Category: Civic Education

Economies cannot function in an institutional vacuum; otherwise there is economic (and political) chaos. At the very minimum there has to be the rule or law; the protection of property rights and constraints on power and corruption if private individuals are to be entrepreneurial, to take risks and invest.

In many developing countries, the rule of law and the protection of property rights is still rudimentary, and politicians (and bureaucrats abuse their powers. Many economists have recently argued that it is weak institutional structures that are the fundamental causes of underdevelopment because the character of institutions is the determinant of all the proximate causes of progress such as investment, education, trade and so on.

Three main ones are highlighted: the extent oflegal protectionof private property; the quality if governance (including the strength of the rule of law) and the limit placed on political leaders. Attempts have been made to distinguish economically the relative importance of institutions compared with other factors (including geography) in explaining different levels ofper capita incomeacross the world, with interesting, but controversial results.

Rodrick et al (2002) take a large sample of developed and developing countries, measuring the quality of institutions mainly by a composite indicator or a number of elements that, capture protection afforded by property rights, and conclude ‘our results indicate that the quality of institutions overrides everything else.

Controlling for institutions, geography has, at least weak direct effects on income …similarly trade has no direct positive effect on income,” Easterly and Lavine (2002) also test the influence of institutions compared with geography and policy variables across 75 rich and poor countries and find that institutions seem to matter most as the determinant of per capita income. Even countries with ‘bad policies’ do well with good institutions.

Defining and Measuring Institutions

What do we mean by institutions?

The term institution has been defined in different ways. Douglass North (1990) describes institutions very broadly, as the formal and informal rules governing human interactions. There are also narrow (and easier to grasp) definitions of institutions that focus on specific organizational entities, procedural devices and regulatory framework.

At a more intermediate level, institutions are defined in terms of the degree of property rights protection, the degree to which laws and regulations are fairly applied, and the extent of corruption. It is narrower than North’s definition, which includes all of the norms governing human interactions. Much of the recent research into determinants of economic development has adopted the intermediate definition.

How is institutional quality measured?

Recent empirical analyses have typically considered three relatively broad measures of institutions, the quality of governance, including the degree of corruption, political rights, public sector efficiency, and regulatory burdens; the extent of legal protection of private property and how well such laws are enforced; and the limits placed on political leaders.

The measures themselves are not objective but, rather, the subjective perceptions and assessment of country experts or the assessment; made by residents responding to surveys carried out by international organizations and non-governmental organizations.

The first of these measures, i.e, the aggregate governance index, is the average of the six measures of institutions developed in a 1999 study by Daniel Kaufman, Art Kraay and Pablo Zoido-Lobaton. These measures include

(1) voice and accountability the extent to which citizens can choose their government and have political rights, civil liberties and an independence press;

(2) political stability and absence of violence – the likelihood that the government will not be overthrown by unconstitutional or violent means

(3) government effectiveness – the quality of public service delivery and competence and political independence of the civil service

(4) regulatory burden – the relative absence of government controls on goods markets, banking systems, and international trade;

(5) rule of law – the protection of persons and’ property against violence and theft, independence and effective judges, and contract enforcement; and

(6) freedom from graft – public power is not abused for private gain or corruption.

A second measure focuses on property rights. This measure indicates the protection that private property receives. Yet another measure, constraints on the executive, reflects institutional and other limits placed on presidents and other political leaders. In a society with appropriate constraints on elites and politicians, there is less fighting between various groups for control of the state, and policies are more sustainable.

It is recognized, however, that the correlation found between institutions and economic development could reflect reverse causality, or omitted factors. We need to find a source of exogenous variation in institutions where institutions differ or change independently of other factors.

Acemoglu et el (2001) argue that the different experience of colonization is one exogenous source where at one extreme colonizers set up exclusively extractive institutions (to exploit minerals and other primary products) such as slavery and forced labour, which neither gave property rights to inhabitants nor constraints the power of elites.

This was the experience in Africa and Latin America, At the other extreme, colonizers created settler societies, replicating the European form of institutions protecting private property and controlling elites and politicians in countries such as Australia, New Zealand and North America.

