalist sphere and the socialist sphere was underpinned on the
idea of modernization
Modernization Theory, as defined by Giddens (1991), paid
attention to the fact that there were important changes to
the way of life from the industrial revolution onwards in
the Western world, which underpinned the sustainable
economic growth in the future.
By the 1950s the idea of modernization provided essentially two
broad alternatives
 Linear economic development
Rostow's Stages of Economic Growth model is one of the major historical
models of economic growth. It was published by American economist Walt
Whitman Rostow in 1960.
Rostow combined the concepts that he had developed earlier during the
1940s and 1950s according to which development was seen as a five-stage
process
1) The traditional stage: An agricultural economy, with very limited trade
and a rigid hierarchical social structure and limited technology.
2) The pre-conditions for take-off stage: Demand for raw materials
drives trade, the society becomes less self-sufficient, opening up to external
impulses, changing social structures.
3) The take-off stage: Manufacturing is industrialized, like in Britains
Industrial Revolution. As a result agriculture looses power in the economy
and society; social order is reshaped. This is the key stage: investment
ensures that the Malthusian trap is broken as income grows faster than
population.
4) The drive to maturity stage: development undergoes a consolidation
by spreading in other industries. General improvement of the conditions of
the population as domestic consumption rises; social infrastructure begins to
develop.
5) Age of mass consumption stage: the industrial base is established,
social rights are conquered and enjoyed; by this state, the westernization
process is nearly completed.
 The bipolar worldview: redefining
us and them

Bipolarity can be defined as a system of world order in which the

majority of global economic, military and cultural influence is held
between two states.

The classic case of a bipolar world is that of the Cold War between
the United States and the Soviet Union, which dominated the
second half of the twentieth century

The big power politics were played on two axes ,An east-west
security axes focused on ideological confrontation between first
(capitalist) and second (communist) world And a north(rich)
south(poor) development axes.
The concept of bipolarity has significant implications for global
order. Firstly, two rival powers cannot remain in equilibrium
indefinitely; one has to surpass the other and therefore conflict is
inevitable in a bipolar world
 ORIGIN
It was a product of US-Eurocentric Mindset

Developed at the end of world War II

The bipolar worldview rank third world countries the last

Which describer the third world countries as backward, underdeveloped and sometimes
worse

The western wants to westernize and modernize the people of Asia, Africa and Latin America

The inner logic of this new US-Eurocentric worldview was the containment of communism
worldwide as articulated by George Kenan
The new agenda of economic developmentalism for the third world
development was set .It was a northern agenda mapping the course of
economic development in the third world from outside, defining goals,
and selecting policy instruments for state-sponsored capitalist
development within all ultimately justified with reference to rational
behavior

The ideological differences between the Capitalist West, represented

by the United States, and the Communist East, represented by the
Soviet Union, reached the boiling point after the end of World War Two.
The conflict lasted for five decades and affected the entire world. . Of
increasing importance also, is the emergence of power blocs, which
arise as lesser powers fall under the influence of one or other of the
superpowers.

