Fifty Years Of Economic Growth And Development Strategy

Introduction

The decades following World War 2 marked a major shift in thinking about economic growth and development strategies globally. Industrialization took off in the 1950s, fueled by post-war recovery, cheap energy, improved transport, and changing terms of trade. This was paired with the rise of a “growth ideology” among national elites, who came to believe in the importance of rapid industrialization and economic growth, often led by a strong interventionist state.

This represented a departure from pre-war colonial policies that tended to favor economic laissez-faire. The devastation of the Great Depression along with the state control seen during WW2 shifted views towards a larger role for government management of the economy. Policymakers now had Keynesian fiscal and monetary tools to smooth fluctuations in the business cycle. The early success of state-directed development in the Soviet Union further reinforced this thinking.

Pre-1945 Development Thinking

In the early part of the twentieth century, the focus in rich countries began to shift towards understanding the problems faced by poor countries, many of which were colonies of the rich empires. The prevailing economic ideology in the colonial powers was oriented towards laissez-faire policies and extracting as many resources from the colonies as efficiently as possible, with little regard for equity.

There were debates between advocates of laissez-faire like Sydney Caine, head of the Colonial Office’s economic division, and those arguing for more state intervention like Arthur Lewis. Lewis pushed back against the laissez-faire bias, reminiscent of the “Treasury view” that Keynes battled in the 1920s and 1930s, that persisted strongly within the colonial powers. The colonies were seen as suppliers of raw materials to British industry rather than allowed to develop their own industrial capacity. When India gained independence, it rejected this extractive approach and pursued policies to develop its own industries rather than just supply Britain. However, the persistence of state-led models long after independence, despite anemic growth, can’t be explained just by rejection of colonial policies.

The Post-War Growth Ideology

Starting in the 1950s, with post-war recovery and decolonization in full swing, industrialization moved into high gear. The nascent growth ideology of national elites was powerfully reinforced by the ideologies of the great powers that defined the political economy of international development throughout the more than three decade long Cold War.

Post-war thinking was influenced by the efficacy of state economic control during World War 2 and the embracing of Keynesian policies following the Great Depression to help smooth business cycle fluctuations, or at least reduce their amplitude. The belief was that policy-makers had the tools to sustain economic activity at a high level or, in other words, to minimize the threat of prolonged downturns that eroded past gains. Because of that, the role of the state enlarged during the long war. The state acquired the responsibility to strive for and maintain rapid growth.

The growth expectations that took root during the 1960s were reinforced by widespread growth accelerations during that decade, achieved not through policy virtuosity but through macroeconomic and political stability, successful efforts at resource mobilization, learning and absorbing technologies from abroad, and exploiting market opportunities opened up by globalization.

Policies for Growth: A Small Pot of Gold

A small set of key factors enable growth for developing economies:

King Capital

• Capital investment drives growth through infrastructure build-out and capacity expansion. This serves as an avenue for technology transfer to developing countries.
• Improving the business climate can increase investment, but many countries struggle to move to high growth through transaction cost reductions alone.

Human Capital, the Knowledge Producer

• Education and science/technology/innovation (ST&I) skills drive inclusive growth. They complement sophisticated capital equipment and technologies from advanced economies.
• The quality of human capital, based on skills and capabilities, matters more than quantity for narrowing technology gaps. This raises productivity through better management, efficiency, and policy implementation.

Innovation System

• Human capital combines with the innovation system to generate ideas and commercial innovations.
• Successful innovation systems involve supportive government policies, research universities, intellectual property protections, competitive markets, and active domestic and foreign businesses.

Demand Management

• Economic openness and trade create opportunities through economies of scale and global value chain integration. This enables technology transfer and competitive pressures.
• Demand management policies link to trade and help firms realize scale economies.

Market versus State: Finding the Right Balance

In the decades following World War 2, there was deep concern among economists about market failures holding back development in poor countries. This led to state intervention and industrial planning, with the aim of coordinating investment and growth. The World Bank provided financing for state-led industrialization in the 1950s and 1960s.

However, the success of the export-driven East Asian “tigers” demonstrated the power of market forces to generate growth. Their liberalized trade regimes contrasted with the import substitution policies of many developing countries.

By the 1980s, the pendulum had swung towards a focus on government failure and excessive regulation. There was a triumphalist view that markets had won the day. However, the 1997 East Asian financial crisis, the poor growth in Latin America and Africa after adopting market reforms, and the success of China and India’s more gradual approach highlighted flaws in the market model as well.

In truth, neither a fully state-led nor laissez faire approach has proven fully successful. Good outcomes depend on finding the right balance between the roles of the state and the market. Governments need to address market failures through interventions, regulation and targeted spending, while harnessing the dynamic efficiencies of private enterprise. At the same time, policies and institutions should aim to minimize government failure arising from incompetence, corruption and political economy distortions. The search continues for the optimal framework to promote growth and human development.