Weak institutional Structures

What determines why some countries were settled and others not? Acemoglu et al argued that the major determinant was the mortality rate faced by the early settlers, and that there is both a negative correlation between past mortality rates and current institutional quality (because institutions persisted) and between past mortality and the current levels of per capita income.

In fact, over 50 per cent of the variations In per capita income across the 75 countries is associated with variation in one particular index of institutional quality whichmeasures ‘protection against expropriation.’ The authors conclude ‘There is 3 high correlation between mortality rates faced by soldiers, bishops and sailors in the colonies and European settlements; between European settlements and early measures of institutions, and between early institutions and institutions today.

We estimate large effects of institutions on income per capita using this source of variation.’ They say that this relationship is not driven by outliers, and is robust controlling for latitude, climate, current disease environment, religion, natural resources, soil quality, ethyl linguistic fragmentation, and current racial composition’. But this is where the controversy starts because presumably his mortality rates of the early settlers, which affected the nature of institutions, was strongly influenced by geography as it affects disease. in the same vein Sachs (2003) argues that the findings of Acemoglu et al.

Concerning the negative relation between mortality rates 200 years ago and per capita income today is simply licking up the pernicious effects of malaria (which stir persists), not institutions. Development is not simply about good government and institutions. institutions might make anti-poverty policies more effective, but that is all.

Poor countries need resources to fight disease; to provide education and infrastructure, and all the other resource prerequisites of development. Sachs classified three types of countries combining institutions and geography, which is a sensible approach:

• Countries where institutions, policies and geography are all reasonably favourable, e.g. the coastal regions of East Asia
• Countries with favourable geography, but weak institutions, e.g. many of the transition economies of Eastern Europe.

Countries impoverished by a combination of unfavourable geography, such as landlocked countries and those plagued with disease and poor governance, e.g. many of the countries of sub-Saharan Africa.

It is important to mention from the start that developing countries are characterized by a number and varied features. Moreover, we should remind that developing countries are homogenous and as such do not exhibit similar features in their totality. However, what we intend to do in this unit is to focus on a number of features that are more or Tess common to developing countries.

As a way of recasting our thoughts on the current topic reference is made to Thirwall (2006) who maintains that there cannot be an increase in living standards and the eradication of poverty without an increase in output per head of the working population,oran increase in labour productivity. ForThirwall, this is asince qua nonof development. He goes on to argue that rich developed countries have high levels of labour productivity; while poor developing countries have low levels of labour productivity.

The questions that naturally arise are: what are the major causes of productivity, and what are the primary sources of productivity growth? In this article, therefore, we outline some of the distinguishing characteristics of developing countries that contribute to the low levels of labour productivity and poor economic performance. The following are some of such features:

• The dominance of agriculture and petty services
• Low level of capital accumulation
• Rapid population growth
• Exports dominated by primary commodities
• The curse of natural resources
• Weak institutional structures

The Dominance of Agriculture and Petty Services

One of the major distinguishing characteristics of poor countries is the fact that their economies are dominated by agriculture and petty service activities. There is very little by way of manufacturing industry. This therefore means that most of the population in developing countries finds employment in the agricultural sector. Available statistics (Thirwall 2006) indicate that 65 per cent of the labour force still relies on agriculture to make a living. This compares with just under30 per cent in the middle income countries and 5 per cent in the high-income countries.

Furthermore, most of the people employed in agricultural production in third world countries either operate at a subsistence level, or they are tenant farmers, or landless labourers. However, this is not to say that there is a lack of commercial farming or commercial agriculture. Commercial agriculture does exist, but it is only a tiny fraction of the entire agricultural sector. This being the case then, it is important to mention that the dominance of agriculture has certain implications. What are these? They include the following:

• Agriculture is adiminishing returnsactivity
• On the demand side, the demand for most agricultural products (and other

primary products derived from the land) isIncome elastic.

Low level of Capital Accumulation

A second major distinguish characteristic of developing countries is their low level of capital accumulation — both physical and human. Physical capital refers to the plant, machinery and equipment used in the production of output. Human capital refers to the skills and expertise embodied in the labour force through education and training. (The role of education in the development process will be discussed later in the unit).

