Economic Planning and Social Justice in Developing Countries

Ozay Mehmet

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781315817262
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1978, this book was written at a time when belief was high in Western-guided economic development of the emerging countries. The success of Marshall Plan in war-torn Europe generated a US-led optimism that, with generous inflows of aid and technical assistance, the Third World could be won over in the Cold War. The author's direct experience as a young academic economist in Cyprus, Malaysia, Uganda and Liberia led him to question this general optimism: the reality on the ground in the developing world did not seem to match Western optimism. Theories and blueprints, made in the West, did not fit the requirements of developing countries.

Higher production and better income distribution were inseparable twin objectives of developing nations. That meant, production of a higher national output must at the same time promote social justice. Investment must create adequate jobs so that new entrants into rapidly expanding labor force could be gainfully employed. Yet, the dominant (Western) theories of development at the time, in particular the Trickle Down Theory of Growth, prescribed "Growth First, Distribution Later" strategy. Similarly, Import Substitution Industrialization theories were emphasized at the expense of export-led growth. Dualistic Growth theories preached urban-biased, anti-rural development.

This book was written as a rebuttal of such faulty theorizing and misguided professional technical assistance and the book's message is no less valid today than in the 1970's.

Part One

ECONOMIC GROWTH WITHOUT SOCIAL JUSTICE

1

WHAT WAS WRONG WITH POST-WAR ECONOMIC PLANNING IN LDCS?

During the two decades following the Second World War economic planning in the less developed countries (LDCs) became highly fashionable. By 1970 there hardly existed an LDC without some kind of Development Plan.¹ Usually prepared at the urging of, and with technical assistance from, the international aid agencies and Western donors, these documents aspired to a set of highly ambitious targets, predicated on the expectation of generous foreign aid funds from Western sources, principally the USA and the United Nations. For their part, Western aid-givers were motivated by a multiplicity of objectives, partly humanitarian, partly commercial and partly military in nature.² A dominant rationalisation was the ‘widening gap’ theory. Its central argument was that while the advanced, industrialised countries of the West were attaining higher standards of living, the underdeveloped countries of the Third World were becoming poorer.³

Western prescriptions to narrow the ‘widening gap’ called for massive aid programmes to finance development projects in the poor countries of Asia, Africa and Latin America. After all, if the Marshall Plan could help bring about the miracle of post-war reconstruction in Western Europe, why not attempt the same experiment in other parts of the world?

However, Western aid to the Third World did not come unconditionally. It came as an instrument of the ‘Cold War’, to defend a capitalist ideology increasingly threatened globally by a Communist alternative. It came to transplant an American or Western way of life in an age of ‘rising expectations’. Above all, it came to foster a process of rapid industrialisation built on technology and know-how imported directly from the West.

Scarcely any attempt was made to adapt these Western formulae to the environments and circumstances of the LDCs. The appropriateness or the capacity of the political and social institutions of these countries to absorb large inflows of foreign funds, or to manage a controlled process of rapid change, were rarely taken into account. The efficiency of the governmental machinery and bureaucracy to implement and monitor large-scale development projects was seldom questioned. Neither was the moral commitment of the political leadership to economic and industrial development doubted. It was as if there existed only one single constraint on industrial expansion: capital shortage. Given generous foreign aid programmes, rapid industrial take-off was merely a matter of time.

W.W. Rostow, the proponent of the take-off theory, proposed a foreign aid strategy to contain Communism, arguing that one or two decades of aid might be adequate to transform a stagnant, low-income LDC into one progressing along a steady growth path.⁴ The ‘Big Push’ theorists, guided by Rosenstein-Rodan, argued that to achieve maximum impact of scarce development funds, all resources should be concentrated on industrialisation since the ‘growth poles’ were only to be found in the manufacturing and non-agricultural sectors.⁵ In fact, inflationary financing could well be utilised, either through forced savings or merely by printing more money, since a higher level of national output was only a few years ahead. For this reason, all other social needs and reforms (such as educational and manpower development, administrative modernisation, agrarian development) could be postponed until industrialisation was sufficiently advanced to become a self-sustaining process. In short, industrialisation, with Western aid and technology, was the panacea to break the poverty trap in which the poor countries of the Third World found themselves, owing to their large and stagnant ‘subsistence’ sectors. Income maximisation via industrialisation became the universal target of economic planning. Equitable income distribution, while generally acknowledged as a desirable objective, was sacrificed to the immediate goal of maximising the gross national product (GNP). In the idiom of the period, there was no point in becoming concerned about distribution when there was practically nothing to distribute.

