Theory and Reality in Development

Connoisseurs of Paul Streeten’s style may remember that it did not develop, it appeared like Minerva from the head of Zeus, fully grown and armed. Here is a sample from its first year in print:

We have found grounds to doubt that businessmen try to maximize profit. They have other aims too. Even if they tried, we would be sceptical that they could: they often do not know the relevant data. Even if they tried and could, it is doubtful whether they in fact would maximize profits: where there is uncertainty actual returns diverge from expected returns. This divergence is in the nature of things. The theory which we have been criticizing assumes that businessmen should, would and could behave in a way which may be undesirable, unsuccessful and impossible.

Seven unstated assumptions of the offending theory are then detected, six of them paired to show how three of them contradict the other three.

Shakespeare did not say it, but it is true that some men are born small, some achieve smallness, and some have smallness thrust upon them. Adam Smith, the father of modern economics, has had to cope with a good deal of such thrusting. That conclusion is inescapable, reading some of the recent pronouncements of conservative extremism (especially in Britain), with persistent attempts to implicate Adam Smith in justifying the straight and the narrow. The invoking of Adam Smith and ‘the invisible hand’ is a widespread phenomenon, varying from explicit attribution to implicit use of Smith’s authority (in, say, the spirited outpourings of the so-called ‘Adam Smith Institute’).

It has generally been accepted that the economic prosperity and growth rate of the Third World is heavily dependent on the growth rates in the world’s main industrialised countries taken as a whole.² This is not surprising given that, even after considerable expansion of intra-trade among non-OECD countries, ‘industrial countries’ absorbed 63.6 per cent of the total exports of non-oil LDCs in the period 1973–80.

The UK Development Studies Association bravely took as its theme, for its September 1983 conference, ‘the continuing recession’. Then, and even more than a year later, the organisers may have appeared foolhardy. The main US indicators, especially real GNP, apparently signalled a strong and prolonged recovery. Many world commodity prices — their record lows of mid-1982 the despair of development experts² — were moving upwards. For a while, even inflation seemed to be recovering; but at the September 1984 Bank-Fund meeting the IMF reported that 1984 was the best year for the world economy since 1976, anticipated 5 per cent real growth in industrial countries’ real GNP, and applauded the apparent containment of inflation, and even (outside Europe) of unemployment.

Reviewing the current international economic scene, it is tempting to slide into a luxurious defeatism and to sound the final alarm. It takes a good deal of courage to remain calm and constructive in a general mood of mass hysteria.

Over the last thirty years, growing attention has been paid to North-South issues. At a political level this was a natural development following many Third World countries’ political independence, and their increasing recognition of the gap in per capita incomes between North and South. While this gap may not have widened in relative terms, it has certainly widened in absolute terms over this period. The questions at issue relate to the ‘rules’ of the game — whether these are biased, how they might be reformed, and how best to operate within them. Despite much talk, there has been very little progress in terms of changing the rules. This chapter is concerned to analyse why this is so, and within the perspective this analysis gives, to make suggestions for more fruitful approaches to North-South negotiations. Paul Streeten has been a leading analyst of these issues, and much of what follows has been inspired by his thinking.²

The role of services in the process of economic growth and structural change has received a great deal of attention in economic literature. By contrast, that of trade in services has been a relatively neglected area of theoretical and empirical research. This is puzzling, since what is conventionally defined as ‘service’ receipts and payments constitutes a significant part of international transactions on the current account.² There is perhaps an implicit assumption that theories developed to explain the pattern of trade in physical products can be used without significant amendment to explain that in services. A moment’s consideration will show that this assumption may be unfounded. The production of physical commodities is determined by factors and technologies quite different from those which affect the production and sale of services. In view of renewed international interest (in GATT and UNCTAD) in negotiating changes in the structure of regulation governing services trade, it seems apt to consider this question at some length.

Beleaguered policy-makers in developing countries have become quite tired of generalised advice. The remedies for macroeconomic malaise or stagnation that are appropriate in one country may be quite unsuited to the problems of another. Today’s ‘recipe’ for stabilisation and development in one country may be disastrous in its effects not only in other countries but also at other times in the same country. ‘Norms’ and ‘averages’ for the world, however fascinating to statisticians and development economists, are dubious guides for policy-makers in individual countries. Unhappiness with ‘global’ prescriptions has rarely been as vociferous as it has become in recent years in the context of the ‘conditionality’ attached to IMF, World Bank and other official lending. The IMF and the World Bank usually deny that they employ a single ‘model’ for all their member countries. Whether these institutions, qua institutions, do or do not, there can be little doubt that, within them, generalised prescriptions abound.

The reader need not be held in suspense. No, the differences between the early 1980s and the early 1930s in Latin America are more significant than their similarities. But the question is pertinent, and the comparison could cast light on both historical episodes, while deepening understanding of the cyclical behaviour of peripheral, semiindustrialised economies, and about their interaction with the international economy.

Dispassionate analysis of land tenure systems and their role in rural development has been hampered by ideological conflict. Political rhetoric in North America and Western Europe reflecting a general hostility towards the Soviet Union has helped to create a widely held view that communal tenure systems invariably result in stagnation of production, inefficiency of resource allocation and coercion of the peasantry. Where they survive, communal systems are thought to do so partly because of large imports of food from the West and partly because of the existence of a tiny private sector which somehow manages to flourish despite attempts by governments to suppress it.

The objective of world food security in a wider sense and a broader perspective is to assure all people, at all times, the physical and economic access to the basic food they need. Sustained physical availability, the stability of adequate food supplies, and command over purchasing power to secure access to food are all necessary components of food security at the level of individuals, households and nations. Measures are needed at national, regional and global levels, not only to expand food supplies through increasing production, especially in low-income, food-deficit countries, but also to maximise the stability of supplies in the face of production fluctuations and to secure access to food supplies on the part of all, especially the poor people and poor nations.

In a recent speech the President of Tanzania observed that ‘Working towards the goal of ‘people-oriented development’ means … allowing our national objectives to determine what type of technology we adopt or adapt from the North’.² Because Tanzania, following the Arusha Declaration of 1967, has relied extensively upon public enterprise, and since the government has had the chance to influence directly the technology chosen by these enterprises, one might reasonably expect to find in the latter a fairly close reflection of national objectives. Yet what evidence is available suggests that this has not occurred: on the contrary, the degree of coincidence in manufacturing parastatals appears to be remarkably slight.

The literature on international economics makes two sets of distinctions between nation states in the contemporary world. The first distinction between rich and poor countries, North and South, is based on differences in levels of income and development. The second distinction between socialist and capitalist countries, East and West, is based on differences in political and economic systems. Such a division of the world into North and South or East and West is not adequate, since the categories are neither mutually exclusive nor exhaustive. The somewhat old-fashioned distinction between the First, Second and Third Worlds is perhaps more appropriate. This enables us to divide the world into three groups of countries: the West constituted by the OECD countries, the East made up of the USSR and Eastern Europe, and the South comprising the less developed world. Such a division of the world economy into East, West and South is not without its conceptual problems, but it is preferable from the viewpoint of analysis in so far as it uses both sets of distinctions mentioned above.