Low levels of capital accumulation are a cause of low productivity and poverty, but are also a function of poverty, because capital accumulation requires investment and saving and it is not easy for poor societies to save. The process of development can be described as a generalized process of capital accumulation, but the levels and rates of capital accumulation in poor countries are low.

The amount of physical capital that labour has to work with in a typical developing country is no more than one-twentieth of the level in Europe and North America. This reflects the cumulative effect over time or much higher savings and investment ratios in the rich countries.

Domestic investment can differ from domestic saving owing to investment from abroad. The figures for low-income countries are distorted by China, which is 2002 saved over 40 per cent of its national income. If we exclude China the savings ratio of the low-income countries is less than half that of the middle- and high-income countries, although their investment ratio is still relatively high because of capital inflows from abroad. These are not always stable, however.

The distinguish development economist, Sir Arthur Lewis, once described development as the process of transforming a country from a net 5 per cent saver and investor to a 12 per cent saver and investor. Rostow, in his famous book The stages of Economic Growth (1960), defines the take-off stage of self- sustaining growth in terms of critical ratio of savings and investment to national income of 10-12 per cent.

What is the significance of this ratio? It has to do with a very simple growth formula, which originally came from the growth model of the famous British economist (Sir) Roy Harrod. The formula is the growth of output is the savings ratio (S/Y) and is the incremental capital – output ratio – that is, how much investment needs to take place in order to increase the flow of output by one unit. Substituting these definitions of s and c into (3.1) shows that in an accounting sense the formulation is an identity since in the national accounts.

Now, for the level of per capita income to rise, output growth must exceed population growth. If population growth is 2 per cent per annum, output growth must exceed 2 per cent per annum. It can be seen that how much saving and investment as a proposition of national income is required for growth depends on the value of the incremental capital, output ratio. It 4 units of capital investment are required to produce a unit flow of output year by year over the life of the investment, then c = 4, so s must be at least 8 per cent for the growth of output to exceed 2 per cent.

A net rate of saving and investment to national income of at least 8 percent or more is therefore necessary if there is to be sustained growth of per capita income. In most developing countries, the net savings and investment ratio is above this critical magnitude, but the fact remains that a major cause of low productivity and poverty in developing countries in the low level of capital that, labour has to work with. In case example 3.1 the difference in the savings and investment climate between India and China is highlighted and discussed.

Rapid Population Growth

A third distinguish feature of most developing countries is that they have a much faster rate of population growth than developed countries, and faster than at any time in the world’s history (see Chapter 8 for a full discussion). This can confer advantages but it also imposes acute problems.

Population growth in the low-income countries as a whole average 1.8 percent per annum, resulting from a birth rate of 29 per 1,000 population (or 2.9 per cent) and a death rate of 11 per 1,000 population (or 1.1 per cent). The rapid acceleration of population growth compared with its historical trend is the result of a dramatic fall in the death rate without a commensurate fail in the birth rate. Population growth in developed countries averages no more than 0.7 per cent per annum.

It takes 10 permits to start a business in India against six in China, while the median time it takes is 90 days in India against 30 days in China. A typical foreign power project requires 43 clearances at central government level and another 57 at a state level. These obstacles are far smaller in China.

In restriction on the hiring and firing of workers, India ranked 73^rdout of 75 countries in the Global Competitiveness Report for 2001. China ranked 23^rd. Bankruptcy is almost impossible for large business. Sixty per cent of liquidation processes before the Indian High Court have continued for more than 10 years. Public administration is also poor. It takes an average of 10.6 days to clear goods at customs into India, against 7.8 into China.

As important as regulatory barriers to competition is India’s poor infrastructure. Paved roads are only 56 percent of the total, against over 80 per cent in China. Shipping a container of textiles to the US costs 35 per cent more than from China. Because of power shortages, 69 percent of Indian companies have their own generator, compared with just 33 per cent in China.

These comparisons are bad news for India in one way, but good news in another. If India can sustain growth of 6 per cent a year when so much does not work very well, imagine what could be achieved if it did.

