FOUNDATION OF DEVELOPMENT STUDIES II

UNIT 1: THEORETICAL APPROACHES TO THE DEFINITION OF DEVELOPMENT

1. DEFINITION OF DEVELOPMENT
The term “development” has various meanings to different people and can be explained in
different contexts. For example, the development needs of a starving population must be
different from those where there is sufficient nutrition (Matowanyka, 1991). Development
has often been confused with “economic growth as measured solely in terms of annual
increases in pre-capita income or gross national product, regardless of its distribution and
the degree of people‟s participation in effective growth” (Mahmoud, 1991). Seers (1972)
asserted that “development means the conditions for realisation of the human personality.
Its evaluation must therefore take into account three linked criteria: where there has been a
reduction in (1) poverty, (2) unemployment, (3) inequality”.

According to Pearson (1992), development involves “An improvement qualitative,

quantitative or both - in the use of available resources”. He also asserts that development
does not refer to one particular perspective on social, political and economic betterment.
Instead, it is a hybrid term for a myriad of strategies adopted for socioeconomic and
environment transformation from current states to desired ones.

2. THE CLASSICAL THEORY OF ECONOMIC STAGNATION

Model

The classical theory, based on the work of the 19th-century English economist David
Ricardo, Principles of Political Economy and Taxation (1817), was pessimistic about the
possibility of sustained economic growth. For Ricardo, who assumed little continuing
technical progress, growth was limited by land scarcity.

The classical economists – Adam Smith, Thomas R. Malthus, Ricardo, and John Stuart Mill –
were influenced by Newtonian physics. Just as Newton posited that activities in the universe
were not random but subject to some grand design, these men believed that the same
natural order determined prices, rent, and economic affairs.

In the late 18th century, Smith argued that in a competitive economy, with no collusion or
monopoly, each individual, by acting in his or her own interest, promoted the public
interest. A producer who charges more than others will not find buyers, a worker who asks
more than the going wage will not find work, and an employer who pays less than
competitors will not find anyone to work. It was as if an invisible hand were behind the self-
interest of capitalists, merchants, landlords, and workers, directing their actions toward
maximum economic growth (Smith 1937, first published 1776). Smith advocated a laissez-
faire (governmental noninterference) and free-trade policy except where labor, capital, and
product markets are monopolistic, a proviso some present-day disciples of Smith overlook.

The classical model also took into account (1) the use of paper money, (2) the development
of institutions to supply it in appropriate quantities, (3) capital accumulation based on
output in excess of wages, and (4) division of labor (limited primarily by the size of the
market). A major tenet of Ricardo was the law of diminishing returns, referring to
successively lower extra outputs from adding an equal extra input to fixed land. For him,
diminishing returns from population growth and a constant amount of land threatened
economic growth. Because Ricardo believed technological change or improved production
techniques could only temporarily check diminishing returns, increasing capital was seen as
the only way of offsetting this long-run threat.

His reasoning took the following path. In the long run, the natural wage is at subsistence –
the cost of perpetuating the labor force (or population, which increases at the same rate).
The wage may deviate but eventually returns to a natural rate at subsistence. On the one
hand, if the wage rises, food production exceeds what is essential for maintaining the
population. Extra food means fewer deaths, and the population increases. More people
need food and the average wage falls. Population growth continues to reduce wages until
they reach the subsistence level once again. On the other hand, a wage below subsistence
increases deaths and eventually contributes to a labor shortage, which raises the wage.
Population decline increases wages once again to the subsistence level. In both instances,
the tendency is for the wage to return to the natural subsistence rate.

With this iron law of wages, total wages increase in proportion to the labor force. Output
increases with population but, other things being equal, output per worker declines with
diminishing returns on fixed land. Thus, the surplus value (output minus wages) per person
declines with increased population. At the same time, land rents per acre increase with
population growth, as land becomes scarcer relative to other factors.

The only way of offsetting diminishing returns is by accumulating increased capital per
person. However, capitalists require minimum profits and interest payments to maintain or
increase capital stock. Yet because profits and interest per person declines and rents
increase with population growth, there is a diminishing surplus (profits, interest, and rent)
available for the capitalists’ accumulation. Ricardo feared that this declining surplus reduces
the inducement to accumulate capital. Labor force expansion leads to a decline in capital
per worker or a decrease in worker productivity and income per capita. Thus, the Ricardian
model indicates eventual economic stagnation or decline.
3. MARX’S HISTORICAL MATERIALISM
Karl Marx’s views were shaped by radical changes in Western Europe: the French Revolution;
the rise of industrial, capitalist production; political and labor revolts; and a growing secular
rationalism. Marx (1818–83) opposed the prevailing philosophy and political economy,
especially the views of utopian socialists and classical economists, in favor of a worldview
called historical materialism.

3.1. Theory
Marx wanted to replace the unhistorical approach of the classicists with a historical dialectic.
Marxists consider classical and later orthodox economic analysis as a still photograph, which
describes reality at a certain time. In contrast, the dialectical approach, analogous to a
moving picture, looks at a social phenomenon by examining where it was and is going and
its process of change. History moves from one stage to another, say, from feudalism to
capitalism to socialism, on the basis of changes in ruling and oppressed classes and their
relationship to each other. Conflict between the forces of production (the state of science
and technology, the organization of production, and the development of human skills) and
the existing relations of production (the appropriation and distribution of output as well as a
society’s way of thinking, its ideology, and worldview) provide the dynamic movement in the
materialist interpretation of history. The interaction between forces and relations of
production shapes politics, law, morality, religion, culture, and ideas.

Accordingly, feudalism is undercut by (1) the migration of serfs to the town; (2) factory
competition with handicraft and manorial production; (3) expanded transport, trade,
discovery, and new international markets on behalf of the new business class; and (4) the
accompanying rise of nation-states. The new class, the proletariat or working class, created
by this next stage, capitalism, is the seed for the destruction of capitalism and the
transformation into the next stage, socialism. Capitalism faces repeated crises because the
market, dependent largely on worker consumption, expands more slowly than productive
capacity. Moreover, this unutilized capacity creates, in Marx’s phrase, a reserve army of the
unemployed, a cheap labor source that expands and contracts with the boom and bust of
business cycles. Furthermore, with the growth of monopoly, many small businesspeople,
artisans, and farmers become propertyless workers who no longer have control over their
workplaces. Eventually the proletariat revolts, takes control of capital, and establishes
socialism. In time, socialism is succeeded by communism, and the state withers away.

Marx’s ideas were popularized by his collaborator, Friedrich Engels, especially from 1883 to
1895, when he finished Marx’s uncompleted manuscripts, interpreted Marxism, and
provided its intellectual and organizational leadership.
From the late 19th century through the first three-quarters of the 20th century, Socialist,
Social Democratic, and Labor parties in Western Europe have tried to introduce socialism
through parliamentary democracy rather than violent revolution. Since the 1970s and 1980s,
however, these parties, some with Marxist origins, have limited their goals to a welfare state,
social market capitalism, or social reform under capitalism.