Politics and Institutions

• The heavy reliance on state intervention in developing countries in the post-war decades was influenced by a reaction to the laissez-faire policies of the colonial era. Countries like India aimed to build domestic industries rather than just supply raw materials to their former colonial power’s industries.
• However, the persistence of state-led models long after independence, even amid slow growth, can be attributed to politics and institutions.
  • In democracies like India, policies like import controls created economic rents that were shared between industrialists who received protection and educated bureaucrats who implemented the policies.
  • In non-democracies like African dictatorships, leaders maintained subsidized food and overvalued currencies to curry favor with the urban population that could potentially overthrow them - an example of urban bias.
• External shocks like the 1970s oil crises and 1980s Soviet collapse necessitated reforms as statist policies became unsustainable, triggering balance of payment crises after years of overvalued exchange rates.
  • East Asian countries that had already begun liberalizing fared better through the shocks.
  • IMF and World Bank became important in imposing reforms tied to financial assistance.
• By the 2000s most developing countries had transformed into stable, market-oriented economies that had adopted the Washington Consensus policies by choice rather than imposition.

Global and Local Context

The Nation-State at the Confluence of the Global and Local

• Large nation states can have substantial impacts beyond their borders through the policies they enact. When major economies like the US or China make policy changes, it creates ripples around the world.

• Even when nation states are small, their collective actions can impact the global economy and financial system. We saw this with the 1997 Asian financial crisis, which started in Thailand but soon spread to impact broader emerging markets.

Subnational Pockets of Poverty

• While national income per capita has risen for many countries, significant pockets of poverty remain, often concentrated geographically within countries.

• Spatial inequalities rooted in history, such as along ethnic/religious lines or between rural and urban areas, can challenge national unity. Even as aggregate indicators improve, localized deprivation based on identity or geography persists.

• Targeted policies are needed to lift up disadvantaged subnational regions and communities, going beyond national averages. Inclusive growth requires ensuring marginalized groups fully participate in development.

Civil Society

Civil society plays an important role in development in two key ways: filling gaps and advocacy.

Civil society organizations have stepped in to address both market failures and government failures. A prime example is microfinance, where civil society groups like Grameen Bank and Self Employed Women’s Association (SEWA) have provided small loans and financial services to poor populations when neither markets nor governments adequately did so. Civil society has often been more effective than state-led efforts in providing key services like microcredit and healthcare to underserved communities.

Additionally, civil society groups give voice to issues and populations that may be overlooked by markets or governments. NGOs and nonprofits advocate for human rights, environmental causes, gender equality, and economic justice. They bring critical on-the-ground experience to debates on development policy. Civil society organizations have pushed for more inclusive, equitable growth. Through advocacy and activism, civil society influences the development agenda and discourse.

So in both direct service provision and policy advocacy, civil society plays a vital role in economic and social development. It often fills gaps left by inadequate markets or government failures. And it gives voice to marginalized groups, provides expertise, and advances important causes. Civil society is an essential piece of the development puzzle.

Outcomes Since 1945

Since 1945, the world has seen great successes in economic growth and development, yet continued challenges remain. Both markets and the state have proven important in spurring progress.

In terms of successes, many countries have experienced rapid industrialization, rising living standards, and reductions in extreme poverty. Developing countries have transitioned toward more open, market-based economic systems while still retaining a role for the state in areas like infrastructure, education, and social welfare. This has allowed previously poor countries to tap into the prosperity of the global economy.

However, pockets of entrenched poverty and lack of development continue to persist, even amid broader national progress. In many countries, rural or remote areas lag behind prosperous urban centers. This spatial inequality aligns with historical geographic and social divides, challenging notions of national unity. Environmental sustainability has also emerged as a key concern, as unbridled growth takes ecological tolls like pollution, biodiversity loss, and climate change.

So while great strides have been made, continued advancement relies on balanced policies that promote both economic dynamism and social/environmental well-being. Markets and the state must play mutually supportive roles in setting rules, providing public goods, and steering development onto an inclusive, sustainable path that leaves no one behind. With balanced policies adapted to local contexts, the promise of prosperity can be more fully realized.

Conclusion

The evolution of development thinking over the past century reflects an ongoing debate about the appropriate balance between market forces and state intervention. In the pre-war colonial era, laissez-faire policies dominated based on an extractive mindset of maximizing resources from colonies. After independence, many developing nations swung to the opposite extreme of heavy state control and import substitution to counter the previous neglect of industrialization.

By the 1980s, the success of export-led growth in East Asia along with stagnation under state control prompted a shift back towards free market policies and the Washington Consensus. However, outcomes in the 1990s and 2000s revealed this pendulum swing went too far, overlooking the vital roles of both the state and civil society. Neither unregulated markets nor authoritarian control deliver sustained, equitable growth on their own.

Looking forward, developing nations need balanced, context-specific strategies that empower citizens, regulate markets, and build capable institutions. The terrain has shifted from a focus on national economic growth to reducing spatial and socioeconomic disparities. With global integration, nations must also consider cross-border impacts and coordinate on providing international public goods. By learning from past extremes, integrating local and global perspectives, and leveraging the strengths of states, markets and civil society - developing countries can forge inclusive, sustainable growth trajectories.