Economic growth can be defined as the increment in a countries’ gross domestic product (GDP). Gdp is deemed the most important indicator as it can be used for comparison purposes across economies or in the same economy at varied time periods. When a country records a positive economic growth its production possibility frontier curve shifts to the right and this does not guarantee its economic development. Economic growth is not synonymous to human development which is realized when a nation or country’s citizens have better living standards and can easily satisfy their basic needs. Some countries such as Congo may record higher economic growth but lag behind in as far as economic development is concerned due to political instability or conflicts. For a country or nation to be said to have developed economic wise, then it must put into consideration the environmental as well as human aspects or factors such as its citizen’s level of education, their health status, good governance, observation of human rights as well as empowerment of the female gender. Various theories have been developed to explain economic development in nations with the major theories being the dependency theory, modernization as well as neo-liberalism.
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According to the modern development thinking, economic development was thought to emanate from economic growth although industrialization and political modernization were included. Political modernization included nation building as well as social modernization where entrepreneurship was embraced. The modernization theory emanates from technological advancement or change. A country is said to be modernized when it has embraced modern and advanced technology. Economic development also depends on other countries. The modern theory of economic development was developed in the 1960’s to explain why some countries were more developed while others were not. For a country to become developed according to this theory, it must change its traditional attitudes, values as well as institutions. Achievement in the economic sense is achieved when people adopt attitudes and values that favor hard work, saving, efficiency and entrepreneurship which are only found in modern societies. This theory argues that a country remains underdeveloped for as long as it embraces traditional customs and culture which prohibit individual achievement and ensure that kin relations are upheld.
Japan is one of the countries that have been identified as a clear illustration of the modernization theory of economic development. Its economic development is thought to have emanated from it’s embracing a national work ethic where all people were committed to hard work. The history of Japan’s modernization dates back to the Meiji era. This is one of the most studied eras in Japanese history. The Meiji era began in 1868 after the coming into power of Mutsuhito taking over the mantle from his father Emperor Komei and introducing structural reforms aimed at modernizing Japan. The first step in this was the introduction of the Five Charter Oath. Core to this was the emphasis on education and technological advancement; “knowledge shall be sought throughout the world so as to strengthen the foundations of imperial rule.” (Jansen & Hall 1989: 495). During this period, the Japanese government initiated a program that would see hundreds of foreign experts from the western nations trooping to Japan to offer specialized training on various subjects ranging from English, engineering and the military amongst others. In the pursuit of the stipulation of the Fifth article in the Charter Oath, thousands of Japanese students benefiting from government subsidies were sent to America and also in Europe to experience firsthand the western oriented education. In addition to this, Japan would also embrace western economic practices that would aid in its transition to becoming the first industrialized country in Asia. It adopted the concept of market economy, this being a radical shift from the command economy that had placed all the key sectors of the economy on the hands of the government corporations. Other reforms ranged from the modernization of the banking sector, reforming of the tax regimes to the unification of the national currency. All these measures had an effect of creating a modern advanced economy that would in a few decades be amongst the most developed nations in the world. A critical look at Japan’s economic history reveals that whereas western concepts and technology were sought, the key factor behind this impetus was the working culture that was instilled by the Meiji rulers. Indeed, the government had spared no effort in enlightening the populace on the need to play an active role in building of the economy and rewarding private entrepreneurship with selective subsidies. (Jansen & Hall 1989: 458).
Modernization theory argues that poor nations can change their status by increasing their economic growth and adopting changes in as far as their beliefs, values and attitudes towards work are concerned. Walt Rostow’s theory of economic development is a clear or perfect illustration of the modernization theory. Rostow argued that the major deterrence of economic development was the fatalistic traditional values where economic hardships are viewed as inevitable or unavoidable facts of life. People in such societies do not see the need for hard work as according to them, their predicament is predetermined. Rostow argues that every society undergoes five major stages before it attains the highest economic development level. The five linear stages are what see a nation emerge from poverty to economic dependency and development.
