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Max Planck Encyclopedia of Public International Law [MPEPIL]

Economic Development, Approaches to

Rafael A Porrata-Doria Jr

Development — Foreign Direct Investment — Developing countries

Published under the auspices of the Max Planck Foundation for International Peace and the Rule of Law under the direction of Rüdiger Wolfrum.

A. Introduction

Since the 1940s, scholars have sought to articulate analytical perspectives to explain the causes of the relative poverty of underdeveloped countries and to identify the ways in which these largely pre-industrial economies could move out of poverty. These constructs seek first to identify the causes of the relative poverty of underdeveloped countries and secondly to specify how underdeveloped economies could achieve economic progress. In this manner, the field of development economics was formalized as an economic sub-discipline (Hunt 7).

The principal concern of these theorists is long-term sustained economic growth which, over time, would improve the standards of living of individuals in developing countries. In order to achieve this, a major criterion would be the articulation of public policies designed to bring about rapid economic growth. These theories have been used to explain the economic gap existing between developing and industrialized countries and to identify the internal and external cultural, political, economic, and institutional mechanisms which impede economic development. Once identified, these mechanisms could be modified to bring about economic progress (Contreras 95).

Since the 1940s a number of different economic development approaches have been articulated and have served as the primary basis for substantial changes in policies and norms in many countries.

This article will describe and evaluate the five principal approaches to economic development that have been articulated in the last 50 years. It will also examine how India, Vietnam, and Mexico have engaged in the process of economic growth within the context of these approaches.

B. Principal Approaches to Economic Development

Five principal approaches to economic development have been articulated and implemented throughout the world. These include the Linear Development approach, the Structuralist or Import Substitution approach, the Marxist approach, the Neoclassical approach, and what I have called the IADB Combined approach. These approaches are imperfect, as shall be seen in the Assessment.

1. The Linear Development Approach

The Linear Development approach started with the concept that economic and political development is an inevitable and evolutionary process that will eventually result in advanced economic, political, and social institutions and therefore in economic and social prosperity. The articulation of this approach is best exemplified by Walt Rostow, who started with the premise that the economic history of any nation can be broken down into five stages of growth, which are the product of political, social, and economic forces (Porrata-Doria 52).

These five stages include the traditional society, the preconditions for take-off, the take-off, the drive to maturity, and the age of mass consumption. The traditional society is one whose structure is developed within limited production functions, based on pre-Newtonian science and technology and on pre-Newtonian attitudes toward the physical world. This society had limited productivity and devoted a very high proportion of its resources to agriculture. Flowing from this agricultural system is a hierarchical social structure with limited scope for vertical mobility (ibid).

The second stage of growth, the preconditions for take-off, is a transitional stage from the traditional society. Here, scientific discoveries begin to be translated into new technologies that allow for growth and increased efficiency in industry and agriculture. Economic progress begins to be perceived as a possible and desirable societal goal. Education, necessary for the understanding and application of modern technology, becomes valued and serves as a mechanism for social mobility. Individuals and governments become willing to mobilize their savings and to take risks in the pursuit of profit from new economic activity. Accordingly, the scope and activities of commerce increase, banks and other sources of capital appear, and investments in modern infrastructure are made. A modern, urban sector appears, and competes for economic, social, and political power with the traditional agricultural sectors (ibid 53).

The take-off, usually caused by some sharp stimulus, such as a political revolution, technological innovation, or the international environment, is the stage where the ‘forces of economic progress’, which had made their entrance during the prior stage, achieve domination and control of society. Economic growth becomes the norm and industrial expansion yields profits that are reinvested in new industry and further urban expansion (ibid).

10 The fourth stage, the drive to maturity, is characterized by two economic changes. The first is the increase of real income per person to the point where large numbers of persons have resources which can be used in the consumption of goods beyond life’s necessities and the second is the change in the structure of the working class to one where its members are predominantly urban dwellers who work in offices or in skilled factory jobs. Economic resources are allocated increasingly to the production of consumer goods and the rendering of services (ibid).