Rapid population growth, like low capital accumulation, may be considered as both a cause of poverty and a consequence. High birth rates are themselves a function of poverty because child mortality is high in poor societies and parents wish to have large families to provide insurance in old age. High rates also go hand in hand with poor education, lack of employment opportunities for women and ignorance of birth control techniques. Population growth in turn helps to perpetuate poverty if it reduces saving, dilutes capital per head and reduces the marginal product oflabour in agriculture.

The pressure of numbers may also put a strain on government expenditure, lead to congestion and overcrowding, impair the environment and put pressure on food supplies, all of which retard the development process, at least in the short run. In the longer run, population growth may stimulate investment and technical progress, and may not pose such a problem if there are complementary resources and factors of production available, but the short run costs may outweigh the advantages for a considerable time.

Introduction

Dependency development is an area of dependency theory which is mainly concerned with the efforts made to export primary resources from countries which are resource-rich but industry-poor. In this articles, we shall look at selected theories that emerged within the Neo-Marxist tradition. But before that it may be useful briefly to refer to the empirical background to the criticism raised against the original mainstream theories within both traditions.

Economic Situation in Developing Countries

First, it should be mentioned that the cumulated knowledge about the economic situation in the less developed countries had uncovered such a complex and multifaceted picture that it had become increasingly difficult to use the somewhat simplified conceptual framework and analytical models. In particular, it had proved impossible to conceive of the Third World as a large group of countries with uniform economic structures, development conditions and potentials. This applied where these countries were described as underdeveloped, as dual economies, as satellites, or as peripheral societies.

Next, it should be stressed that actual changes in the less developed countries in general implied greater and greater differentiation, accentuation of existing, and emergence of new, differences between the developing countries. To illustrate, they reacted and had to react in very dissimilar ways so the so-called oil crisis in 1973 and 1979, just as they reacted very differently to the continued stagnation in the world economy at the beginning of the 1980s. Because of this process of differentiation, it became increasingly inadequate to treat the Third World as a homogenous group of countries.

One of the few common traits that persisted was that economic progress almost everywhere remained limited to small geographic enclaves, to certain narrowly limited sectors, and so small prosperous social groups. The phenomenon has been characterized as `Singaporisation’, after the city state of Singapore, which, although surrounded by backward and poor areas, experienced unusual economic progress as early as the 1960s and 1970s.

However, even a common feature like ‘Singaporisation’ created problems for the classical theories, because it signified general tendencies very different from those envisaged in the theories. ‘Singaporisation’ corresponded poorly with the expectations of the modernization theories. It was contrary to these theories that development and modernization could be encapsulated and distorted to such a degree. Neither did this fit with the experiences garnered from the industrialised countries.

Limitations of the classical Dependency Theory

At the same time, the classical dependency theories were unable to explain the extensive industrial development which in fact occurred in many Third world countries. They faced particular problems when trying to understand and explain why, in countries like South Korea and Taiwan, even relatively close links had been forged between agriculture industry, and between the various industrial sectors.

This was in direct contradiction to the main thesis on the obstructing and blocking impact on close association with the world market and the rich countries: South Korea and Taiwan were among those countries most closely liked to the global capitalist structures and the centres of accumulation in the highly industrial countries.

These and many other factors prompted many development researchers and people who were actively engaged in development work to start looking seriously for other theories and strategies. The relatively closed theories, which at the same time treated the developing countries as a homogenous group had had their day. In their place appeared a number of more open theories which also, in a systematic manner, took into account the differences between the many countries of the Third World.

Many of these theories focused on specific aspects of reality, special development problems, and selected factors. One example could be proposition regarding the role of transnational companies in Latin American countries; another could be natural resource management in Western Africa and its impact upon economic performance.

The new wave of theories appeared partly as a criticism of the classical dependency theories; others took their point of departure in the modernization theories, but elaborated these considerably further, several of the new theories had little or more intellectual relationship or affinity with either or these two earlier schools of thought.

The Brazilian social scientist, F.H. Cardoso, was one of those who took his starting point in the original Latin American dependency theories (Cardoso and Faletto, 1979). However, he rejected the notion that peripheral countries could be treated as one group of dependence economies. In addition, he rebutted the idea that the world market and other external factors should be seen as more important than intra-societal conditions and forces, as some of these theories had asserted. Cardoso claimed instead that the external factors would have very different impacts, depending on the dissimilar internal conditions.

