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A BRIEF REVIEW OF DEPENDENCY THEORY AND THE DEVELOPMENTAL STATE MODEL
Abel B.S. Gaiya
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Development economics, like many other sub-fields of economics, has experienced its fair share of flux in theory domination across time – from the post-war structuralist period to the neoliberal period from the late 1970s onward. Yet while debates have undergone persistence in the mainstream, there have been voices which could be termed ‘heterodox’, which have also proposed theories that attempt to explain the phenomenon of underdevelopment, prospects for development, and strategies and policies for development. An attempt to chart out some of these alternative developmental theories, policies and strategies is undertaken.
The essay assesses two heterodox theories of development: dependency theory and the developmental state model. Under each theory, the analysis addresses of the nature and causes underdevelopment, the requirements for development (strategy), and actions towards development (policy). The issues of institutions, markets, the state, the environment, the political economy, and international organizations will also be highlighted.
To Lenin (1939) colonialism facilitated the command of international capital over much of the Third World, using them as raw material suppliers and sealing the new colonies into this global division of labour (Balaji, 1994:110). Frank (1967) theorized that incorporation into the world economy had led to a systematic economic underdevelopment of the periphery; as colonies were drained of surplus as they exchanged primary products for manufactured goods from the industrialized core regions. Frank (1967) and others argued that this global capitalist structure was not transformed through political liberation, as the interests of the periphery’s dominant classes were closely tied with those in the core. In fact, this division was justified under the economic framework of comparative advantage advocated by the classics and neoclassical theory (Wilson, 2013:4). As Balaji (1994:111) explains, it was argued that development in the core would only lead to underdevelopment in the periphery. Thus, dependency theory provided a relatively pessimistic view of development as long as the core-periphery relationship exists. Frank (1972), as Oslington and Mahmood (1993:633) explain, actually concluded that given the alliance of the national bourgeoisie in the periphery with the core, the conclusion is of the necessity of revolution – and the ambience of socialism is strongly perceptible in the writings.
The dependency view of the peripheral market is that industrial development depends on exports which make possible importation of capital goods; and these exports are typically linked to extractive sectors which are controlled by powerful oligarchies with links to foreign capital (Chilcote, 1974:16). Hence, foreign direct investment (FDI) is assessed in light of MNCs which are actually conduits for the extraction of surplus from the periphery and its repatriation to the core – manifesting in capital flight from the periphery (Chilcote, 1974). The periphery thus experiences “internal disarticulation” (Smith, 1981:759) – the opposite of Wade’s (2003) ‘articulation’ – as, rather than having national integration, it is injected into the international economy, due to the “centripetal logic of strategies for growth coming out of multinational headquarters” (Evans, 1979:12) in a way that excludes the mass citizenry. This, in addition to the structural exploitation of the rural economy by the urban bourgeoisie (Matunhu, 2011:68), inter alia, perpetuates high inequalities of wealth and income within the periphery. Dependency theory’s view of institutions is thus one of historical-structural engineering/evolution to support this core-periphery political economic order – manifesting, albeit at an international level, in Skocpol’s (1977:1082) observation that because strong states buttress and increase the differential flow of surplus to the core, the adjustment policies of the World Bank and IMF and the differential in strength of the various states within the system is crucial to maintain the system as a whole. Peripheral country leaders, for instance those of Africa, have allowed the core to exploit the periphery by, for instance, relinquishing a lot of their power to chart roads to development and through WTO agreements in 1995 (Matunhu, 2011:61). Additionally, due to the extractive purpose of the periphery, environmental problems due to extractive activity are experienced (Twerefou, 2009) by the periphery; and displacement/dispossession of communities for the purpose of resource extraction can be detrimental (Evans, 2010:37).
This conclusion of development pessimism is problematic. Frank's thesis presents a static picture of relations in a changing world economy, and by making relations with the core the engine of all development, it failed to consider whether and how changing conditions within the periphery, such as shifting social alliances, could affect economic development (Balaji, 1994:111). This echoes Smith’s (1981:781) critique that dependency theory neglects the possibility of internal political, social, or physical forces, for their own autonomous reasons, being large determinants of the inability/difficulty to generate industrial development. As such, Evans (1979) argued that development was not inconceivable even under conditions of dependency, pointing to Brazil’s industrialization and rapid growth made possible by an alliance between the state, local capital and MNCs (Balaji, 1994:111). Yet, Ferraro (2008), also from the dependency school, theorizes that the policy prescription for dependent countries is that they should attempt to pursue policies of self-reliance contrary to the external integration prescription of the neo-classical models endorsed by the IMF and World Bank.