11 In the last stage, the age of mass consumption, the balance of attention of society, which takes an advanced industrial society as a given, shifts from the creation of wealth to the consideration of the purposes for which that wealth ought to be used (ibid).

12 Three factors are striking about this approach. The first is the inevitability of the process. The second factor is the direct interrelationship between the creation and growth of stable, powerful and ‘modern’ political and social institutions and economic growth. Without the former, the latter will not occur. The last factor is the assertion that, for many, if not most, countries, the preconditions for take-off will have arisen out of the import of modern technology, capital, norms, and institutions from more ‘modern and advanced’ countries. The existence of free trade at an international level seems to be a critical precondition to this process. Moreover, development requires a free capitalist market system, liberal democratic political institutions, and the rule of law (ibid 53–54).

13 Nations and international institutions in the developed world can assist developing countries in achieving the goals described above through financial and technical expertise and resources that could be used to build modern institutions and to provide capital financing for the creation and improvement of economic facilities and resources (ibid 54).

2. The Structuralist or Import Substitution Approach

14 The Structuralist or Import Substitution approach is based on the work of the UN Economic Commission for Latin America (‘ECLA’) and its long-time executive secretary, the Argentine economist Raúl Prebisch, during the 1950s and 1960s. This approach started with a division of the world’s economy in two: the centre and the periphery (Porrata-Doria 55).

15 The centre consists of countries that had reached a high degree of industrialization. Such countries consume primary goods, that is raw materials, and produce many finished goods, which are then exported to the rest of the world. Developments in technology and increases in productivity lower the production costs of the centre’s finished goods, which in turn increase the demand for them (ibid).

16 All countries not in the centre are in the periphery of the world economy. Countries in the periphery export primary goods to the centre and import the finished goods, using their scarce capital and foreign exchange to pay for them. The countries of the periphery find themselves in a difficult position, since technological innovations do not affect the production of primary goods as they do that of finished goods. Furthermore, demand and prices of primary products are far more volatile than those of finished products and technological advances can effectively eliminate the market for their primary products completely. Competition from big multinational enterprises established in the centre can and does destroy those few industries that had been formed in the periphery. Furthermore, shortages of capital prevent the development of new industries in the periphery. The economies of the periphery are dependent on the economies of the centre. As a result, the countries of the centre become richer while the countries of the periphery remain poor (ibid).

17 The Structuralist approach challenged the unequal distribution of gains from trade between the centre and the periphery and the inadequacy of market mechanisms in stimulating development by proposing that the countries in the periphery engage in a policy of substitution of the finished goods that were being imported from the countries of the centre. This policy of industrial development needed to the managed by the state, which was the only actor in the countries of the periphery which was powerful, technically competent, and ‘objective’ enough to successfully implement it (ibid 55–56).

18 This approach included, first, a limitation on the growth (or even a reduction in imports) of finished goods from the countries of the centre. Furthermore, it encouraged the creation of new industries (financed by savings achieved from the limitation of imports, government expenditures, and funds from international organizations) to produce previously imported goods for which there was a local demand. In order to produce a competitive product, these infant industries needed access to the latest technology and incentives to make the product attractive and affordable. Accordingly, laws mandating the transfer of imported technology were essential and protection from foreign competition and foreign takeover using tariffs, limitations on foreign investment, subsidies, and other similar devices of governmental regulation. The government, because of its attributes of rationality, efficiency, and honesty, was presumed to be able to mobilize and unite all the various economic and political interests in society (ibid 56).

19 A further characteristic of this approach is its preference for regional economic integration. Once new industries in the periphery were created and functioning successfully, they would face a problem: their national markets were too small to be able to absorb all of their production. Accordingly, in order to thrive and grow, they would need to export their production abroad. Thus, economic integration on a regional scale is necessary to attract capital and technology to a larger market, which would enable the producers of these newly manufactured products to increase their efficiency and sales (ibid 56).