4. ROSTOW’S STAGES OF ECONOMIC GROWTH

People existed for centuries with little change in their economic life. When major changes
occurred, as in the last 500 years or so, they often took place abruptly. In The Stages of
Economic Growth (1961), Walter W. Rostow, an eminent economic historian, sets forth a
new historical synthesis about the beginnings of modern economic growth on six
continents.

Rostow’s economic stages are (1) the traditional society, (2) the preconditions for takeoff, (3)
the takeoff, (4) the drive to maturity, and (5) the age of high mass consumption.

4.1. The traditional society

Rostow has little to say about the concept of traditional society except to indicate that it is
based on attitudes and technology prominent before the turn of the 18th century. The work
of Isaac Newton ushered in change. He formulated the law of gravity and the elements of
differential calculus. After Newton, people widely believed “that the external world was
subject to a few knowable laws, and was systematically capable of productive manipulation”
(Rostow 1961:4).

4.2. Preconditions Stage

Rostow’s preconditions stage for sustained industrialization includes radical changes in
three nonindustrial sectors: (1) increased transport investment to enlarge the market and
production specialization; (2) a revolution in agriculture, so that a growing urban population
can be fed; and (3) an expansion of imports, including capital, financed perhaps by
exporting some natural resources. These changes, including increased capital formation,
require a political elite interested in economic development. This interest may be instigated
by a nationalist reaction against foreign domination or the desire to have a higher standard
of living.

4.3. Takeoff
Rostow’s central historical stage is the takeoff, a decisive expansion occurring over 20 to 30
years, which radically transforms a country’s economy and society. During this stage,
barriers to steady growth are finally overcome, while forces making for widespread
economic progress dominate the society, so that growth becomes the normal condition.
The takeoff period is a dramatic moment in history, corresponding to the beginning of the
Industrial Revolution in late-18th-century Britain; pre–Civil War railroad and manufacturing
development in the United States; the period after the 1848 revolution in Germany; the
years just after the 1868 Meiji restoration in Japan; the rapid growth of the railroad, coal,
iron, and heavy engineering industries in the quarter-century before the 1917 Russian
Revolution; and a period starting within a decade of India’s independence (1947) and the
communist victory in China (1949).

Rostow indicates that three conditions must be satisfied for takeoff.

1. Net investment as a percentage of net national product (NNP) increases sharply – from 5
percent or less to over 10 percent. If an investment of 3.5 percent of NNP leads to a growth
of 1 percent per year, then 10.5 percent of NNP is needed for a 3-percent growth (or a 2-
percent per-capita increase if population grows at 1 percent).

2. At least one substantial manufacturing sector grows rapidly. The growth of a leading
manufacturing sector spreads to its input suppliers expanding to meet its increased demand
and to its buyers benefiting from its larger output. In the last three decades of the 1700s, for
example, the cotton textile industry in Britain expanded rapidly because of the use of the
spinning jenny, water frame, and mule in textiles and the increased demand for cotton
clothing. The development of textile manufactures, and their exports, had wide direct and
indirect effects on the demand for coal, iron, machinery, and transport. In the United States,
France, Germany, Canada, and Russia, the growth of the railroad, by widening markets, was
a powerful stimulus in the coal, iron, and engineering industries, which in turn fueled the
takeoff.

3. A political, social, and institutional framework quickly emerges to exploit expansion in the
modern sectors. This condition implies mobilizing capital through retained earnings from
rapidly expanding sectors; an improved system to tax high-income groups, especially in
agriculture; developing banks and capital markets; and, in most instances, foreign
investment. Furthermore, where state initiative is lacking, the culture must support a new
class of entrepreneurs prepared to take the risk of innovating.

4.4. Drive To Maturity

The drive to maturity, a period of growth that is regular, expected, and self-sustained,
follows takeoff. A labor force that is predominantly urban, increasingly skilled, less
individualistic, and more bureaucratic and looks increasingly to the state to provide
economic security characterizes this stage.

4.5. Age Of High Mass Consumption

The symbols of this last stage, reached in the United States in the 1920s and in Western
Europe in the 1950s, are the automobile, suburbanization, and innumerable durable
consumer goods and gadgets. In Rostow’s view, other societies may choose a welfare state
or international military and political power.

5. VICIOUS CIRCLE THEORY

The vicious circle theory indicates that poverty perpetuates itself in mutually reinforcing
vicious circles on both the supply and demand sides.

5.1. Supply Side

Because incomes are low, consumption cannot be diverted to saving for capital formation.
Lack of capital results in low productivity per person, which perpetuates low levels of
income. Thus, the circle is complete. A country is poor because it was previously too poor to
save and invest. Or as Jeffrey Sachs (2005:56) explains the poverty trap: “Poverty itself [is
the] cause of economic stagnation.”

Japan’s high savings rates during periods of rapid economic growth during the 1950s,
1960s, and 1970s, and the high savings rates of the Asian tigers, Malaysia, and Thailand
imply the other side of the coin of the vicious circle. As countries grow richer, they save
more, creating a virtuous circle in which high savings rates lead to faster growth (Edwards
1995; Economist 1995b:72; World Bank 2003i:218–220).

5.2. Demand Side

Furthermore, because incomes are low, market size (for consumer goods such as shoes,
electric bulbs, and textiles) is too small to encourage potential investors. Lack of investment
means low productivity and continued low income. A country is poor because it was
previously too poor to provide the market to spur investment.

6. BALANCED VERSUS UNBALANCED GROWTH

A major development debate from the 1940s through the 1960s concerned balanced
growth versus unbalanced growth. Some of the debate was semantic, as the meaning of
balance can vary from the absurd requirement that all sectors grow at the same rate to the
more sensible plea that some attention be given to all major sectors – industry, agriculture,
and services. However, absurdities aside, the discussion raised some important issues. What
are the relative merits of strategies of gradualism versus a big push? Is capital or
entrepreneurship the major limitation to growth?

7. BALANCED GROWTH
Its advocates call the synchronized application of capital to a wide range of different
industries balanced growth. Ragnar Nurkse (1953) considers this strategy the only way of
escaping from the vicious circle of poverty. He does not consider the expansion of exports
promising, because the price elasticity of demand (minus percentage change in quantity
demanded divided by percentage change in price) for the LDCs’ predominantly primary
exports is less than one, thus reducing export earnings with increased volume, other things
being equal.

7.1. Big Push Thesis

Those advocating this synchronized application of capital to all major sectors support the
big push thesis, arguing that a strategy of gradualism is doomed to failure. A substantial
effort is essential to overcome the inertia inherent in a stagnant economy. The situation is
analogous to a car being stuck in the snow: It will not move with a gradually increasing
push; it needs a big push.