According to Rostow, the first stage of development is the ‘traditional or subsistence economy’ which is purely based on agriculture as the means of production. The population growth rate is minimal and there are little manufacturing processes. Modern science is limited and people seek spiritual attitudes to explain the physical world. There is also minimal social mobility with the powerful owning the factors of production. (Preston 1996:171). The second stage is the ‘precondition to take off’ where people start to adopt industrialization and more machinery used. Modern science starts to be embraced at this stage. Interactions with other developed countries lead to the adoption of new techniques. At this stage the population also rises. Infrastructure is developed and industries start to thrive. The third stage is the ‘take off stage’ which is precipitated by technological advancement though political environment also plays a major role. Investment increases by a large magnitude and new industries are established. An entrepreneurial class expands and profits are protracted back into the economy through the increased investment. The employment rates rise and the national income is not left behind. The fourth stage of development according to Rostow is ‘the drive towards maturity’. This stage is experienced by the increased spread of modern technology which spreads across the entire economy. Here, the national income rises by 10-20% and the economy can produce as much industrial equipment as possible. There are sufficient entrepreneurial as well as technical skills to produce anything in the society. In this stage, the economy diversifies, service industries develop and population growth stabilizes. The final stage is the ‘age of mass consumption’ where the industrial system has advanced greatly. The population growth slows down at a considerable rate. There is a high production and consumption of consumer goods. At this stage, people can consume beyond their needs as production is intense. Primitive modes of production at this stage have been substituted with urban skills and more people work in offices. More resources are channeled to other areas like on social security as well as social welfare (Preston 1996:175).
Rostow’s model or stages of development face immense criticism with some dismissing it as being based on mere historical coincidence. The model is also viewed as having been oversimplified and out dated. There are various aspects that have been overlooked and the fact that it is based on data collected in the 60s compromises its application in the recent times. Varying changes have taken place from when the data was collected and today (Dompere & Ejaz 1995: 87).
Rostow is also condemned for assuming that all nations or countries have similar resources, population as well as climate. Uniformity in as far as development is concerned cannot be observed when there are variances in both the natural as well as the human resources. The movement from the traditional stage to the take off stage calls for capital injection which could be inform of foreign debts. Repayment of such debts may interfere with time a nation gets into the next stage, a factor that he ignored. Rostow’s model is also criticized on the basis that it fails to acknowledge that the development of one nation could be at the expense of another for instance through the process of colonization as well as imperialism.
He also failed to indicate the need of a financial infrastructure which could channel the savings made to investment. Again, there was no guarantee that the investment made would lead to economic growth. Some investments could have been in vain or unproductive. The need for other infrastructures like education, roads, rails and communication were also undermined and they are important to register economic development. He emphasized on investment though he did not indicate if it was to be done efficiently or it was used on luxury goods. The argument that countries would learn and adopt better production means that would ensure economic development has failed the test of time as some countries remain in the initial stages of development though others continue to advance.
The model is also criticized on the grounds that it is ‘Anglo centric’ and only based on what was experienced in North America and Western Europe. (Saldana-Portillo 2003: 42). It also fails to take account for the racial differences although it is clear that there is a correlation between one’s ethnicity and their prosperity levels. The model cannot be used for predictive purposes as it is based on historical data and there is no clear cut way to explain the time that each stage takes. Rostow’s argument that all nations must follow these stages was proved wrong as some countries have developed without undergoing the said stages. A clear example of such a nation is Saudi Arabia whose development can be blamed on her rich natural resources. Rostow’s model also fails to provide a clear link of the movement of one stage to the next and some characteristics are similar across two stages. He also argued that countries were to learn from the developed ones in their process to economic development but time has proved him wrong. Some developing countries lag very far behind in as far as economic development is concerned even though they interact with the developed nations.
Modernization suggests that poverty can be reinforced by government policies that interfere with the economy as well as people’s or citizens cultural beliefs. Economic development is said to occur in nations that embrace capitalistic tendencies such as East Asian countries which have developed for their increased savings, aggressive work ethics as well as adopting a market based economy for instance China.