3. The Marxist Approach

20 Marxist approaches to economic development focused on the exploitative relationships between advanced capitalist countries and the developing world (Contreras 94). Its proponents accepted Marxist philosophy in principle but argued that it had to be modified if it was to be applicable to developing countries. Moreover, because Marx did not have sufficient information to develop a theory dealing with underdevelopment, new observations about the nature of the world economy and the process of development needed to be made (ibid 101).

21 Marxist approaches to economic development appeared to focus on two major issues: the relationships between advanced capitalist countries and underdeveloped countries and the connection between socialism and industrialization.

22 To Marxist development economists, the relationship between developed and developing countries is one of exploitation. They gave Marx’s theory of surplus value (which stated that, because capitalists expropriated a large portion of his labour, the worker received only a fraction of the product of his labour) an international dimension. As such, industrialized countries historically extracted surplus value from developing countries by paying very low prices for primary products imported from developing countries and then transforming them to finished products which they would resell to them at very high prices. The result of these exploitative relationships is a never-ending cycle of chronic poverty and misery in developing countries (Contreras 102).

23 The only way for a developing country to escape this cycle of oppression is through a socialist revolution. The problem here is that, according to classical Marxist theory, a social revolution is possible only after a country has undergone a capitalist transformation. Thus, a revolution could not occur in a developing country until industrialization was complete (Contreras 102). The problem is that industrialization under a capitalist system is extremely difficult or impossible for a developing country to achieve because of several factors, such as the lack of capital investment, the poverty of workers, which limits them to subsistence consumption, and the misallocation of value received from exports by the ruling class (Larraín 118–19; Contreras 102).

24 How is this status quo to be broken? Since the cause of underdevelopment is capitalism, then it is capitalism that must be abolished. This is done when, without waiting for industrialization, the masses engage in a socialist revolution. The revolution would then place the surplus value of society in the hands of the workers, who would then invest in socialist development (Larraín 118–19; Contreras 103). The revolutionary government would then achieve external independence by cutting itself off from the exploitative relationships arising from the international capitalist trading system (Larraín 119–20).

4. The Neoclassical Approach

25 As a reaction to the Structuralist approach, a number of conservative economists, including a number of faculty members at the University of Chicago’s School of Economics (collectively known as the ‘Chicago School’) entered the development theory debate and articulated what became known as the Neoclassical or Neo-Liberal approach to development.

26 This approach believes that only classical economic theory is relevant in dealing with development issues. Its analysis, based on the ideas and tools of Neoclassical economic theory, appears to stress three major topics: the centrality of the free market, a reduced role for government, and the importance of the quantity theory of money (Porrata-Doria 58).

27 The Neoclassical approach views the market as the framework of free and informed individual exchange. Moreover, it is the paradigm of a free and non-coercive social organization and the focus and objective of economic scientific accumulation. Since the market is rational and efficient, it works. Because the market works, freedom becomes possible and is represented by three features: the private ownership of capital or productive assets, the private management of economic enterprise, and the existence of competitive enterprise (ibid).

28 Government, on the other hand, is a form of monopoly that interferes with the market and inhibits freedom by denying individuals economic choices. Government should, therefore, play a different role and not behave as a monopolistic force. This means that government should provide a process and system for modifying rules, mediating differences among participants regarding the meaning of the rules, and enforcing compliance with the rules. It should not be involved in the creation or maintenance of public economic monopolies or the barring of actors from the market. In short, the critical role of government is that of ‘keeper and enforcer’ of the rules voluntarily created by its citizens, and not as an economic actor (ibid).

29 Lastly, the quantity theory of money is also an extremely important factor in the equation. Its principal tenet is that inflation is, at all times and everywhere, a monetary phenomenon. Only a steady increase in the money supply, consistent with real growth of the economy, can ensure price stability. This conclusion is based on the premise that the general equilibrium of the economic system, its so-called ‘natural state’, insures price stability. This price stability and equilibrium can only be disrupted by inappropriate government intervention (ibid).