For Paul N. Rosenstein-Rodan (1943:202–211), the factors that contribute to economic

growth, such as demand and investment in infrastructure, do not increase smoothly but are
subject to sizable jumps or indivisibilities. These indivisibilities result from flaws created in
the investment market by external economies, that is, cost advantages rendered free by one
producer to another. These benefits spill over to society as a whole, or to some member of
it, rather than to the investor concerned. As an example, the increased production,
decreased average costs, and labor training and experience that result from additional
investment in the steel industry will benefit other industries as well. Greater output
stimulates the demand for iron, coal, and transport. Lower costs may make vehicles and
aluminum cheaper. In addition other industries may benefit later by hiring laborers who
acquired industrial skills in the steel mills. Thus, the social profitability of this investment
exceeds its private profitability. Moreover, unless government intervenes, total private
investment will be too low.

Indivisibility in infrastructure. For Rosenstein-Rodan, a major indivisibility is in

infrastructure, such as power, transport, and communications. This basic social capital
reduces costs to other industries. To illustrate, the railroad from Kanpur to the Calcutta
docks increases the competitiveness of India’s wool textiles domestically and abroad.
However, the investment for the 950-kilometer, Kanpur–Calcutta rail line is virtually
indivisible, in that a line a fraction as long is of little value. Building the Aswan Dam or the
Monterrey–Mexico City telegraph line is subject to similar discontinuities.

Indivisibility in demand. This indivisibility arises from the interdependence of investment

decisions; that is, a prospective investor is uncertain whether the output from his or her
investment project will find a market. Rosenstein-Rodan uses the example of an economy
closed to international trade to illustrate this indivisibility. He assumes that there are
numerous subsistence agricultural laborers whose work adds nothing to total output (that
is, the marginal productivity of their labor equals zero). If 100 of these farm workers were
hired in a shoe factory, their wages would increase income.

If the newly employed workers spend all of their additional income on shoes they produce
the shoe factory will find a market and would succeed. In fact, however, they will not spend
all of their additional income on shoes. There is no “easy” solution of creating an additional
market in this way. The risk of not finding a market reduces the incentive to invest, and the
shoe factory investment project will probably be abandoned. (Rosenstein-Rodan 1951:62)

However, instead, let us put 10,000 workers in 100 factories (and farms) that among them
will produce the bulk of consumer goods on which the newly employed workers will spend
their wages. What was not true of the shoe factory is true for the complementary system of
100 enterprises. The new producers are each others’ customers and create additional
markets through increased incomes. Complementary demand reduces the risk of not
finding a market. Reducing interdependent risks increases the incentive to invest.

7.2. The Murphy–Shleifer–Vishny Model

Kevin Murphy, Andrei Shleifer, and Robert Vishny (1989:537–564) analyze an economy in
which world trade is costly – perhaps today, Bolivia, where a majority of the population live
on a high plateau between two north–south Andes mountain chains; landlocked east-central
African states Rwanda, Burundi, Uganda, or Malawi; or isolated islands Papua New Guinea;
or, in the 19th century, the United States, Australia, or Japan. Domestic agriculture or
exports may not be sufficient for industrialization, so these economies need large domestic
markets, a la Rosenstein-Rodan. For increas- ` ing returns from sliding down the initial part
of a U-shaped long-run average cost curve (representing successive plants with more
specialized labor and equipment), sales must be high enough to cover fixed setup costs.

To illustrate, “in the first half of the nineteenth century, the United States greatly surpassed
England in the range of consumer products it manufactured using mass production
techniques” (ibid., p. 538). In contrast to high-quality English artisan products for a quality-
conscious upper class, American producers offered standardized mass-produced utilitarian
items, largely bought by relatively well-off farmers and other middle classes. Colombia’s
tobacco export boom failed to lead to widespread economic development, as incomes went
to a few plantation owners who spent on luxury imports. Later, from 1880 to 1915, however,
the boom in coffee exports, grown on small family enterprises, benefited large numbers
demanding domestic manufactures (ibid., p. 539). For industrialization, incomes from the
leading sector must be broadly distributed, providing demand for manufactures.

8. HIRSCHMAN’S STRATEGY OF UNBALANCE

Albert O. Hirschman (1958) develops the idea of unbalanced investment to complement
existing imbalances. He contends that deliberately unbalancing the economy, in line with a
predesigned strategy, is the best path for economic growth. He argues that the big push
thesis may make interesting reading for economists, but it is gloomy news for the LDCs:
They do not have the skills needed to launch such a massive effort. The major shortage in
LDCs is not the supply of savings, but the decision to invest by entrepreneurs, the risk takers
and decision makers. The ability to invest is dependent on the amount and nature of
existing investments. Hirschman believes poor countries need a development strategy that
spurs investment decisions.

He suggests that since resources and abilities are limited, a big push is sensible only in
strategically selected industries within the economy. Growth then spreads from one sector
to another (similar to Rostow’s concept of leading and following sectors).

However, investment should not be left solely to individual entrepreneurs in the market, as
the profitability of different investment projects may depend on the order in which they are
undertaken. For example, assume investment in a truck factory yields a return of 10 percent
per year; in a steel factory, 8 percent, with the interest rate 9 percent. If left to the market, a
private investor will invest in the truck factory. Later on, as a result of this initial investment,
returns on a steel investment increase to 10 percent, so then the investor invests in steel.

Assume, however, that establishing a steel factory would increase the returns in the truck
factory in the next period from 10 to 16 percent. Society would be better off investing in the
steel factory first, and the truck enterprise second, rather than making independent
decisions based on the market. Planners need to consider the interdependence of one
investment project with another so that they maximize overall social profitability. They need
to make the investment that spurs the greatest amount of new investment decisions.
Investments should occur in industries that have the greatest linkages, including backward
linkages to enterprises that sell inputs to the industry, and forward linkages to units that
buy output from the industry. The steel industry, with backward linkages to coal and iron
production, and forward linkages to the construction and truck industries, has good
investment potential, according to Hirschman.

Even a government that limits its major role to providing infrastructure can time its
investment projects to spur private investments. Government investment in transport and
power will increase productivity and thus encourage investment in other activities.

Initially, planners trying to maximize linkages will not want to hamper imports too much,
because doing so will deprive the country of forward linkages to domestic industries using
imports. In fact, officials may encourage imports until they reach a threshold in order to
create these forward linkages. Once these linkages have been developed, protective tariffs
will provide a strong inducement for domestic entrepreneurs to replace imports with
domestically produced goods.

9. THE LEWIS–FEI–RANIS MODEL

The purpose of the Lewis–Fei–Ranis model is to explain how economic growth gets started
in a less-developed country with a traditional agricultural sector and an industrial capitalist
sector. In the Lewis–Fei–Ranis model, economic growth occurs because of the increase in
the size of the industrial sector, which accumulates capital, relative to the subsistence
agricultural sectors, which amasses no capital at all. The source of capital in the industrial
sector is profits from the low wages paid an unlimited supply of surplus labor from
traditional agriculture.

9.1. The Lewis Model

Urban industrialists increase their labor supply by attracting workers from agriculture who
migrate to urban areas when wages there exceed rural agricultural wages. Sir W. Arthur
Lewis elaborates on this explanation in his explanation of labor transfer from agriculture to
industry in a newly industrializing country. In contrast to those economists writing since the
early 1970s, who have been concerned about overurbanization, Lewis, writing in 1954, is
concerned about possible labor shortages in the expanding industrial sector.