Domestic constraints and institutional capacity inside the third world

seemed not to matter all, it was as if developing countries were all
empty ready for brand new start.
 MODERNISATION AND LEADERSHIP
Modernization is the concept that originates from
Europe that refers to a model of a progressive
transition from a 'pre-modern' or 'traditional' to a
'modern' society. In pre-modern age, man thought that
things, such as calamity, were caused by nature and
there is no human hand in it, but in morn ages, human
thoughts are dominated by rationalization and
science. With the transition from pre-modern age to
modern age, people do not guide themselves through
traditions and super natural things. Simultaneously,
people have started defining leadership on the basis
of rationalism and they no more choose leadership on
the hereditary basis. They want quite a number of
qualities from a leader. Lets now go back to the main
topic modernization and leadership. The subject made
ABILITY TO LISTEN
Richard Branson has said that If you want to stand out
as a leader, a good place to begin is by listening. By
listening to other people you show appreciation
towards them, which is a good starting point for
forming relationships based on trust. Good leader also
recognizes that he/she is not a source of all wisdom,
but by listening one can get new ideas and
perspectives.
FLEXIBILITY
Business is changing all the time and it requires
flexibility and good reaction skills from the larders.
When everything does not go as planned (as usually
happens), the leader should be able to make decisions
fast and without getting stressed.
GOOD COMMUNICATION SKILLS
Todays leaders need to understand and manage an
increasingly fragmented media environment and
communicate the companys message systematically
and skillfully. Employees also expect seamless and
open communication and without effective
communication skills. it would be difficult for the
leaders to inspire them.
COURAGE
Leaders need lots of courage and boldness nerve to
try something new, ability to make decisions in
uncertain situations and courage to tackle situations or
issues that are somehow unpleasant or otherwise
against the company goals.
ACCOUNTABILITY
ABILITY TO ADJUST THE LEADERSHIP STYLE
ACCORDING TO THE SITUATION AT HAND
Leaders must be forerunners, pioneers, guides or, for
example, builders of collaboration, all depending on the
situation.
STRATEGIC MINDSET
Strategic mindset is needed, so that the leader can
successfully create and enforce the viability of the
company.
INTEREST TOWARDS CUSTOMERS
Leaders must be interested in their customers and their
customers business and strategy, because customer
oriented thinking and good customer experience are
success factors of the future.
GOOD ABILITIES TO COOPERATE
Leading is primarily influencing through others, whether
APPRECIATION FOR DIVERSITY
Only bad leaders seek to work with people that are like
them and agree with them on everything. Good leaders
seek and value diversity and differences of opinions.
FAIRNESS
Good leaders must treat everyone equally and their
behavior must be predictable.
ABILITY TO HANDLE PRESSURE AND DIFFICULT
SITUATIONS
Theres rarely days when the leader can avoid tough
situations. Ability to control stress and build something
meaningful even from the most difficult situations help
the leaders to manage their daily work.
ABILITY TO FOCUS
Leaders must be able to manage the big picture, but
they also need focus on the essential and guide others
to focus on what is needed. Because nobody is
absolutely perfect and finding all these qualities in one
person is rare, one should also list here knowing
his/her own limitations. Good leaders know what they
cannot do and where are their limits. Although one can
seek to develop the skills they lack, sometimes it is
better to ask for help. Therefore, modern leadership
requires the leader to have many skills and qualities
that create value for the customer, for the organization
and for the individual.
 The new macroeconomics

John Maynard Keynes is the architect of new macroeconomics

He developed the the General Theory of Employment, Interest
and Money in 1936
He favoured active state intervention through deficit financing
He described the magic of multiplier to cure deficiency of
aggregate demand.
This was a situation of typical developing countries
But keynesian theory developed it for the Western Economies
and then the deep depression.
Keynes found the solution via deficit financing
It led to a full employment policy
The theory did not fit anywhere because the third world was still in
the future , it had to await the age of decolonization.
It emerged as the key theory of popularize capitalization of third
world development.
The golden age of modeling
 The golden age of modeling

The 20 year period from 1950 to 1970 can be labeled as a

golden age of Eurocentric modeling to shape third world
economic development (Moraweta 1977: Tolbert & Baum 1985)
During this period ,Keynesian disciples pioneered the extension
and application of macromodelling to the third world ,which
ultimately evolved into the national accounting system adopted by
the world bank and the united nations.
Notable among these theorists were Harrod 91948).Domar
(1946),Nurske (1953),Tinbergen (1964,1967) and Kuznets
(1959,1966)
Some of their theories will be further examined such as-
Lewis two-sector model.
 The golden age of modeling

However ,as one examples at this stage ,and in view of its

subsequent importance ,reference can be made to Joan Robinson
s concept of disguised unemployment (Robinson 1936).
This concept was formulated on the basis of massive and
widespread under-employment in industrial economics during the
depression years.
Subsequently ,it was utilized most effectively by Artuer Lewes
(1954) in his Nobel winning contribution ,namely ,the two sector
theory of capitalist economic development with unlimited supplies
of labor .
 The golden age of modeling