30 The Neoclassical approach to development theory gives primacy to three principal areas of policy development: free trade (and lack of protectionism) in the international arena, deregulation and the cultivation of market institutions in developing countries, and the provision of foreign aid by developed countries or international organizations in order to stimulate growth (ibid 59).

31 This approach was implemented in the 1980s and 1990s by many countries that had previously embraced the Structuralist approach. Because of this change in approaches, these countries engaged in substantial privatizations of public enterprise and extensive deregulation.

5. The Combined Approach

32 The Combined approach is best articulated in a study prepared by the Inter-American Development Bank (‘IADB’) in 2014. In this report, the IADB started from the premise that both the Structuralist and Neoclassical approaches did not result in increased economic development and prosperity in the countries that enacted them (Crespi Fernández-Arias and Stein [eds] 19–20, 23).

33 There are essentially two reasons for this. The first is that both approaches give primacy to either the public or the private sector and completely separate their roles in the development process. As a result, one sector usually acts independently of the other. Unfortunately, neither the public nor the private sector has the complete information that it needs to plan and act to develop the economy, Therefore, the public sector cannot appropriately evaluate the need for intervention or the design of appropriate policies to implement these interventions and the private sector, in acting independently, could engage in actions that would negatively affect another sector of the economy or society (ibid 424–28). Secondly, economic development policies in the 21st century are facing a very different world. It is a world in which states focus on the global rather than the national economy and engage in export transformation strategies to better their position in global markets. Similarly, emphasis has switched from increasing the size of the manufacturing sector to economic diversification by developing new industrial and service sectors and increasing the use of technology in current industries. Direct foreign investment policies are now targeted to specific technologically advanced sectors and state interventions in the economy tend to be rarer and more targeted (ibid 23). Indeed, the IADB notes that most cases of successful economic development in the world have been based on the developing country’s capacity to produce new and better goods. In other words, economic development is fuelled by innovation and productive transformation (ibid 333).

34 What, then, is an appropriate economic development approach for this world? The IADB’s answer is that a successful economic development strategy is one that involves a partnership between the public and private sectors involving a long-term consensus regarding the importance of public support of innovation and the constant adjustment of public policy toward the achievement of that goal. This goal would be achieved through the adoption of foreign technology, the generation of a research and development infrastructure to stimulate the development of new firms, economic sectors, and technology, and the development or worker skills through education and training (ibid 77). This public-private partnership would resolve the asymmetrical information problem discussed above and would keep both partners from abusing their positions vis-à-vis each other (ibid 428–29).

35 In this type of partnership, the public sector serves as a facilitator of production decisions that must be implemented by the private sector in cooperation with the state. State intervention involves the investment of public funds or public goods (such as infrastructure or property rules) or market interventions (such as subsidies or tariffs) that are meant to improve innovation or the global competitiveness of the national economy or to correct market failures (ibid 36). Market failures occur when the productive activities of economic actors generate externalities (such as the lack of trained employees) that negatively affect other sectors of the economy or lower the country’s net social benefit. When seeking to address market failures, the public sector must evaluate its proposed policies to determine whether they are the best way to address the particular market failure at issue without creating additional negative externalities (ibid 38–39).

36 The IADB cites South Korea as an example of a successful public-private economic development partnership. This partnership is described as having unfolded in three stages. In the first stage, the public sector enacted export production policies and promoted the importation of and direct foreign investment in technology and investment in new education and technological facilities. In the second stage, the public sector created policies that enabled the private sector to adapt foreign technology for their use through licensing, reverse engineering, and imitation and continued to provide stimulus for technology development through partnerships with the private sector. In the third stage, the private sector, through its own investment and internal research and development, developed, created, and exported new technologically advanced products. Currently, the IADB notes, the Korean public and private sectors are working together to deal with increased international competition through increased support for small and medium enterprises and research and development (ibid 81).