Urban industrialists increase their labor supply by attracting workers from agriculture who
migrate to urban areas when wages there exceed rural agricultural wages. Sir W. Arthur
Lewis elaborates on this explanation in his explanation of labor transfer from agriculture to
industry in a newly industrializing country. In contrast to those economists writing since the
early 1970s, who have been concerned about overurbanization, Lewis, writing in 1954, is
concerned about possible labor shortages in the expanding industrial sector.
Lewis believes in zero (or negligible) marginal productivity of labor in subsistence
agriculture, a sector virtually without capital and technological progress. Yet he contends
that the wage (w) in agriculture is positive at subsistence (s): w s . For this to be true, it is
essential only that the average product of labor be at a subsistence level, as agricultural
workers divide the produce equally among themselves until food availability is above
subsistence. Lewis feels equilibrium wages in agriculture stay at w s through the classical
mechanism of the iron law of wages, in which higher wages are brought down by
population growth, and lower wages raised as output spread over a smaller population is
reduced by an increased mortality rate.

For the more capital-intensive urban industrial sector to attract labor from the rural area, it
is essential to pay ws plus a 30-percent inducement, or wk (the capitalist wage). This higher
wage compensates for the higher cost of living as well as the psychological cost of moving
to a more regimented environment. At w k the urban employer can attract an unlimited
supply of unskilled rural labor. The employer will hire this labor up to the point Q L1 , where
the value of its extra product (or the left marginal revenue product curve MRP L1 ) equals the
wage wk. The total wages of the workers are equal to OQ L1, the quantity of labor, multiplied
by wk, the wage (that is, rectangle OQL1BA). The capitalist earns the surplus, the amount
between the wage and that part of the marginal product curve above the wage.

Lewis assumes that the capitalist saves the entire surplus (profits, interest, and rent) and the
worker saves nothing. Furthermore, he suggests that all the surplus is reinvested, increasing
the amount of capital per worker and thus the marginal product of labor to MRP L2, so that
more labor QL2 can be hired at wage rate wk. This process enlarges the surplus, adds to
capital formation, raises labor’s marginal productivity, increases the labor hired, enlarges the
surplus, and so on, through the cycle until all surplus labor is absorbed into the industrial
sector. Beyond this point QL3, the labor supply curve (SLk) is upward-sloping and additional
laborers can be attracted only with a higher wage. As productivity increases beyond MRP L3 to
MRPL4, the MRPL (or demand for labor) curve intersects the labor supply curve at a wage
wT and at a quantity of labor QL4 in excess of surplus rural labor (Lewis 1954:139–191).

In the Lewis model, capital is created by using surplus labor (with little social cost). Capital
goods are created without giving up the production of consumer goods. However, to
finance surplus labor, additional credit may sometimes be needed.

The significance of Lewis’s model is that growth takes place as a result of structural change.
An economy consisting primarily of a subsistence agricultural sector (which does not save) is
transformed into one predominantly in the modern capitalist sector (which does save). As
the relative size of the capitalist sector grows, the ratio of profits and other surplus to
national income grows.

10. THE FEI–RANIS MODIFICATION

How can LDCs maintain subsistence output per farm worker in the midst of population
expansion? John Fei and Gustav Ranis, in their modification of the Lewis model, contend
that the agricultural sector must grow, through technological progress, for output to grow
as fast as population; technical change increases output per hectare to compensate for the
increase in labor per land, which is a fixed resource. Gustav Ranis and John C. H. Fei
(1961:533–565; Fei and Ranis 1964) label wk from 0 to QL3 an institutional wage supported by
nonmarket factors such as the government minimum wage or labor union pressure. This
institutional wage can remain infinitely elastic even when the marginal revenue productivity
of labor is greater than zero; this wage remains at the same level as long as marginal
productivity is less than the wage. However, the threshold for both agricultural and
industrial sectors occurs when the marginal revenue productivity in agriculture equals the
wage. At this point, the turning point or commercialization point, industry abandons the
institutional wage, and together with agriculture, must pay the market rate. As with the
Lewis model, the advent of fully commercialized agriculture and industry ends industrial
growth (or what Fei–Ranis labels the takeoff into self-sustained growth).

One problem is to avoid increasing the average product of labor in agriculture and the
industrial institutional wage that would halt industrial expansion. Fei and Ranis solve this
with a sleight of hand; the LDC maintains a constant institutional wage until Q L3 but at the
expense of realism: each migrating farm worker takes his or her own subsistence bundle to
the industrial sector.

How do Fei and Ranis prevent rises in food prices (and the agricultural terms of trade) from
increasing the industrial wage? They propose a balanced growth between agriculture and
industry. However, agricultural growth increases farm income, undermining the restraints on
the institutional wage.

11. DEPENDENCY THEORY

Celso Furtado (1970, 1968), a Brazilian economist with the U.N. Economic Committee for
Latin America, was an early contributor to the Spanish and Portuguese literature in
dependency theory in the 1950s and 1960s. According to him, since the 18th century, global
changes in demand resulted in a new international division of labor in which the peripheral
countries of Asia, Africa, and Latin America specialized in primary products in an enclave
controlled by foreigners while importing consumer goods that were the fruits of technical
progress in the central countries of the West. The increased productivity and new
consumption patterns in peripheral countries benefited a small ruling class and its allies
(less than a tenth of the population), who cooperated with the DCs to achieve
modernization (economic development among a modernizing minority). The result is
“peripheral capitalism, a capitalism unable to generate innovations and dependent for
transformation upon decisions from the outside” (Furtado 1973:120).
A major dependency theorist, Andre Gunder Frank, was a U.S. expatriate recently affiliated
with England’s University of East Anglia. Frank, writing in the mid-1960s, criticized the view
held by many development scholars that contemporary underdeveloped countries resemble
the earlier stages of now-developed countries. Many of these scholars viewed
modernization in LDCs as simply the adoption of economic and political systems developed
in Western Europe and North America.

For Frank, the presently developed countries were never underdeveloped, although they
may have been undeveloped. His basic thesis is that underdevelopment does not mean
traditional (that is, nonmodern) economic, political, and social institutions but LDC
subjection to the colonial rule and imperial domination of foreign powers. In essence, Frank
sees underdevelopment as the effect of the penetration of modern capitalism into the
archaic economic structures of the third world. He sees the deindustrialization of India
under British colonialism, the disruption of African society by the slave trade and
subsequent colonialism, and the total destruction of Incan and Aztec civilizations by the
Spanish conquistadors as examples of the creation of underdevelopment (Frank 1969).

More plainly stated, the economic development of the rich countries contributes to the
underdevelopment of the poor. Development in an LDC is not self-generating nor
autonomous but ancillary. The LDCs are economic satellites of the highly developed regions
of Northern America and Western Europe in the international capitalist system. The Afro-
Asian and Latin American countries least integrated into this system tend to be the most
highly developed. For Frank, Japanese economic development after the 1860s is the classic
case illustrating his theory. Japan’s industrial growth remains unmatched: Japan, unlike most
of the rest of Asia, was never a capitalist satellite.