The Lewis Two-Sector Model

Originated by Arthur Lewis
It was Eurocentric
The UN and other western donors eagerly became implementing
agencies for this urban-based development strategy.
Which subsequently caused ,as a result of unplanned urbanization
and rural urban exodus, so much dislocation and destruction in the
third world.
Vicious circles of poverty
and
the poverty trap
The cycle of poverty is the
"set of factors or events by
which poverty, once started,
is likely to continue unless
there is outside intervention".
The cycle of poverty has been defined
as a phenomenon where poor families
become impoverished for at least
three generations.
Causes of poverty:

Low productivity
Low salary
Poor infrastructure and governance
Business failure
Ignorance, lack of skills and technology
Unhealthiness or diseases
Disaster
Inability to access to resources such as
land, finance, information, technical
assistance
No ongoing education
Lack of education and knowledge
Poverty Trap

Poverty trap is a self-perpetuating

condition where an economy, caught in a
vicious cycle, suffers from persistent
underdevelopment.
The Big Push
Theory

Prof. Rosenstein
Rodan
 Introduction
It is based on the principle of big push or by the
way of big investment for development in an UDC.
Investment below a certain level will be a mere
wastage and will not enable the economy to break
the vicious circle of poverty.

Explanation
Prof. R Rodan has mentioned three kinds of
indivisibilities which are considered foremost in
getting the path of economic development:

Indivisibility in production function.

Indivisibility in demand.
Indivisibility in Supply of Savings.
1. Indivisibility in Production Function
It refers to the indivisibilities of input, output,
process of production etc.
These indivisibilities lead to increasing returns
(i.e., increase in output income employment)
and lowers capital output ratio.
The most important instance of this
indivisibility is Social Over head capital.
Social Overhead capital (SOC)
It includes the production of power, transport,
communication and public utility services with
heavy amount of investment on directly
productive activities.
Their installation requires a "sizeable initial
lump' of investment, but as time passes, better
utilization brings down cost and makes it
profitable.
Indivisibilities of creating SOCs
Indivisibilities of time: SOC is irreversible in time as
it has to be provided before setting up directly
productive industries.
Indivisibility of durability: SO lasts for long period
less capital not beneficial.
Investment of an irreducible industry mix of
public utilities: SOs must be developed immediately.
Isolated facilities will not be beneficial.
2. Indivisibility in demand.
The central idea of Rodan in this regard is that UDCs
have small sized markets due to low per capita income
and low purchasing power of general mass of people.
It can be taken care of by expanding the size of the
market and development of the complementary
industries together.
Example of Shoe factory.
 Indivisibility in Supply of Savings
Substantial investment in a no. of industries at
one and the same time requires a very high
level of savings, which is very difficult to
achieve in an UDC.
Solution to this is, when income is increased
due to increase in investment mechanisms
must be provided to raise the marginal rate of
saving in comparison to average rate of
savings.
Criticisms
* High minimum quantum Investment is not explained, and
also, the capacity of UDCS to invest is absent.
* There are no specific measures to overcome bottlenecks.
* He doesn't give importance to PPP Model.
* He doesn't give much importance to technology.
* It fails to recognize that the amount of resources in UDCs is
limited.
* It is a program of comprehensive industrialization,
agriculture gets no mention.
* It lays too much emphasis on the indivisibilities.
* There is a danger of inflation.
* This theory can not be adopted without active state
participation guidance and control. But, in UDCs the Govt.
administration in very much inefficient, inexperienced and
lethargic to handle.
Theory not Supported by History
As noted by Furtado, the theory is not confirmed by historical
facts.
Ex. BOLIVIA, where large investments were spent on social
overheads yet the economy remained stationary and per capita
income also remained low.
 Linear

Stages Theory
The theorists of 1950s and early 1960s viewed the process of development as a
series of successive stages of economic growth through which all the advanced
nations of the world had passed.
W.W. Rostow was an American economist who presented 'Stages of Growth' model
of development.
Stages of economic growth are:
 Practical Importance of Rostow's Stages:

The above stage theory of development, or the history of modern societies is of the view that the
advanced countries had passed the stage of take off into self-sustaining growth. While the UDCs are

still passing through traditional society or the pre-conditions to take-off .