C. Examples of National Approaches to Economic Development

37 In this section, we will assess how India, Vietnam, and Mexico have dealt with the approaches described above in crafting their own economic development strategies.

1. India

38 After independence, India adopted the Structuralist approach as its economic development strategy, with the Indian State serving as the dominant actor in the economy. As part of an import substitution strategy, the Indian government created an industrialization programme which focused primarily on basic goods, such as steel and machinery. This programme used licensing of industrial activity, the reservation of key areas of the economy for state activity, controls over foreign direct investment, and frequent intervention in the labour market as tools to achieve its goals. Unfortunately, this strategy turned out to be ineffective, bureaucratic, and conducive to rent-seeking behaviour (Kniivilä 303).

39 This failure led to provisional reforms during the 1980s which were meant to encourage the import of capital goods, rationalize the tax system, and relax industrial regulation. These reforms were broadened and systematized after 1991 following a macroeconomic crisis. As a result, resource allocation in the economy shifted from the state to the market. Accordingly, the licensing system controlling industrial production, the restrictions on inflows for capital and technology transfer, and the rules restricting the expansion of large companies were relaxed, the currency was devalued, quantitative restriction on imports of raw materials, intermediates, and capital goods was abolished, tariff levels were reduced, and exchange controls were simplified. Additional measures included the breaking up of public monopolies, the reduction of foreign currency debt dependence, and tax reforms (Debts). Norms regulating the labour and agricultural section were, however, left largely untouched (ibid).

40 Unlike Mexico, India did not abandon all its Structuralist policies. In fact, India has partially abandoned the Structuralist approach and partially adopted the Neoclassical approach. These reforms have resulted in India’s increased integration with the global economy and markets (since 1991) and substantial economic growth, with India’s GDP per capita doubling since 1980 (Prime 623, 634; Bosworth and Collins 46). This growth has, however, been somewhat unbalanced, led by a rapid expansion of service industries and little or no growth in traditional industrial manufacturing. Indeed, India has a higher share of exports occurring in the commercial services sector rather than in the manufactured goods sector.

41 Some analysts believe that this imbalance is due to infrastructure constraints and other restrictions within the Indian domestic economy. Others believe that the export orientation of commercial services, with little emphasis on serving the Indian market, may also be due to the government ownership and control of, and non-competitiveness of, Indian manufacturing (Prime 624, Bosworth and Collins 46). Others point out that the location and technological level of industrial firms may also be a factor, since regulatory liberalization fostered innovation, profits, and growth in high-technology industries, and reduced them in low-technology ones (Kniivilä 305).

42 It can be argued that India’s hesitation to discard all its Structuralist policy apparatus has limited the success of its Neoclassical reforms, Thus, as one commentator notes, India must further integrate with the global economy to deepen and sustain its growth in investment flows and trade in goods beyond its current emphasis on service exports for its economic development programme to be successful. This will also require reductions in public sector deficits, increased capital inflows from abroad, an increase in foreign direct investment, the repair and expansion of inadequate infrastructure, and the broadening of international trade in the manufactured goods sector (Bosworth and Collins 63–64).

2. Vietnam

43 Vietnam’s traditional economic development programme followed the Marxist approach, which consisted of three major components. These included the allocation of resources through central planning and the elimination of all markets for goods and labour; ownership of all major means of production by the state and the elimination of private enterprises; and the distribution of income according to labour input and elimination of wage differentials based on labour markets (Beresford 221, 226).

44 In 1986, this model was abandoned in favour of a market-oriented socialist economy under state guidance known as Doi Moi. As a result, central planning has been eliminated and labour markets have replaced distribution according to labour (ibid 221). The state has dedicated a rising share of its investments to infrastructure construction and improvement (ibid 228). Since then, the Vietnamese economy, state and society have undergone a dramatic transformation resulting in high GDP growth, rapid poverty reduction, more political openness, and cultural diversity (ibid 221). The Vietnamese economy, as seen by one analyst, is in the throes of a transition strategy between a centrally planned economy and a free market one (Tho 122–23).