Frank suggests that satellite countries experience their greatest economic development
when they are least dependent on the world capitalist system. Thus, Argentina, Brazil,
Mexico, and Chile grew most rapidly during World War I, the Great Depression, and World
War II, when trade and financial ties with major capitalist countries were weakest.
Significantly, the most underdeveloped regions today are those that have had the closest
ties to Western capitalism in the past. They were the greatest exporters of primary products
to, and the biggest sources of capital for, developed countries and were abandoned by
them when for one reason or another business fell off. Frank points to India’s Bengal; the
one-time sugar-exporting West Indies and Northeastern Brazil; the defunct mining districts
of Minas Gerais in Brazil, highland Peru, and Bolivia; and the former silver regions of Mexico
as examples. He contends that even the latifundium, the large plantation or hacienda that
has contributed so much to underdevelopment in Latin America, originated as a
commercial, capitalist enterprise, not a feudal institution, which contradicts the generally
held thesis that a region is underdeveloped because it is isolated and precapitalist.
It is an error, Frank feels, to argue that the development of the underdeveloped countries
will be stimulated by indiscriminately transferring capital, institutions, and values from
developed countries. He suggests that, in fact, the following economic activities have
contributed to underdevelopment, not development:

1. Replacing indigenous enterprises with technologically more advanced, global, subsidiary

companies.

2. Forming an unskilled labor force to work in factories and mines and on plantations.

3. Recruiting highly educated youths for junior posts in the colonial administrative service.

4. Workers migrating from villages to foreign-dominated urban complexes.

5. Opening the economy to trade with, and investment from, developed countries.

According to Frank, a third-world country can develop only by withdrawing from the world
capitalist system. Perforce, such a withdrawal means a large reduction in trade, aid,
investment, and technology from the developed capitalist countries.

12. THE NEOCOLONIAL DEPENDENCE MODEL

The first major stream, which we call the neocolonial dependence model, is an indirect
outgrowth of Marxist thinking. It attributes the existence and continuance of
underdevelopment primarily to the historical evolution of a highly unequal international
capitalist system of rich country–poor country relationships. 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 developing countries) renders
attempts by poor nations to be self-reliant and independent difficult and sometimes even
impossible. Certain groups in the developing countries (including landlords, entrepreneurs,
military rulers, merchants, salaried public officials, and trade union leaders) who enjoy high
incomes, social status, and political power constitute a small elite ruling class whose
principal interest, knowingly or not, is in the perpetuation of the international capitalist
system of inequality and conformity in which they are rewarded. Directly and indirectly, they
serve (are dominated by) and are rewarded by (are dependent on) international special
interest power groups, including multinational corporations, national bilateral aid agencies,
and multilateral assistance organizations like the World Bank or the International Monetary
Fund (IMF), which are tied by allegiance or funding to the wealthy capitalist countries. The
elites’ activities and viewpoints often serve to inhibit any genuine reform efforts that might
benefit the wider population and in some cases actually lead to even lower levels of living
and to the perpetuation of underdevelopment. In short, the neo-Marxist, neocolonial view
of underdevelopment attributes a large part of the developing world’s continuing 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.10 Underdevelopment is thus seen as an externally induced
phenomenon, in contrast to the linearstages and structural-change theories’ stress on
internal constraints such as insufficient savings and investment or lack of education and
skills. Revolutionary struggles or at least major restructuring of the world capitalist system is
therefore required to free dependent developing nations from the direct and indirect
economic control of their developed-world and domestic oppressors.

One of the most forceful statements of the international-dependence school of thought was
made by Theotonio Dos Santos:

Underdevelopment, far from constituting a state of backwardness prior to capitalism, is rather

a consequence and a particular form of capitalist development known as dependent
capitalism. . . . Dependence is a conditioning situation in which the economies of one group of
countries are conditioned by the development and expansion of others. A relationship of
interdependence between two or more economies or between such economies and the world
trading system becomes a dependent relationship when some countries can expand through
selfimpulsion while others, being in a dependent position, can only expand as a reflection of
the expansion of the dominant countries, which may have positive or negative effects on their
immediate development. In either case, the basic situation of dependence causes these
countries to be both backward and exploited. Dominant countries are endowed with
technological, commercial, capital and sociopolitical predominance over dependent countries
—the form of this predominance varying according to the particular historical moment—and
can therefore exploit them, and extract part of the locally produced surplus. Dependence, then,
is based upon an international division of labor which allows industrial development to take
place in some countries while restricting it in others, whose growth is conditioned by and
subjected to the power centers of the world.

A similar but obviously non-Marxist perspective was expounded by Pope John Paul II in his
widely quoted 1988 encyclical letter (a formal, elaborate expression of papal teaching)
Sollicitude rei socialis (The Social Concerns of the Church), in which he declared:

One must denounce the existence of economic, financial, and social mechanisms which,
although they are manipulated by people, often function almost automatically, thus
accentuating the situation of wealth for some and poverty for the rest. These mechanisms,
which are maneuvered directly or indirectly by the more developed countries, by their very
functioning, favor the interests of the people manipulating them. But in the end they suffocate
or condition the economies of the less developed countries.
13. HARROD DOMAR GROWTH MODEL
Every economy must save a certain proportion of its national income, if only to replace
worn-out or impaired capital goods (buildings, equipment, and materials). However, in
order to grow, new investments representing net additions to the capital stock are
necessary. If we assume that there is some direct economic relationship between the size of
the total capital stock, K, and total GDP, Y—for example, if $3 of capital is always necessary
to produce an annual $1 stream of GDP—it follows that any net additions to the capital
stock in the form of new investment will bring about corresponding increases in the flow of
national output, GDP.

Suppose that this relationship, known in economics as the capital-output ratio, is roughly
3 to 1. (Capital-output ratio is a ratio that shows the units of capital required to produce a
unit of output over a given period of time.). If we define the capital-output ratio as k and
assume further that the national net savings ratio, s, is a fixed proportion of national output
(e.g., 6%) and that total new investment is determined by the level of total savings, we can
construct the following simple model of economic growth:

1. Net saving (S) is some proportion, s, of national income (Y) such that we have the simple
equation

2. Net investment (I) is defined as the change in the capital stock, K, and can be represented

by such that

But because the total capital stock, K, bears a direct relationship to total national income or
output, Y, as expressed by the capital-output ratio, c,3 it follows that
UNIT 2: INTERNATIONAL FLOW OF FINANCIAL RESOURCES

1. INTERNATIONAL MONETARY SYSTEM

The global or international monetary system is a system of institutions and mechanisms to
foster world trade, manage the flow of financial capital, and determine currency exchange
rates.

2. BALANCE OF PAYMENTS: FUNDAMENTALS,

ACCOUNTING COMPONENTS
Balance of payments (BoP) accounts are an accounting record of all monetary transactions
between a country and the rest of the world. These transactions include payments for the
country's exports and imports of goods, services, financial capital, and financial transfers.
The Bop is a collection of accounts conventionally grouped into three main categories with
subdivisions in each. The three main categories are:

(a) The Current Account: Under this are included imports and exports of goods and
services and uni-lateral transfers of goods and services.

