A Brief History of Orthodox Development Theory

Essay, 2016

7 Pages, Grade: 80

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Across the West at the end of the second world war, as Keynesianism was the foremost
economic theory (Engel, 2010), and it was understood that the Keynesian Revolution had shown
that orthodox economics was an examination only of a special case of an economy in full
employment (Oslington, 1993:631), hence early development economics was largely not a mere
application of orthodox economics but rather fairly distinct. This is strongly seen in the early works
of Nurkse (1953), Rosenstein-Rodan (1943), and Lewis (1954). The orthodox neoclassical
economic logic ­ which stressed the position of comparative advantage and trade ­ held a relatively
weak spot (Knutsson, 2009:11). The position on trade was that of export pessimism and a
preference for import-substitution, the position on markets was that it was characterized by market
failure which justified the state taking the lead in development.
Both Eastern socialist and Western capitalist development strategies at this point put significant
emphasis on the state's role (Hettne, 1995) in coordinating investment and steering the economy
towards modernization. There was even support of state-led industrialization through assistance by
the World Bank. However, supporters of market-oriented Chicago School began to argue that the
main barriers to the rational peasants making the correct investment decisions were urban-biased
government policies (Pasour, 2013). Others argued that both theory and evidence showed that the
export pessimism and resulting import-substitution policy countered this approach, and rather
countries ended up having lower growth rates than those which had maintained relatively open
economies (Krugman, 1995:730) ­ see Lal and Rajapatirana (1987).
Generally, a subordinate position in development thinking was retained by the trade-oriented
neo-classical economic school in the 1960s. Rather, what prevailed were the perspectives of
structuralists which sturdily questioned international trade's benefits in the process of development
(the Prebish-Singer thesis, for instance) ­ although orthodox writers like Bhagwati (1988) had
criticized them as having been proven unjustified by the unfolding reality during the 1950s and
Keynesian developmentalism collapsed in the 1970s, and neoliberalism rose in the 1980s (Engel,
2010). Proponents emphasized price stability, liberalization of finance and trade, flexible labour
markets, and privatization. The IMF's and World Bank's Structural Adjustment Programs (SAPs)
featured this `Washington Consensus'. By the 1980s, Africa's high poverty and sluggish growth
were ascribed to inappropriate and excessive government intervention in the economy (Berg, 1981)
­ what Krueger (1990) calls `government failure' through capture by private interests, bureaucratic
incompetence, or some other set of factors. A response to this can be made in Evans' (2010:52)
succinct dictum, `no developmental state, no development', or in Reinert's (2010:102) terms, the
equilibrium under some degree of government failure (that only partly exploits its dynamic
potential) is better than failing on the opposite side with market failure characterized by poverty

and unemployment. Of course this does not mean that one should not take lightly Krueger's
(1990:18) warning of the risks of government failure. Although, the Washington Consensus
represented, in part, a reaction to government failures in countering market failures, the pendulum,
as Stiglitz (2004:3) puts it, "swung too far in the other direction and for too long".
The one-size-fits-all neoliberal model disregards differences among a variety of contexts among
nations. Todaro and Smith (2015:87) explain that although on strictly efficiency (as opposed to
equity) criteria, state intervention usually is outperformed by market price allocation, the attainment
of suitable economic policies based either on enlightened state intervention or markets is an
extremely difficult venture given the reality of the political and institutional political structure of
many developing economies. Under the Washington Consensus, priority was not on making the
state more effective, but on rolling it back (Rodrik, 2000:86). Little attention was given to the
complementarity between the public and private economic domains, as well as institutions (Rodrik,
The global financial liberalizations of the 1980s and 1990s imposed through the SAPs have been
characterized by what Best (2003) regards as a deviation from the embedded liberalism that once
characterized the post-war international arrangement in which each country was allowed to conduct
its own national experiments as long as they had no negative international consequences. With
regards to trade liberalization, Rodrik (2000) has maintained that import-substitution worked well in
a broad range of countries, and why they experienced downturn after 1973 was not due to the
`exhaustion' of import-substitution effectiveness, but due to external shocks against which there
was an inability to appropriately adjust macroeconomic policies. Additionally, the experiences of the
Asian late industrializers increased the confidence of the neo-classical analysts (Oslington, 1993)­
pointing to their successes as `free market' examples, whereas in reality these Asian tigers are far
from the laissez-faire example ascribed to them by neoclassicals (Todaro & Smith, 2015:86).
Unlike structural transformation, the neoliberal SAPs had a relatively short-term focus (Akbulut
et al. 2015:774). The aim was to return an economy to a sustainable balance of payments position
and maintaining price stability (Bergeron, 2004). SAPs have led to deepening of commodification,
worsened income inequality, greater vulnerability to financial instability, ecological degradation, and
class injustice intensification (Stiglitz, 2002). Rodrik and Rosenzweig (2010), explain that
development policy's efficacy is rarely a question of `does it work' (as is supposed by Washington
consensus and other `general recipes'), but is instead one of `when does it work and when not and
why". The failure of the originally formulated SAPs to successfully address Africa's development
challenges resulted in rethinking the approach (Heidhues & Obare, 2011:61). The dialogue in
Washington turned toward governance, and "reinvigorating the state's capability" (World Bank
1997, p. 27). A humbler view began to take shape among multilateral institutions with regard to
conditionality (Rodrik, 2000). Displeasure over the orthodoxy was fuelled by the East Asian

financial crisis (which uncovered the hazards of unconstrained financial liberalization), general
dissatisfaction with Latin American market-oriented reforms and the increasing realization that
mechanisms of social protection were paid too little attention to, and the failure of privatization and
price reform in the Russian Federation in the absence of a supportive political, legal, and regulatory
apparatus (Rodrik, 2000:86). Additionally, late neoclassical economists began to introduce
institutional influences into their analyses (Thorbecke, 2006:17). This has manifested in the new
institutional economics strand of neoclassical economics. As the 1990s loomed, there were growing
calls for "adjustment with a human face" ­ pointing toward giving more thought to development's
social dimension and the state's role (Heidhues & Obare, 2011:61). SAPs have been repackaged in a
way to make it alluring to stakeholders in development by, inter alia, increasing its consideration of
distinct national characteristics and seeking inclusiveness (Heidhues & Obare, 2011:61).
The pendulum of development theory and strategy has swung several times from the 20
century and into
the 21
century. The aim of the essay was to assess mainstream development strategy as it took on a
neoclassical shape. Three dimensions of are explored: trade, markets, and the state. To conclude, the
quote of Rodrik (2000:86) seems fitting: "we enter the 21st century with a better understanding of the complementarity
between markets and the state-a greater appreciation of the virtues of the mixed economy. That is the good news".

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A Brief History of Orthodox Development Theory
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Development Economics
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Abel Gaiya (Author), 2016, A Brief History of Orthodox Development Theory, Munich, GRIN Verlag, https://www.grin.com/document/429689


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