Criticism:
Rostow's five stages of economic growth are against Marx stages of feudalism, bourgeoisie,
capitalism, socialism and communism.
(i) Stage Making Idea is Misleading
(ii) Leading Sectors
(iii) Data is Unconfirmed
(iv) No Distinction Between Pre-Conditions and Take-Off
(v) Self-Sustained Growth
(vi) Pre-Conditions is Not a Chronological Concept
(vii) Idea of Increase in Investment is Not New
 Balanced vs. Unbalanced Growth

In order to get rid of vicious circle of poverty, underdeveloped countries

need investment on a large-scale.

There are two theories concerning strategy of economic development:

1.Theory of Balanced Growth: According to Rodan, Nurkse and

Lewis, economic development these economies should make
simultaneous investment in all sectors to achieve balance growth.

2.Theory of Unbalanced Growth :According to Hirschman, Singer,

Fleming. These economies should create a situation of unbalance by
making large investment in anyone sector
 Balanced Growth

1.Rosenstein-Rodan - Big push needed because of

indivisibilities of infrastructure & demand

2.Ragnar Nurske - synchronized application of capital to wide

range of different industries

Unbalanced Growth
1.Albert Hirschman Need to consider how investment
affects profitability of other sectors

2.Walt Whitman Rostow:

 Dissimilarities

Balanced GrowthTheory: Unbalaced Growth Theory:

1. Simultaneous growth of 1. Focuses is on the growth of
all sectors of the economy. certain key sectors of the
economy
2. Seeks to accelerate the
process of growth through 2. The process of growth
simultaneous investment through Imbalances in the
across all sectors of the system.
economy
3. Requires lot of 3. Requires relatively
capital investment much less
right from the investment.
beginning of growth
process. 4. A Short period
4. A long period of strategy of growth.
strategy of growth
5. It is decision
5. Size of the market is making and
the principal limiting entrepreneurial skill
factor.
 Similarities
1. Ignore the Role of the Government
2. Inelastic Supply of Factors
 Advantage of Theory of Balanced
Growth
Large size of Market
External Economies
Horizontal Economies, Vertical Economies
Better Division of Labour
Better Use of Capital
Rapid Rate of Development
Encouragement of Private Enterprises
Breaking of Vicious Circle of Poverty
Encouragement of International
Specialization
Development of Social Overhead Costs
 Criticism of Theory of
Balanced Growth

This theory Criticized by Fleming, Singer, Hirschman and Kurihara:

Agricultural investment needed.

Infrastructure not so indivisible.

Economy that can undertake balanced growth is not underdeveloped -

capital, skills, materials needed are immense.

Not starting from scratch.

Growth in 1960s & 1970s without massive investments.

Unrealistic or Ignores Scarcity of Resources

Same Policy for Developed and Underdeveloped countries

Feature of the Theory of Unbalanced
Growth
Investment should first be made in
the key sectors of the economy.
Based on the principle of
inducement & pressures.
Big Push
Real life observations
Significance of the Public sector with
regard to SOC activities
 Criticism of the Theory of Unbalanced Growth

According to Paul Streeten

Inflation

Wastage of Resources

No Mention of Obstacles

Increase in Uncertainty

Unbalance is not Necessary

Neglect of Degree of Unbalance

Lack of basic Facilities

Disadvantages of Localization
 Economic Dualism:
The Lewis Two Sector Model

The "Dual Sector Model" is a theory of development in which

surplus labor from traditional agricultural sector is transferred to
the modern industrial sector whose growth over time absorbs the
surplus labor, promotes industrialization and stimulates
sustained development.
Initially the dual-sector model as given by W. A. Lewis was
enumerated in his article entitled "Economic Development with
Unlimited Supplies of Labor" written in 1954, the model itself was
named in Lewis's honor.
 Surplus Labor and Traditional Norms

Rural Sector: Defined as "that part of the economy

which is not using reproducible capital". It can also
be adjusted as the indigenous traditional sector or
the "self employed sector". The per head output is
comparatively lower in this sector and this is because
it is not fructified with capital.

