Classical and neo-

liberal development
theories

Lecture No 04
Classical Theories
Most of this Course focuses on post-1945 development theories and policies, it is
important to recognise that these ideas did not appear in an intellectual vacuum,
but rather were rooted in the tradition of economic, political and sociological
theorizing which developed in Europe from the eighteenth century onwards.

One of the key theorists to influence later ideas about economic development
was Adam Smith. His book, An Inquiry into the Nature and Causes of the
Wealth of Nations was published in 1776 and
was a response to the mercantile (trade) focus of economic policy
at that time in Western Europe.
18th Century : Trade was focus for Economic growth
Protectionist Policies to protect domestic Industries
Role of State is decisive
Adam Smith: Invisible Hand
 Focus should be on production rather than trade
 Concept of “Division of Labor” for Production
 The whole process will be regulated by Invisible hand of
Market rather than by …..?
 Smith believed that individuals would act in self interest: if a
product was too expensive, nobody would buy it and the
seller would either reduce the prices or change to selling
something else. Similarly if wages were too low, workers
would move to other jobs.
 This approch to economic development called Market-
Centered approach, also been termed laissez-faire Economics.
David Ricardo: Comparitive Advantage
 Another highly influential classical economist who advocated
free market and developed the theory of “Comparative
Advantage”
 Countries should concentrate on producing and then selling the
goods that they had an advantage in producing because of their
assets, such as land, mineral resource, labour, technical or
scientific expertise.
 This meant a global division of labour.
 Greater capacity for growth
 This way limited resources would be used more efficiently
Keynes :Economic growth theory
 During 20 th Century Classical economists’ Market Cantered Approach failure

 1929 Wall Street Crash and the Great Depression of the 1930s

 Economists began to develop new understandings of national economies.

Foremost among these was the British economist John Maynard Keynes, who,
in 1936 published The General Theory of Employment, Interest and Money .

 Keynes argued that the key to growth was real investment

 This investment, he claimed, would have a positive effect on job creation and the
further generation of wealth, through the multiplier effect. This effect could,
however, also work in reverse, so that declining levels of real investment would
lead to a downward spiral into economic crisis.
Keynes :Economic growth theory
 Unlike the classical economists, Keynes saw a key role for the government
in promoting economic growth. Rather than letting the market operate
alone, Keynes said that governments could intervene to promote
investment either through monetary policies such as changing interest
rates, or directly through government expenditure.
Rostow : Linear-stages theory
 In 1960, Walt Rostow published The Stages of Economic Growth: A
Non-Communist Manifesto .
 Economic Growth rather Development
 Stages of economic growth’ were the route to ‘more developed’ status.
 Thus, in goal terms, ‘development’ was conceived of as a state where
the mass of the population could afford to spend large amounts on
consumer products, the economy was largely non-agricultural and very
much urban-based.
 As a process, ‘development’ was defined in relation to modernity, and
to a move from agricultural societies with ‘traditional’ cultural
practices, to a rational, industrial and service focused economy.
 Structural change models
 The ideas of gradual shifts over time along a particular path was also found
within what Todaro (2000) terms ‘structural change models. The basic
theme of these models of development was the ways in which national
economies shifted from a rural, agriculture base to an urban, manufacturing
one. Thus ‘development’ was conceived of as a largely economic
phenomenon.
 W. Arthur Lewis
 He conceived of the economy of ‘underdeveloped countries’ being
dualistic, i.e. divided into two. The so-called ‘traditional’ sector consisted
largely of subsistence agriculture, although some forms of urban self-
employment could also come under this heading. The ‘modern’ sector, in
contrast, was made up of commercial agriculture, plantations,
manufacturing and mining.
Neo-liberalism
 Neo-Liberal Thoght

 A new era in development started during 1970s when keynesian approach of

governement Intervention was questioned.

 It was argued that state involvement in economic activity was leading to

inefficiency and slower rates of economic growth than would be achieved it
market were left to its own devices.

 Deepak Lal (1983) and Bela (1971, 1981)

 For Neo-Classical and Neo-liberal theorists the route to greater economic

growth and greater well-being for all was through reducing state intervention
and letting the market set wages and prices.
 Neo-Liberal Thoght

 Toye (1993) described

this shift about
‘development’ as
“counter revolution”

 Bela’s (1971) work of

four latin American and
five Asian Economies
World Bank Policy
 By 1983 it was clear that the World Bank had taken on this way of
thinking about economic development. In the 1983 World Development
Report, there was a focus on stressing the relationship between economic
growth rates and the degree of state intervention in prices. The implication
was that the most rapid growth rates were found in those countries which
were most outward-oriented and where states were least involved in
‘distorting the market’
 This move towards a celebration of the market as a neutral resource-allocating
system, was found not only in relation to the Global South, but also in the so-
called ‘Second World’ with moves away from state socialism and in the
industrialized countries of Western Europe and North America. The United
Kingdom under Margaret Thatcher, elected in 1979, and the USA under
Ronald Reagan, who took office in 1981, are probably the best examples of
this economic philosophy in action.
Debt Crises and
Structural adjustment
programmes
Structural Adjustment Programs (SAPs)

 Probably the most well-known aspect of neo-liberal development theory in

practice has been the implementation of structural adjustment programmes
(SAPs) since the late 1970s.
 These policies have often been adopted by national governments in return for
continuing financial support from the International Monetary Fund and
World Bank.
 The underpinning philosophy of SAPs is to impose the policies developed in
the North on Southern nations.
 During the late 1970s and early 1980s, national governments found themselves
increasingly unable to pay the interest on the debt they had accrued through
borrowing both from commercial banks and multilateral organizations.
 Structural Adjustment Programs (SAPs)

 SAPs encompass a series of government-led policies which are aimed at

reducing the role of the state in the running of the national economy.
 This does not mean that the state is no longer involved, but rather that the
market is given much greater power.
 SAPs usually include two categories of policies which can be classified as
stabilization measures and adjustment measures.
 The first group includes policies such as stopping increases in government-sector
wages, cutting back on government expenditure and devaluing the currency.
 Adjustment measures include opening up the national economy to foreign
investment, reforms in the tax system and privatization
Consequences of SAPs
 The withdrawing of the state, the opening up of the national economy to
foreign investment and currency devaluation did not have the desired
effect; rather poverty levels increased as real wages went down,
unemployment increased, and the cost of living rose. The removal of
state safety nets in some cases also left the most vulnerable and
destitute with no form of assistance.
 In some places economic stabilization may have been achieved, but the
costs in terms of human welfare have been severe (Simon et al. 1995).
 However, the key point is that it is agreed that although SAPs may not
have caused poverty in a direct sense, they certainly did not lead to
poverty reduction’ (McIlwaine 2002: 99).
Poverty Reduction Strategies
Growing awareness of the detrimental social effects of SAPs and the move towards a
global poverty reduction agenda, led the World Bank and IMF to reshape SAPs in the
late 1990s. Neo-liberal adjustment policies are still a key part of the organizations’
conditions for lending funds, but greater attention is paid to the needs of the poorest
people in society. The diversity of national situations is also acknowledged, compared
to the one-size-fits-all approach under SAPs. These news policies are grouped under
the heading ‘Poverty Reduction Strategies’ (PRSs) and a key element is the Poverty
Reduction Strategy Paper (PRSP). This is a document which each government must
produce in order to qualify for further funding.