45 Despite these changes, state-owned industrial enterprises (‘SOEs’) remain a substantial part of Vietnam’s economy. Prior to Doi Moi, the government’s focus was on creating new SOEs with the expectation that these enterprises would be self-sustaining. Once created, they had trade protection from the state, but received little or no economic support. The plethora of SOEs created under central planning resulted in chronic input shortages, with the result that these enterprises were not able to ensure the quality of their outputs or meet production quotas. Indeed, it appears that these SOEs, rather than instruments of industrialization and modernization, served primarily a social networking and welfare function (Beresford 227–32).

46 The Doi Moi strategy gave SOEs much greater autonomy, allowing them to form joint ventures with foreign investors and allowing smaller firms to be partially privatized. Since 2000, the total number of SOEs in Vietnam has been reduced (from 12,000 to 4,086), with many smaller firms merged into larger state economic groups. These groups continue to enjoy near monopoly status in certain key industries and are not exposed to market competition. Their top management is still appointed by the state, and their social network function remains extremely important. These network connections are sources of capital, land, and other resources and result in SOEs rapidly accumulating capital and fixed assets, to the detriment of other sectors of society. Accordingly, the dividing line between the private and public sectors in Vietnam is blurred (Tho 130; Beresford 234–35). A number of these firms have become financially successful through joint ventures with foreign firms and changed business lines (Beresford 231).

47 Currently, the Vietnamese economy, in spite of its past growth, is plagued by high inflation, large trade deficits, an expanding fiscal deficit, and a tightening of credit and the money supply (Tho 122). Some of these problems are the results of external pressures, but they have been exacerbated by inefficient operations and the hoarding of capital and fixed assets by SOEs (ibid 137–38). SOEs’ privileged access to land exacerbates this problem (‘No Man’s Land: Property Disputes in Vietnam’ [15 June 2017] The Economist).

48 Again, an argument can be made that, for Vietnam’s economic development programme to succeed, it must completely abandon all the institutions created by central planning during its use of the Marxist development approach. Accordingly, to prosper and resolve its current problems, Vietnam would accelerate its transition to a market economy, by eliminating SOEs’ privileged market positions and access to capital and land, reforming their governance, and exposing them to market competition (Tho 137–38).

3. Mexico

49 From the 1940s to the 1980s Mexico adopted and implemented the Structuralist approach through a stateled industrialization policy that concentrated on industrial development through import substitution. This policy provided incentives to manufacturing exporters and moderate levels of protection to manufacturing with limited dispersion of protection rates across industries. It also included a number of sector-specific programmes which gave increasing emphasis to export targets and price competitiveness. The manufacturing sector, especially the heavy intermediaries, consumer durables, and capital goods sectors, benefited greatly from these policies. As a result, growth, productivity, and performance in the economy increased substantially. As a result, Mexico generated impressive macroeconomic performance from 1940 to 1950 (Moreno-Brid and Ros 115–16).

50 Two external shocks severely impacted the Mexican economy in the 1980s. The first was the 1982 international debt crisis, during which foreign debt service sharply increased and the availability of new external finance was sharply reduced. A rise in US interest rates, which led to a contraction in the rate of expansion (with a concomitant decrease in import demand) exacerbated its impact on the Mexican economy. The second was the 1986 oil price shock, which dramatically deteriorated the Mexican economy terms of trade and cut off a large part of its foreign exchange and fiscal revenues (ibid 146). This led to what was descried as a ‘lost decade’ of reduced living standards, increased inflation, declining government expenditures and falling wages (ibid 161).