(b) The Capital Account: Under this are grouped transactions leading to changes in foreign
financial assets and liabilities of the country.

(c) The Reserve Account: In principle this is no different from the capital account in as much
as it also relates to financial assets and liabilities. However, in this category only ―reserve
assets‖ are included.

The IMF definition: The International Monetary Fund (IMF) use a particular set of
definitions for the BOP accounts, which is also used by the Organization for Economic
Cooperation and Development (OECD), and the United Nations System of National
Accounts (SNA). The main difference in the IMF's terminology is that it uses the term
"financial account" to capture transactions that would under alternative definitions be
recorded in the capital account. The IMF uses the term capital account to designate a subset
of transactions that, according to other usage, form a small part of the overall capital
account.[6] The IMF separates these transactions out to form an additional top level division
of the BOP accounts. Expressed with the IMF definition, the BOP identity can be written:

Current account financial account capital account balancing item=0.

The IMF uses the term current account with the same meaning as that used by other
organizations, although it has its own names for its three leading subdivisions, which are:
The goods and services account (the overall trade balance)

The primary income account (factor income such as from loans and investments)

The secondary income account (transfer payments)

2.1. Current Account Of Balance Of Payment

Current Account transactions

The Current accounts records the transaction in merchandise and invisibles with the rest of
the world. Merchandise covers imports and exports and invisibles include travel
transportation insurance, investment and other services. The current account mainly consists
of 4 types of transactions

i) Exports and imports of goods: Exports of goods are credits (+) to the current account.
Imports of goods are debits (-) to the current account.

ii) Exports and imports of services: Exports of services are credits (+) to the current account.
Imports of services are debits (-) to the current account.

Interest payments on international investments

Interest, dividends and other income received on U.S. assets held abroad are credits (+).
Interest, dividends and payments made on foreign assets held in the U.S. are debits (-).
Since 1994, the U.S. has run a net debit in the investment income account: more payments
are made to foreigners than foreigners make to U.S. investors.

Current transfers

Remittances by Americans working abroad, pensions paid by foreign countries to their

citizens living in the U.S., aid offered by foreigners to the U.S. count as credits (+).

Remittances by foreigners working in the U.S., pensions paid by the United States to its
citizens living abroad, aid offered to foreigners by the U.S. count as debits (-) As expected
the U.S. runs a deficit in current transfers.

The sum of these components is known as the current account balance. A negative number
is called a current account deficit and a positive number called a current account surplus. As
expected, given that it runs a surplus only in the services component of the current account,
the U.S. runs a substantial current account deficit.

2.2. Capital Account Of Balance Of Payment

In the case of the capital account an increase (decrease) in the county foreign financial
assets are debit (credit) whereas any increase (decrease) in the country foreign financial
liabilities are credits (debits). The transaction under the Capital account is classified as:

· Foreign Investment

· Loans

· Banking Capital

· Rupee debt services

· Other debt capital

Loans include the concessional loans received by the government‘ or public sector bodies ,
long term loan and medium term borrowings from the commercial capital market in the
form of loans Bond issue and short term credits.

2.3. Factors Affecting The Components Of Bop Account

Exports of goods and services affected by following factors

· The prevailing rate of domestic currency

· Inflation rate

· Income of foreigners

· World price of the commodity

· Trade barriers.

Imports of Goods and services

· Level of Domestic Income

· International prices

· Inflation rate

· Value of Domestic Currency

· Trade Barriers
3. FACTORS AFFECTING THE INTERNATIONAL FINANCIAL
MARKET
i) Cost of Labor: Firms in countries where labor costs are low commonly have an advantage
when competing globally, especially in labor intensive industries

ii) Inflation: Current account decreases if inflation increases relative to trade partners.

iii) National Income: Current account decreases if national income increases relative to
other countries.

iv) Government Policies: can increase imports through:

v) Restrictions on imports

vi) Subsidies for exporters

· Lack of Restriction on piracy

· Environmental restrictions

· Labor laws

· Tax breaks

· Country security laws

vii) Exchange Rates: current account decreases if currency appreciates relative to other
currencies.

3.1. Impact Of Government Policies

i) Restrictions on Imports: Taxes (tariffs) on imported goods increase prices and limit
consumption. Quotas limit the volume of imports.

ii) Subsidies for Exporters: Government subsidies help firms produce at a lower cost than
their global competitors.

iii) Restrictions on Piracy: A government can affect international trade flows by its lack of
restrictions on piracy.
iv) Environmental Restrictions: Environmental restrictions impose higher costs on local
firms, placing them at a global disadvantage compared to firms in other countries that are
not subject to the same restrictions.

v) Labor Laws: countries with more restrictive laws will incur higher expenses for labor,
other factors being equal.

vi) Business Laws: Firms in countries with more restrictive bribery laws may not be able to
compete globally in some situations.

vii) Tax Breaks: Though not necessarily a subsidy, but still a form of government financial
support that might benefit many firms that exports products.

viii) Country Security Laws: Governments may impose certain restrictions when national
security is a concern, which can affect on trade.

3.2. Impact of Exchange Rates

Effect of exchange rate on balance of trade deficit:

When a home currency is exchanged for a foreign currency to buy foreign goods, then the
home currency faces downward pressure, leading to increased foreign demand for the
country‘s products. On the other way, Exchange rates will not automatically correct any
international trade balances when other forces are at work.

4. AGENCIES THAT FACILITATE INTERNATIONAL FLOWS

Discussed in below

4.1. International Monetary fund

The IMF is an organization of 183 member countries. Established in 1946, it aims

· to promote international monetary cooperation and exchange stability;

· to foster economic growth and high levels of employment; and

· to provide temporary financial assistance to help ease imbalances of payments.

· promote cooperation among countries on international monetary issues,

· promote stability in exchange rates

· provide temporary funds to member countries attempting to correct imbalances of
international payments

· promote free mobility of capital funds across countries

· Promote free trade.

Its operations involve surveillance, and financial and technical assistance. In particular, its
compensatory financing facility attempts to reduce the impact of export instability on
country economies. The IM F uses a quota system, and its unit of account is the SDR (special
drawing right). It is clear from these objectives that the IMF‘s goals encourage increased
internationalization of business

4.2. World Bank Group

· Established in 1944, the Group assists development with the primary focus of helping the
poorest people and the poorest countries.

· It has 183 member countries, and is composed of five organizations - IBRD, IDA, IFC, MIGA
and ICSID

4.3. IBRD: International Bank for Reconstruction and

Development
· Better known as the World Bank, the IBRD provides loans and development assistance to
middle-income countries and creditworthy poorer countries.

· In particular, its structural adjustment loans are intended to enhance a country‘s long-term
economic growth.

· The IBRD is not a profit-maximizing organization. Nevertheless, it has earned a net income
every year since 1948.

· It may spread its funds by entering into cofinancing agreements with official aid agencies,
export credit agencies, as well as commercial banks.