So decisive were the internal conditions, according to-Cardoso, that he would not rule out the possibility of extensive capitalist development in some dependent economies. Indeed, he did observe, in his own thorough analyses of Brazil that significant capitalist growth had occurred, though without creating auto centric reproduction and followed by marginalization of large segments of the population. When Cardoso referred to internal conditions, attention was drawn not only to economic structures but also to the social classes, t4ie distribution of power in the society, and the role of the state. His analyses thus reflected systematic’ attempts at combining economics and political science.

In contrast to Frank Cardoso regarded the national bourgeoisies of the dependence societies as potentially powerful and capable of shaping development. These classes could be so weak that they functioned merely as an extended arm of imperialism. But the national business community and its leaders, under other circumstances, as in the case of Brazil — act so autonornous/ and effectively that national, long-term interests were taken into account and embodied in the strategies pursued by the state.

The kind of development and societal transformation that could be brought about in even the most successful peripheral societies did not col respond to the development pattern in the centre countries. The result was not auto centric reproduction, but rather development in dependency (as opposed to Frank’s development of dependency). Or as Cardoso himself characterized it: dependent, associated development — that is development dependent on, and linked to, the world market and the centre economies.

In the further characterization of dependent development, Cardoso used, to a large extent concepts and formulations that resembled those of Amin. He thus emphasized the unbalanced and distorted production structure with its greatly over-enlarged sector manufacturing luxury goods exclusively for the benefit of the bourgeoisie and the middle class. Moreover, he high=lighted the absence of a sector that produced capital goods and the resulting dependency on machinery and equipment imports from the centre countries. But in contrast to Amin, Cardoso was very careful about generating. He would rather talk specifically about Brazil than about the peripheral countries in general.

In a similar way, Cardoso was reluctant to recommend general strategies, for a large number of dependent countries. Regarding Brazil, he pointed to a democratic form of regime as the most important precondition for turning societal development in a direction which would benefit the great majority of the people. Socialism was not on the agenda, and introducing it was in any case not as unproblematic as claimed by Frank and Amin.

Parallel to Cardoso’s efforts to adjust the classical dependency theories to the more! complex reality of Brazil, a number of German development researchers, under the leadership of Dieter Senghass and Ulrich Menzel, carried out a series of extensive historical studies of both centre and peripheral societies. The result was systematic and elaborate differentiation within both categories of counties. Their point was that when the centre countries were subjected to closer investigation, it turned out that they too, like the peripheral societies, revealed very different individualized structures and patterns of transformation. There were great differences for instance, between the Nordic and France or Germany.

Based on their historical studies Senghass and Menzel arrived at dissolution of the dichotomy between centre and periphery. In its place they put a number of patterns of integration into the world economy and the resulting development trajectories.

In addition, they reached the conclusion that the international conditions by themselves could not explain why a given society managed, or did not manage, so break out of the dependency trap. Far more important were the internal socio-economic conditions and political institutions in determining whether the economy in a given country could be transformed from a dependent export economy to an auto centric, nationally integrated economy.

From a number of country studies Senghass and Menzel extracted a list of conditions which, in Europe at least, could explain the occurrence or auto centric development. The important socio-economic variables included a relatively egalitarian distribution of land and incomes; a high level of literacy; and economic policies and institutions that supported industrialization and industrial interests. The political variables included extensive mobilization of farmers and workers; effective democratization to weaken the old elites; and partnership between the bureaucracy, industrial interests and the new social movements.

Senghass and Menzel, when they initiated their ambitious research programme, essentially wanted to find out how much could be learned from the over a century and a half of European experiences that would be of relevance to understanding the basic preconditions for the transformation of dependent, peripheral economies into auto centric economies.

There is little doubt that they have produced highly adequate documentation concerning he intra societal conditions, but here is also little doubt that their approach can be further enriched by more systematically taking into consideration the basic changes in the world capitalist system which have impacted heavily upon contemporary centre, periphery relationships.