51 As a result of this crisis, the Mexican government undertook an extensive programme of economic reforms covering trade and industrial policy, foreign investment and capital account liberalization, privatization of public enterprises, financial liberalization, and the deregulation of domestic economic activities (ibid 161–63). In short, the Mexican government rapidly abandoned the Structuralist approach as the basis of its economic development policy and wholeheartedly embraced the Neoclassical approach. The speed and depth of this change of policy distinguished Mexico from other countries which found themselves in a similar situation (ibid).

52 The culminating phase of this reform was Mexico’s adhesion to the North American Free Trade Agreement (1992) (‘NAFTA’) which became effective in 1994 and which eliminated tariff and nontariff barriers, and loosened foreign investment restrictions among Mexico, Canada, and the United States (ibid 164).

53 Mexico, unlike India and Vietnam, completely dismantled its Structuralist policies and replaced them with Neo-Liberal norms. These changes substantially increased Mexico’s participation in global markets. Export has accelerated from a rate of 5.8% per year in 1982–93 to 11.1% per year in 1993–2006, a remarkable export rate in the international context (ibid 181). Moreover, the export sector has become increasingly diversified, with a substantial increase in medium- and high-technology–intensive exports.

54 Mexico’s Neo-Liberal economic development policies have not proven to be a panacea. The export sector appears to be highly concentrated, with a few large firms with oligopolistic power in the domestic market, access to foreign capital, and links to transnational corporations successfully becoming major exporters. These coexist with large numbers of medium and small firms with little access to capital or technology that struggle to survive (ibid 187). Moreover, Mexico’s export manufacturing firms have become heavily dependent on imports of raw materials and parts, with rather reduced local content and weak linkages with domestic suppliers, to the substantial detriment of domestic producers and suppliers (ibid 189). Moreover, the reform process has not significantly resulted in increased growth in Mexico’s vast agricultural sector or a reduction in its rural poverty (ibid 199).

55 Mexico’s complete integration with global markets has made its economy vulnerable to external pressure and events. Two recent examples may put Mexico’s economic development in jeopardy. First, the US government’s notification that it intends to renegotiate NAFTA (Swanson) may negatively impact Mexico’s trade relations with the United States, and significantly affect its import, export, and domestic sectors. Secondly, the rise of Chinese competition with Mexico for exports to the valuable US market (which represented 89% of all Mexican exports in 2011) may also directly and negatively affect the Mexican economy (Wise 149–51), as will increased Chinese exports to Mexico (Guajardo 9–11).

D. Assessment

56 None of the economic development approaches discussed above appears to be a panacea. Indeed, all of them have been subject to substantial criticism.

57 A principal concern with the Linear approach is that modern experience makes it clear that economic progress and ‘development’, however defined, is not an inevitable and linear process. Moreover, external infusions of money and technical expertise for ‘modern institution building’ in less developed countries do not necessarily result in effective, competent, efficient, or honest institutions. Similarly, external infusions of money and technical expertise into the development and establishment of new industries and industrial facilities in less developed countries do not necessarily result in the establishment of successful businesses. To the contrary, these infusions often entrenched local elites, destabilized traditional societies, wasted resources, and enmeshed many less developed countries in insurmountable debt (Porrata-Doria 55, 63).

58 The Structuralist approach was also severely criticized, and this criticism has been borne out by the experience of those countries that adopted it. Many of the countries that embraced this model found themselves no better off than they had been under policies adopted under the Linear approach. Experience determined that the substitution of market mechanisms for state management as the principal catalyst of economic development did not work. Moreover, nationalization of private industry and the creation of new public industries created a bloated public sector and a massive monetary drain on often limited public industry. The state as manager was not generally technically competent, effective, objective, or efficient in managing an extensive economic infrastructure. Moreover, private and public ‘infant industries’ nurtured by protective import substitution norms never seemed to mature and become either regionally or globally competitive. High tariffs merely invited retaliation from other countries, with resulting damage to export markets. Technology transfer regimes did not result in the acquisition of new technology, but instead cut off access to new technologies. Lastly, limitations on foreign investment did not stimulate domestic capital investment, but prevented the importation of much-needed foreign capital (ibid 57, 63).