4.4. IDA: International Development Association

· IDA was set up in 1960 as an agency that lends to the very poor developing nations on
highly concessional terms.

· IDA lends only to those countries that lack the financial ability to borrow from IBRD.
· IBRD and IDA are run on the same lines, sharing the same staff, headquarters and project
evaluation standards.

4.5. IFC: International Finance Corporation

The IFC was set up in 1956 to promote sustainable private sector investment in developing
countries, by

· financing private sector projects;

· helping to mobilize financing in the international financial markets; and

· Providing advice and technical assistance to businesses and governments

4.6. MIGA: Multilateral Investment Guarantee Agency
The MIGA was created in 1988 to promote FDI in emerging economies, by

· offering political risk insurance to investors and lenders; and

· Helping developing countries attract and retain private investment.

4.7. ICSID: International Centre for Settlement of Investment

Disputes
The ICSID was created in 1966 to facilitate the settlement of investment disputes between
governments and foreign investors, thereby helping to promote increased flows of
international investment.

4.8. World Trade Organization (WTO)

· Created in 1995, the WTO is the successor to the General Agreement on Tariffs and Trade
(GATT).

· It deals with the global rules of trade between nations to ensure that trade flows smoothly,
predictably and freely.

· At the heart of the WTO's multilateral trading system are its trade agreements.

Its functions include:

· administering WTO trade agreements;

· serving as a forum for trade negotiations;

· handling trade disputes;

· monitoring national trading policies;

· providing technical assistance and training for developing countries; and

· Cooperating with other international groups.

4.9. Bank for International Settlements (BIS)

· Set up in 1930, the BIS is an international organization that fosters cooperation among
central banks and other agencies in pursuit of monetary and financial stability.

· It is the ―central banks‘ central bank‖ and ―lender of last resort. ‖

The BIS functions as:

· a forum for international monetary and financial cooperation;

· a bank for central banks;

· a center for monetary and economic research; and

· an agent or trustee in connection with international financial operations.

4.10. Regional Development Agencies

Agencies with more regional objectives relating to economic development include

· the Inter-American Development Bank;

· the Asian Development Bank;

· the African Development Bank; and

· the European Bank for Reconstruction and Development.

5. FOREIGN AID
In addition to export earnings and private foreign direct and financial investment, foreign
aid is also another important source of developing countries foreign exchange.
Foreign aid includes all those resource transfers from one country (usually a developed one)
to another (usually a less developed one) provided it meets the following conditions or
criteria:

a) Non- commercial from a donor point of view

b) Characterized by concessional terms such as low interest rates or longer repayment

periods. That is to say resource transfers given in terms softer than commercial transactions
or transfers. Therefore foreign aid can be referred to as all official grants and concessional
loans in currency or kind that are aimed at transferring resources from primarily developed
nations to developing nations on developmental and income distribution grounds. Foreign
aid is also known as official development assistance since it originates from official sources
be it governmental or multilateral.

5.1. Background to Foreign Aid (Multilateral and Bilateral Aid)

Official development assistance include bilateral grants, loans and technical assistance as
well as multilateral flows. Such public development assistance may be divided into two
broad categories:

a) Bilateral Aid - this is aid given by one country government to another and it is usually
drawn from tax-payers money.

b) Multilateral aid – this is aid given by multinational donor agencies is usually drawn
from more than one country’s resources.

It is important to note that aid is not always given to the neediest countries. Actually 50% of
bilateral aid goes to 46% of the countries with lowest incomes as it is usually given on
economic, political and military considerations.

6. REASONS FOR GIVING AID

6.1. Donor Point of View
Donors rarely give aid on humanitarian and moral grounds except in cases of emergency
food relief programmes. Usually it is given for their political, strategic and economic self-
interest. Two important reasons or objectives for giving aid are the following:

a) Political Motivation – political motives play an important role for aid granting. This is
because they want to win and strengthen their allies especially during the cold war period.
The USA used this approach in the 1940s under the Marshal plan. The plan was designed to
restructure western Europe in order to combat communism. In the 1950s Africa became the
focus of cold war interests hence attention shifted there for security rather than long term
development goals.

b) Economic Motivation – economic motives are important. Foreign aid may be used
to promote export sales and access raw materials for economic gain. As a result 80% of aid
given constitute interest bearing loans and 93% of the aid fund is spent in donor countries
for procuring expert service, equipment and raw materials for use in recipient countries.

Discussed below

6.2. Recipient point of view (why LDCs receive Aid)

Despite the negative consequences associated with foreign aid many developing countries
still accept foreign aid. Reasons given include:

a) Development ingredient – Foreign aid is an essential ingredient for development since

it supplements scarce domestic resources.

b) Political consideration – Foreign aid provides a political leverage to the existing

leadership to suppress opposition and perpetuate themselves in power.

c) Moral grounds – Developing countries also accept foreign aid since they believe it
redresses past exploitation suffered. Therefore developed countries should accept
responsibility for the poor people’s welfare.

Despite the above, there are certain problems associated with measuring aid. The major
problem is that nominal value of aid differs from the real value. This is because the nominal
value that is normally used is not deflated to take into account inflation hence it is
misleading given the rapid rise in inflation rates. In addition, aid tying and differences in
significance attached to aid by both the aid giver and receiver may make it difficult to
measure aid.

6.3. Effects of Foreign Aid

Foreign aid can contribute positively to development. This is true in the case of emergency
food relief aid given in times of disasters. However, most foreign aid tends to have negative
developmental effects on recipient countries. These include the following:
a) It retards growth by substituting domestic savings and investments leading to an
increase in the debt burden.

b) Increases the gap between the urban and rural sector by introducing modern urban
based technologies.

c) Benefits a small urban based LDC elite and thus enforces wrong consumption habits.

Another important component of foreign aid is food aid.

6.4. Food Aid

Food aid is that part of foreign aid which is given in form of food or in monetary form
meant for food purposes. Food aid is usually considered as an interim solution to a
country’s food deficient pending an increase in its own agricultural production.

7. STRUCTURAL ADJUSTMENT PROGRAMMES

Structural adjustment programmes (SAPs) or "economic recovery programmes" (ERPs) are
similar in their essential components. The role of structural adjustment programmes in an
economy is a contentious issue. Essentially, the adjustment of a country's economy means
no more than to take into account altered economic circumstances and market conditions.
It should be recognised, therefore, that economies adjust during periods of economic
growth as well as during times of recession, stagnation, or depression.

8. OBJECTIVES OF SAPS
SAPS are designed, conditioned and supervised by the IMF and World Bank due to the
partial financial character of the problems. Their implementation is a government task and
requires a certain degree of negotiation. At this stage, different objectives can be observed
for the government and the financial institutions. The government’s objective is to balance
the current account without compromising the economy’s capacity to grow.

The IMF/World Bank’s objective on the other hand is to restore financial positions and
repayment capacities (BOP and C/A balance).