Additionally, although Raul Prebisch similarly theorized this core-periphery relationship (manifesting to some basic degree in structuralism) referring to Latin America, Prebisch concluded – contrary to the dependency theorists – that the only way for the peripheries to escape their disadvantaged position and hence underdevelopment was to reform the structure of their economies by creating industries and so relying less on the production of primary products (O’Toole, 2011:425). The way to do this was to come from the state (Bodenheimer, 1970).
Developmental state (DS)
Generally, the primary defence for state intervention has been identified as the reality of market failure (Kasahara, 2013:3). A simple neoliberal solution to development such as financial liberalization to increase the supply of capital is inadequate due to low investment demand (Rodrik & Subramanian, 2009). Early development theory placed great emphasis on the state as a coordinator and facilitator of development (Chang, 1999). Evans (2010) argues that the 21st century DS must be a capability-enhancing state – thereby laying grounds for more proactive and broad human and social development as part of development policy.
Johnson’s (1982) DS model, was characterized by a market steered with instruments articulated by a small-scale, elite economic bureaucracy within which a prime agency takes the lead in the formulation and implementation of policy (Kasahara, 2013:4). For Evans (2010:45), the developmental state needs both bureaucratic capacity and embedded autonomy. Chibber (2005:228), coming from a political economy perspective, maintains that the logic of developmental state features significant contradictions in that the kind of political alliance (between the state and capitalists) that was required to support it is responsible for its disintegration. The lack of discipline that could arise from this alliance is discussed by Krueger (1990).
A central component of the DS model is strategic industrial policy which can be conducted in comparative advantage-conforming or -defying fashion (Lin & Chang, 2007). The role of institutions, although not well stressed during the early decades of developmentalism, is important – for instance, Rodrik (2001:91) emphasizes the importance of strong institutions for responding to external shocks which can divert the developmental pathway; using the external shocks of the 1970s as an example. However, the DS literature has largely neglected addressing environmental challenges (Swilling et al., 2016:651). However, environmental goals can be integrated with development plans (UNEP, 1972), and has been labelled ‘green growth’ (OECD, 2012:5) – for instance by fusing industrial policy with environmental goals through industrial development in renewables and a commitment to reducing energy intensity of industry. The DS can also be instrumental in coordinating actions towards achieving international goals such as the MDGs and SDGs (Schmidt, 2015).
Additionally, Wade (2003:635) maintains that the pursuit of internal integration through a high level of sectoral integration makes possible and viable robust political coalitions between capital and labour to maintain inclusive growth under democratic regimes.
A major contemporary challenge to the DS model is that of a shrinking “development space” for developing countries, as the traditional DS tools of tariffs, subsidies, technology policies, and so on, are being moved further beyond policy grasp (Wade, 2003:622) through WTO agreements.
Furthermore, contrary to the faith of the Washington Consensus that the government’s role in development be minimized, evidence points to successful development strategies pursued in East Asia where the developmental state was active (Stiglitz, 2004). Yet, it should not be underestimated the real risk of government failure and rent-seekers under perpetual protection by the state (Krueger, 1990) that may not only leading to inefficiency and waste, but high inequality of wealth fuelled by rents. Nonetheless, even the IMF, which along with the World Bank in the 1980s advocated the Washington Consensus, is now opening up to the fundamental limitations to neoliberalism (Ostry et al., 2016). The 21st century has now been entered into with a greater appreciation for the complementarities between the state and markets (Rodrik, 2000:86).
An examination of two alternative theories of development – dependency theory and the developmental state model – has been conducted. While dependency theory maps out a core-periphery global political economy in which the periphery is exploited for its raw materials to fuel the development of the core, the developmental state maps out the possibility for the state to lead the market towards industrialization and possibly away from this core-periphery lacuna. The development pessimism of dependency theory has been undermined by developmental successes of several countries such as the Newly Industrialized Economies, and the developmental state has been instrumental in these successes.
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- Bachelor of Commerce (Honours) Abel Gaiya (Author), 2016, A Brief Review of Dependency Theory and the Developmental State Model, Munich, GRIN Verlag, https://www.grin.com/document/429691