59 The Marxist approach is similarly problematic, since it is more a criticism of free market capitalism than a prescription for a programme of economic development. For a developing country to escape the capitalist oppression that prevents it from escaping poverty and oppression, it must have a socialist revolution. This revolution would transform its economy into a socialist one, with the elimination of all markets for goods and labour, allocation of resources through central planning, the elimination of private enterprises, and the ownership of all major means of production by the state (Beresford 221, 226). Even after achieving these goals, and assuming that a socialist planned economy would bring prosperity (which was not the case in Vietnam), a developing country would still have to face the exploitative capitalist global market dominated by developed countries, since there is no socialist alternative thereto. Accordingly, socialist developing countries would continue to be exploited and oppressed, and be unable to escape this cycle.

60 The Neoclassical approach is also imperfect. As can be seen, for example, in Chile’s adoption of this approach in 1982, the elimination of state regulation, intervention, or involvement in the economic system does not necessarily result in increased economic growth and stability. To the contrary, it can result in instability and increased debt. Privatization of government-owned industries as an ideological imperative often results in ‘fire sales’, causing great economic losses to the state and creating monopolistic or oligopolistic concentration of industrial power in small groups. Excessive dependence on foreign capital inflows and excessive private foreign debt can also be very problematic and unstable (Porrata-Doria 59–61, 63–64). As has been shown in the case of Mexico, total integration with the global economy can subject a developing country to pressure and instability from external events beyond its control.

61 The Combined approach, as articulated by the IADB in 2014, seems to combine elements of both the Structuralist and the Neoclassical approaches. As can be seen in the South Korean example cited by the IADB, economic development and prosperity can occur in situations where the public and private sectors can cooperatively work together on a series of consensus policies designed to spur entrepreneurship and innovation. Both government and the private sector have unique strengths which must be jointly utilized by both to foster economic prosperity. Under this approach, government and the private sector are equal partners in the development process, with neither being the principal actor. This is very different from the other approaches, where either the state or the private sector controls the economy.

62 From a logical point of view, this approach makes sense. As the South Korean example shows, when both the state and the private sector can agree to become equal partners in creating and implementing developing policies, the results can be remarkable. This is, however, more easily said than done. One problem is getting both the public and the private sector to reach a consensus on the articulation and implementation of development policies. Experience shows that this consensus and equal partnership are extremely hard to achieve. Without them, the Combined approach seems to indicate that successful development is not possible. The second problem with this approach is its primary focus on the role of the acquisition and development of new technologies on economic development. Simply stated, economic progress and development depend on whether a country which is a ‘technology have not’ becomes a ‘technology have’ and seems to assume that any country can become a ‘technology have’ if it implements the right policies. This makes the acquisition of technology and innovation seem like inevitable processes, and makes this approach somewhat similar to the Linear approach. If one substitutes ‘creation of new industries’ and ‘development of modern institutions’ for ‘acquisition and development of technology’, the approaches sound very similar. As we have seen in the analysis of the Linear approach, this ‘inevitability’ is simply not reflected in modern experience.

63 Several conclusions can be drawn from our examination of the economic development policies of India, Vietnam, and Mexico. First, their experience shows that neither the Structuralist nor the Marxist approach leads to successful long-term economic development and prosperity. Secondly, experience also shows that, for a change in economic development approaches to be successful, a country must promptly abandon all its previous economic development policies. Piecemeal economic policy changes do not appear to work. Mexico’s experience also shows that even a developing country’s successful transition to a Neoclassical economic development model has risks and issues that may bring forth negative effects.

64 Lastly, there is another possibility: successful economic development is so interconnected to a nation’s internal and external culture, politics, history, economy, and institutions that there is no general overarching theory or approach that will work for all countries or regions. Therefore, each country’s economic development strategy must be individually tailored to these factors.

Select Bibliography

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