However the objectives of the SAPS can be summarised under the four broad categories:

1. To restructure and diversity the productive based of the economy – this means opening
up other sources of exports.
2. To achieve fiscal and BOP viabilities over a period of time – elimination of subsidies,
budget cuts, increase tax on consumer goods and freezing nominal wage increments.

3. To lay basis for a sustainable non-inflationary growth through monetary instruments

like control of money supply, credit creation and positive real interest rates.

4. To reduce the dominance of the unproductive investments in the public sector, improve
that sectors efficiency and enhance growth potential of the private sector through
liberalization deregulation

Standard components of SAP

Policy option instruments objective

1. Pricing policy – deregulation of markets and removal of subsidies to producers and

consumers – correct relative prices

2. Exchange rate – devaluation – BOP equilibrium and correct relative prices.

3. Trade policy – Liberalization/tariff reduction – achieve efficiency through comparative

advantage.

4. Monetary policy – restrain monetary supply – eliminate inflation sources.

5. Privatization, rationalization and commercialisation – private enterprise/services,

deregulate labour/land markets – achieve efficiency and eliminate rigidities.

9. TRADITIONAL SOCIAL STRUCTURES AS BARRIERS TO

DEVELOPMENT
In traditional societies, peasant farming is more than a livelihood. It is a way of life. Land is
regarded as something that supported a community rather than being regarded as a source
of profit. In all traditional societies farming systems and social structures were closely
intertwined. Since the farming system was tied to a common environment, there tended to
be common patterns of social behaviour which at times acted as an impediment to
agricultural development.

With calamitous consequences such as a plague by locusts in rural Africa, social systems
were geared to disperse wealth and to prevent an individual enriching himself at the
expense of the community. For instance the use of artificial fertilizer was perceived as a way
of stealing fertility from other peoples field and could attract sanctions from other peasants.
Although peasants are not wholly reactionary and un productive, they tend to be risk averse.
Peasant farmers may be reluctant to adopt cash crop cultivation because the purchase of
inputs adds a risk to the natural hazards which peasants face. Another factor of traditional
farming that constrains agricultural development in Africa is that the consequences of the
interdependency of the social system with the farming system are that changing one system
invariable disrupts the other.

Therefore, the solution to Africa’s food/agricultural problems can be solved by modern

farming i.e innovative farmers. This requires investing in education and research and
extension and allows the emergency of new crop of farmers receptive to new ideas,
experimental farming and are capable of putting them into effect.

10. STRUCTURAL LAND POLICIES

These policies designed to improve the structure of agricultural production in terms of size,
layout, farm equipment and rural infrastructure. The government may interfere in order to
retain the non-financial social benefits which could be lost in a free market environment and
cause hardships for small scale farmers. The three components of structural policies include
land reforms, land consolidation and amalgamation.

For a structural policy to work, it must be accompanied with viable marketing and price
policies. This will help farmers move from subsistence to commercial farming by enhancing
their ability to produce for the market (surplus). In addition there is need for strong linkages
to exist between the agriculture and industrial sector. When industries expand, it tends to
have a strong pull for agricultural labour. The above is an essential requirement for
improving the efficiency of agriculture. Finally structural changes may come about as a
result of changes in technology, economic variables and social attitudes.

11. TECHNOLOGICAL WEAKNESSES IN LDCs

Technology, basically, means an improvement in the way of doing things particularly with
respect to production. It also relate to skills formation. Most literature on agricultural
development generally recognized that an important condition for making the transition
from natural resource based agriculture to science based agricultural system in LDCs is the
transmission of new techniques. This role is played by extension education for farmers.
However it has been found out that extension education was based on the wrong premises
in most LDCs.

For instance it was argue that the conservatism of peasants was the main obstacle to
agricultural development in LDCs. However studies indicate that peasants respond to
economic incentives to adopt new techniques of production. When they fail to respond, its
basically because advances in technology are not sufficiently rapidly enough to enable them
produce high returns. The major source of weakness in LDCs technology capacity is the
monopoly enjoyed by Multi National Corporations (MNCs) and developed countries DCs in
the field of technology and lack of capacity for LDCs to create its own scientific
establishment capable of making its own innovations competitive with those of the DCs.

Infrastructure for Agricultural Development

The capacity of agricultural producers to respond to technical change and economic

opportunities available to them depends to a large measure on the level of infrastructural
development in rural Areas.

A border definition of infrastructure include those inputs and services which are organized
and controlled by community rather than by the individual. This infrastructure which is very
vital to agricultural development can be divided into two:

a) Physical infrastructure – roads, dams, rural electrification

b) Institutional infrastructure – extension services, disease and pest control organization.

Physical infrastructure such as drainage and irrigation increase the famer control over crops
that can be grown in a particular region and season by moderating rainfall variation. As a
result LDCs have made major investments in physical infrastructure. In addition physical
infrastructure is a necessary condition for economic development.

Institutional infrastructure on the other hand ensures that small scale farmers (SSF) are
provided with the necessary market incentives such as credit facilities and marketing
services. This will motivate peasants and other SSF to behave in an economically rational
manner and expand production and marketed output.

12. EFFECTS OF SAP ON AGRICULTURAL PRODUCTION

An analysis of the effects of SAP on agricultural production is complex and contradictory.
This is because in trying to achieve short term equilibrium, growth and efficiency without
removing inequalities, a range of socio-economic agents are removed from the production
process. These include small scale farmers, women and children and the landless and
unemployed. In general terms, the exclusion of small scale farmers from the production
process had a serious negative implication on agricultural production due to their numerical
superiority. This was caused by various factors such as:

a) Budget cuts – under SAPS production for domestic markets suffers due to reduction in
government expenditure. Small scale farmers producing for the home market are located in
outlying areas and have limited access to infrastructure and support institutions. High prices
failed to induce them to grow more due to marketing problems. Furthermore budget cuts
affect SSFs more. Government only rehabilitate the existing infrastructure located in urban
areas resulting in SSF suffering from increased overhead costs.

b) Credit squeeze – restricts access by SSF to formal credit due to high interest rates and
lack of security. Couldn’t increase production due to lack of finances to purchase inputs.

c) Devaluation – rise in price of imported goods due to successive devaluation led to

declining purchasing power of exports in terms of imports. Also led to stiff competition for
markets at a time when demand for their export commodities was declining.

d) Removal of producer/consumer subsidies – designed to deregulate prices and

increase productivity. Farmer’s response to high consumer prices was constraints by high
prices of inputs, transport and handling costs. This led to declining productivity especially by
the SSF due to high cost of inputs.

e) Privatization – lack of private institution in rural areas capable of operating efficient

marketing, storage and transport facilities. Rural based SSFs depend on inefficient
government institutions. Where private sector exists in rural areas, only a few SSF could
afford the facilities. This has serious consequences on production/productivity.

f) Liberation – market liberation had a positive impact in urban areas. In rural areas SSF
had to settle for floor prices hence negative consequences due to minimum private
involvement in agriculture marketing

g) Income distribution – preference for export production lead to serious income

inequalities and food insecurity. Most SSF producing for the domestic market were forced
out of production due to high cost of inputs. Women who are the major participants in food
production had their source of income compromised.