Industrial Sector: Defined this as "that part of

the economy which uses reproducible capital and
pays capitalists thereof". The use of capital is
controlled by the capitalists, who hire the
services of labour. It includes manufacturing,
plantations, mines etc. The capitalist sector may
be private or public.
 Assumptions

Developing economy has a surplus of unproductive labor in the

agricultural sector.
These workers are attracted to the growing manufacturing sector
where higher wages are offered.
The wages in the manufacturing sector are more or less fixed.
Entrepreneurs in the manufacturing sector make profit because they
charge a price above the fixed wage rate.
Profits will be reinvested in the business in the form of fixed capital.
An advanced manufacturing sector means an economy has moved
from a traditional to an industrialized one.
Process diagram
 Critique of Lewis Model Assumptions

Unevenness of development pattern

Benefits of development in early stages ensue entirely to capitalists
Why inequality tends to rise in early stages
Benefits flow down to workers only in last stage
Surplus Labor assumption not applicable in some contexts
No role assigned to human capital investments and its importance in
industrial progress
 Import substitution industrialization (ISI)

ISI is a theory of economics typically utilized by developing countries or

emerging market nations seeking to decrease dependence on developed
countries and to increase self-sufficiency. The primary goal of the
implemented theory is to protect, strengthen and grow local industries
utilizing a variety of tactics, including tariffs, import quotas, and
subsidized government loans.
 Export promotion

Exports are viewed as an "engine of growth", and increases in exports

stimulate domestic investment through an accelerator effect. The increase
in investment has the consequence of increasing the internal demand
while at the same time expanding productive capacity and productivity
 The infant industry argument

The infant industry argument is an economic rationale for

trade protectionism. The core of the argument is that nascent
industries often do not have the economies of scale that their older
competitors from other countries may have, and thus need to be
protected until they can attain similar economies of scale
Neo-classical growth and Distribution theories
 Neo-classical growth and Distribution theories

Neoclassical growth theory is an economic theory that outlines how a steadyeconomic

growth rate can be accomplished with the proper amounts of the three driving forces: labor,
capital and technology.
The theory states that by varying the amounts of labor and capital in the production
function, anequilibrium state can be accomplished.
The theory also argues that technological change has a major influence on an economy, and
that economic growth cannot continue without advances in technology.
 Neo-classical growth and Distribution theories

The roots of these negative consequence lie in the neo classical growth theory which
guided the design of postwar economic development in developing countries.
This capital is-ever theory, exemplified in the famous Harrod-Dommar Models, Scarified
basic human needs and people development for capital accumulation.

Fig: The Neo-Classical growth Theory

 Neo-classical growth and Distribution theories

The steady-state growth is where savings, sy, are just suffering maintain the investment
requirement, namely (d+n) happens such as a and c when the capita -labor exactly
matches saving.
At a higher capital-labor ratio, such relative to k0, saving corresponding to y0 falls short
of required investment.
Either a higher saving must be generated such as s, y to achieve state-state growth at
point c, or a lower capital labor ratio must be realized through greater capital efficiency.
This literature is complex and often confusing, reflecting different question of theory
such as the savings function, the nature of technology, the adjustment and stability of
growth and moving equilibrium in a capital economy.
 Neo-classical growth and Distribution theories

Yet, the various paradigms have one crucial common feature; they were constructed on
common (i.e. western) assumption of rational, reductionist and optimizing behavior.
Paradigm debate over growth modeling often appeared as a sterile Byzantine argument far
removed from the realities and requirements of developing countries.
The former was led by Joan Robinson and the latter by Robert Solow; both focused on a real
model, with no fiscal or monetary policy, and hence no policy levers linked to economic
development.
Kalador (1957) formalized a neo-classical growth model in which, following Malthus. Workers
made no contribution to aggregate savings.
 The Trickle Down Theory

Westernizing Third World

Economic and Social Equity were Sacrificed for Capital
Growth
The Theory of Economic Growth Boldly Declared Our
subject is Economic Growth not Distribution
Make the Wealthy Richer in the Take-Off Stage
Accelerated economic growth filter down and spread across
Benefits to the poorer segments of the developing Societies
Western derivation from rationalism
 The Trickle Down Theory

Westernizing Third World

Western experts and middlemen with know-how
determined priorities and target for third world countries
Assuming decisions has no reciprocal impacts
Until mid-1960s prospects of third world development
designed according to western blueprints.
Q&A