Critics of the modernization theory
The modernization theory is criticized for arguing that the US as well as other developed countries have superior values than those embraced by other nations. It is also blames the poor for their status quo, although it is quite clear that some factors beyond their control can be blamed for their predicament. (Shannon 1989:6). This theory is also criticized for failing to put into account the role of interrelationships between countries which affect their economic as well as social conditions. The modernization theory argues that developed countries will be better off when they let the natural forces of competition take full charge in the economy. It favors the free markets to trigger economic progress or prosperity. However, critics argue that it is impossible to have free markets operating effectively as the role of the government cannot be underscored. Government’s influence on the economy is evident when it interacts with the private companies to promote exports, restrict imports or even in the deterrence of the importation or production of certain goods. (Lipsey & Chrystal 2008:13). The modernization theory is also criticized for being Eurocentric in its analysis of the third world countries. It also fails to appreciate or rather take into account that countries cannot be industrialized at the same rate.
According to the dependency theories, the core meaning of development was economic growth due to accumulation which saw or rather led to the development of underdeveloped economies. It emphasized on the ‘auto-centric development’ or ‘national accumulation’. The dependency theory tries to explain why some countries remain poor for long periods of time or why they are undeveloped. It adopts the aspect of exploitation of the poor countries by the rich or powerful countries. This theory can be clearly explained by the manner in which the European countries as well as the US have strong interests in poor countries such as Iran and Iraq which are popular for their rich endowment in natural resources precisely fuels. The argument here is that the poor countries are poor due to the exploitation by the rich or powerful countries. A perfect illustration of the dependency theory of economic development is economic prosperity recorded in the 1600 by the European nations which colonized Africa, Asia and the Americas as they searched for raw materials as well as market for their products. Colonialism aimed at keeping the undeveloped countries poor to reduce competition with the developed and powerful nations. Britain would for instance purchase cheap cotton from India, process it into cloth in their mills before selling it at a higher price in India and earn huge profits. They deterred the development of Indian mills which would have produced cheaper clothes. During the colonialism era, dependency was maintained for as long as the powerful and developed countries controlled the political as well as military organization of the poor nations. Although colonialism was soon eliminated when it became very expensive to maintain troops in foreign nations, a new form of exploitation was adopted. The developed nations still intervene by sending troops as well as imposing restrictions which could be political or economical in nature to ensure their sustained control and dependence of these nations. They impose price controls, tariffs as well as control their accessibility to credit. They also control the prices of raw materials at very low rates and since most less developed countries rely on such exports, they acquire minimal profits to reasonable economic development. Such control is defined or rather referred to as neocolonialism where control and dependence of the poor by the rich is sustained although without the direct political as well as economical involvement. Poor countries remain in huge debts and are forced to embrace the conditions that have been set by the rich nations that loaned them. Multinational corporations also work to reinforce the dependency levels as they exploit the cheap raw material and labor that is offered in the less developed countries. (Chan & Clark 1992:67).
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The dependency theory blames the powerful countries for perpetuating poverty rates among the poor countries through colonialism, neocolonialism as well as through the multinational corporations. It can be used to explain the economic development in the less developed countries such as Africa and Latin America. It is however criticized on the grounds that some countries such as Ethiopia were never colonized yet they have not developed economically. Again, the multinational corporations are thought to have a negative effect on the developed countries as they lead to the transfer of human capital, technology as well as profit transfer that could have otherwise been retained in their countries. Again, some countries have developed economic wise despite their being colonized by the western powerful countries for instance Singapore and Hong Kong. Their dependence on the western nations for foreign loans and trade is deemed as the major reason behind their economic success contrary to the expectation. (Bottomore 1991:137)
The dependency theory argues that the rich countries have a permanent advantage over the less developed countries. The dependency theory seems to offer an explanation of why some nations remain poor even after they have embraced the values of modern societies. It explores the interdependence between the rich and powerful nations and the poor or low income nations. The dependency theory suggests that economic development is realized as a result of external political, social as well as economic influences on a country’s development policies. This theory is often used to explain the economic conditions of the Latin America. According to the dependency theory, the international system has a prevalent form of capitalism which could be financial, commercial or industrial in nature. The dominant nations have a strong interest in acquiring raw materials such as agricultural products and minerals as well as cheap labor. There is also a competitive degree in the capital concentration and rivalry in the power concentration and the form of trade embraced is mercantilist in nature. On the other hand, the Latin America country’s supply the raw materials to the developed world as well as offer a market for the developed countries products.