Model-Building and Macro-Planning

Model-building was the indispensable tool of planners and economists involved in the design of development plans. Models afforded the means for the application of economic theories to the practical task of planning.

The typical development plan in the early post-war period was a macro model based on certain key aggregate relationships between employment, output and investment.⁶ Derived from the Keynesian income and employment theory, originally by Harrod and Domar, these macro models related aggregate output to the stock of capital by the capital-output ratio.⁷ The UN took the initiative to popularise macro-planning based on the crucial capital-output ratio. Thus, it was declared in 1955:

The rate of economic growth may be analytically considered as being the function of two factors: (a) the rate of capital formation and (b) the capital/output ratio; accordingly development policies may be described as aiming to increase the former, reduce the latter, or do both.⁸

Another group of UN experts stated: ‘After estimating the current rate of savings, the crucial question will be what amount of net national output can be expected from investment to be made on the basis of the estimated savings.’ ⁹ Naturally, these declarations were consistent with the general opinion in the economics profession at the time that the bottleneck resource in the development process was capital. As Lewis had expressed it:

The central problem in the theory of economic growth is to understand the process by which a community is converted from being a 5 percent to a 12 percent saver – with all the changes in attitudes, in institutions and in techniques which accompany this conversion.¹⁰

The macro models were logically complete constructions designed for internal consistency. The need for consistency was obvious: to avoid resource bottlenecks or surpluses in the process of growth. In fact, the principle of formal consistency implied zero substitution in factor use. This proved to be highly damaging in the implementation stage since, even in closed economies, there are always alternative techniques of production, such as more or less labour-intensive and more or less capital-intensive methods. For example, different proportions of bricks, cement and steel could be used in the building and construction projects. The range of alternative techniques would be even greater in the case of open economies linked to the world economy through international trade. Consequently, there might be significant departures in the implementation stage from the theoretical assumptions and fixed input-output relations presumed in the planning stage. Strict adherence to the original plan procedures would, doubtless, create an intolerable degree of inflexibility and might cause waste and inefficiency – contrary to original objectives.

The Indian planning experience based on a ‘grand strategy’ is a good example of macro model-building. This strategy was heavily influenced by the macro-economic theories of C.P. Mahalanobis¹¹ involving sequential inter-industry flows and optimal timing. The basic Mahalanobis idea was that the growth process should be carefully integrated and the growth of each sector phased over time to achieve optimal sectoral linkage and interdependence. Thus, the first sector to be developed was heavy industry, centred around the creation of an Indian iron and steel industry. This was necessary to increase the domestic supply of producer goods which subsequently would be needed to develop consumer-goods industries

The early five-year Indian plans were drafted in line with the ‘grand strategy’ theories. While heavy industrialisation was given top priority, agricultural production lagged and imports of food as well as machinery increased rapidly, leading to a severe balance of payments crisis, and a slow-down in the rate of economic growth. The major lesson of the Indian experience with the ‘grand design’ approach is that the planners and policy-makers can neglect rural areas and food production only at their peril.¹²

A national plan is only as good as the quality and quantity of information on which it is based. Effective macro-planning requires national accounts covering production, employment, prices, incomes and balance of payments, as well as detailed inter-industry relationships. A fundamental weakness of planning efforts in the post-war years was the lack of adequate and reliable data. Some LDCs did not even possess vital statistics about population, let alone GNP and detailed input-output relationships. In such cases, the bolder planners simply indulged in ‘planning without facts’,¹³ making guesstimates on more or less arbitrary assumptions. A striking example of this is Somalia's First Five-Year Plan, 1963–67. To quote the candid admission of the planners:

The methodology of planning for the Somali Republic does not follow the usual pattern based on the Gross National Product (GNP) approach, for the simple reason that information about GNP is not available. Certain other necessary data is either not available at all, or if available, is unreliable and incomplete. This is true of population, birth and death rates, age distribution, immigration and emigration, labour force, employment and unemployment, wages and salaries, areas und...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• Acknowledgements
• Preface
• Part One: Economic Growth Without SocialJustice
• Part Two: Some Case-Studies of the Influence of Elites on Economic Planning and Polic
• Part Three: Egalitarian Planning and Reform in LD
• Index