Benazir Bhutto, January 20, 1997
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Economics has often been called the "dismal science." And that certainly has seemed to be the case for much of this century, particularly when it comes to analyzing the troubles of the world's poorer nations. For much of this century, the outlook for these countries has been gloomy, and the prevalent theories have offered little hope.
In the first writings on the subject, Ragnar Nurkes ascribed poverty to what he called the vicious circle. Low incomes led to low savings, which in turn led to low investment and low growth. To put it simply, he held that a country was poor because it was poor. And that's certainly not a very upbeat message for those who live in developing nations.
The African-born Nobel Prize winner Arthur Lewis was another pioneer in the science of economic development. He sought to break the vicious circle with his theory of development through unlimited supplies of labor. According to Lewis, there is a vast reservoir of unemployed labor in the rural areas of underdeveloped countries.
A much larger percentage of the population of these nations worked in agriculture — producing an equal amount of food. If the underdeveloped countries could streamline their agricultural production, it would free up a large chunk of their population to pursue other opportunities, such as industrialization. Oftentimes, however, it seemed the implementation of this theory only led to more urban poor, uprooted from the countryside and struggling to stay alive.
Another theory held that inequalities of income are actually good for a country, since rich people save more than poor people and having a high national savings rate is important. According to this school of thought, known as the Galenson and Leibenstein model, equality is sacrificed at the altar of growth. In other words, having office high-rises right next to urban slums wasn't a problem — it was part of the solution.
As all of these economics theories were debated in the halls of academia during the '60s, the Galenson-Leibenstein model gained widespread acceptance.
It was in this atmosphere that Nobel Prize-winning professor Gunnar Myradal led a team of economists in writing "Asian Drama." For the first time, the world had an economic theory that emphasized the intrinsic value of people, the "human factor." According to Myradal, the main obstacle to growth lay in human attitudes and the institutions of the Third World.
He also emphasized the need for investment in health and education. Rebutting previous doctrines, Myradal argued for more social-sector spending to assist the poor. This, in turn, would spark higher consumption and invigorate human energy, instigating higher output.
This emphasis on satisfying the basic needs of the people soon became the gospel truth and was endorsed by such institutions as the World Bank, which had previously concentrated on funding giant industrial projects. The World Bank and others began putting the theories of "Asian Drama" into action.
But there's more to the human factor theory than just social spending. One of the lesser-known aspects of Myradal's book was its reliance on markets, the removal of government subsidies and the abolition of discretionary controls. Deregulation and privatization were part of the plan, as well.
The role of the state in economic development has shifted with the passage of time. In the wake of decolonization, from the '50s to the mid-'70s, the state played a major role in infrastructure development. The state was the leading factor in the development of power, communications, transport and even heavy industry, banking and insurance.
During the 1970s, for instance, there was a spate of nationalization in Chile, Pakistan and Egypt. The government wrested control of industries away from vested corporate interests, often leading to bloodshed and political turmoil. The goal was to develop domestic industries and reduce reliance on foreign imports.
But now, we've entered a new phase and a new plateau of development. The newly industrialized countries in the Far East, known as the Asian Tigers, have shown there is another path to growth. Prosperity can be achieved through the development of export-oriented economies.
And what is the distinctive feature of the Asian Tigers? It's a skilled labor force, high rates of literacy, low rates of population growth and the emancipation of women — the human factor. Once again, Myradal's theories have proven to be on the mark. Although it's taken us nearly 30 years to discover, it's the people that count.
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