Neo-liberalism theory of economic development argues that there is nothing special with the developed nations and that development is merely due to the adoption of right prices while letting the market forces work effectively. Neo-liberalism theories emphasize on the role of free trade and rational choice in economic growth and development. (Harvey 2007: 1). This theory is also termed as neoclassical theory of economic development which favors reduced government control in the economy due to the nation that state involvement in an economy led to inefficiencies that deterred economic growth and development. The argument here was that letting the market forces take full charge of the economy translated to efficient allocation of resources which had social advantages too. The role of foreign aid was also highlighted as of having negative effects on the economy. The world major financial institutions such as the World Bank and the International Monetary Fund embraced the structural adjustment programmes (SAPS) as neoliberal economic policies with the aim of promoting economic growth and development. SAPS have however failed to bring about economic development but instead lead to the misery of many in the less developed countries.(Elliot 2006: 24).
Opponents of free trade as a vehicle to economic growth and development argue that the third world countries need fair trade rather than free trade. This is attributed to the fact that nations have varied comparative as well as absolute advantages and hence varied production levels. Again, researchers have established a clear link between trade liberalization and the major social factors such as economic growth, reduced corruption as well as increased democracy.
The neo liberalism theory of economic development can be highlighted to explain the economic development in China, an East Asian country. Since adopting the 1987 structural reforms where China replaced the initially state controlled economy with effective market controlled economy where the forces of demand and supply took full charge. There was the privatization of various state owned properties, a fact that led to their increased efficiency as well as effectiveness. The neo liberal tendencies are evident in the privatization of government owned assets and the total embracing of capitalistic tendencies. Capitalism has however been linked to other social evils such as crime, corruption unemployment as well as environmental issues. The inequality between the rich and the poor has also increased as the rich become richer while the poor become poorer. (Harvey 2007: 23).
According to Micheal Walton, in the article Neo,liberalism in latin America good or bad or incomplete ( 2004:166), the neo liberal approach to economic development can take two dimensions. One it leads to a shift in the policies adopted in a nation to favor more reliance on the market and secondly it leads to a reduction in the state involvement in the society. This theory can be viewed as a recent or modern theory as it started gaining popularity in the 1980s and 90’s. The test of time has proved that for free market systems to yield positive results, other factors must come to play and that it is not automatic that a market oriented economy will trigger economic growth and development. Such factors include the degree in which nations resources are distributed as well as the structural policies which govern the manner in which the social development and infrastructure are organized. The nation’s political as well as social institutions also play a critical role in determining the effect of economic growth through the neo-liberalism approach. Proponents of the neo liberalism approach of economic development argued that a shift to the market oriented economy would lead to economic development and stability as well as distribution of resources. Stability in this context would be fiscal and monetary in nature. Reliance on the markets or the forces of demand and supply and increased economic integration was thought to have increased growth effects. Income distribution was thought to be evenly distributed as chances for corruption would be reduced significantly. Competition would be boosted and this would lead to increased quality production of goods and services (Schuerkens 2007: 17).
Indeed, modernization theory and the neo liberalism theory have aptly captured the ways through which economic growth can be achieved. Although containing inherent weaknesses as can be discerned from the overflowing criticism against them, they elaborately point out the key ingredients core to economic growth. The modernization theory has outlined the importance of a nation to shift from the traditional approach to economic operations to a modernized system if economic growth is to be accomplished. Although riddled with controversy due to its conservative and steadfast hold on to traditions, the case of Japan is highlighted as the best explication of how modernization is the core path to economic development. According to this theory, economic growth has been elusive to most Third World Countries due to their reluctance to embrace modernity opting rather to stick to their traditional, wasteful and parochial practices. Neo-liberalism has also charted an unparalleled path towards economic growth. It lays its emphasis on the market forces as the key determinants of the economy. For countries hence to achieve an economic growth rivaling that of the developed nations, it is imperative that the government role in the economy be lessened to a bare minimum and the market forces be given room to thrive. (Schuerkens 2007: 19).
Rostow failed to indicate the need of a financial infrastructure which could channel the savings made to investment. Again there was no guarantee that the investment made would lead to economic growth. The need for other infrastructures like education, roads, rails and communication were also undermined and they are important to register economic development. He emphasized on investment though he did not indicate if it was efficient or it was used on luxury goods. The argument that countries would learn and adopt better production means that would ensure economic development has failed the test of time as some countries remain in the initial stages of development though others continue to advance.