Economic Development: Then and Now

DEVELOPMENT ECONOMICS as a separate branch of economics emerged at the end of the Second World War. During the dominance of neo-classical economics from the 1870s until the Keynesian Revolution of the 1930s, economists were more concerned with partial equilibrium analysis. They worked on the assumption that a free competitive capitalist economy would automatically ensure the maximisation of national output at full employment. The idea that a competitive market economy based on individualism and freedom of enterprise maximises economic growth (in the long-term) was fundamental to Classical Economics. Adam Smith was sympathetic to the capitalist class. Among the Classical Economists, J S Mill however had a somewhat ambivalent attitude to both capitalism and economic growth. At one stage of his life, Mill became an admirer of socialism and argued against the advantages of a growth-oriented free market economy. The Great Depression (1930-31) was a new turning point in economic thinking. In his General Theory of Employment Interest and Money, Keynes argued that a free enterprise economy could lead to (permanent) underemployment equilibrium. Thus Keynes challenged the fundamental basis of Classical Economics and called for governmental intervention to create full employment through public works and deficit financing. The Keynesian short-run analysis was extended by Harrod and Domar to examine the conditions for long-term steady-growth of the capitalist society. Harrod and Domar initiated new interest in macroeconomic analysis in the post-1945 period in which a large number of mainstream economists got involved. The central issue in the post-war discussion on growth literature was how to maintain full employment and economic growth (i.e., an increase in real per capita income) at a steady rate by avoiding cyclical fluctuations. The post-World War II period also witnessed the end of the long era of European colonisation of Asia and Africa. The newly emerging independent countries in the 1950s were eager to bring about rapid economic transformation to improve the living standards of the masses. It was in this context that the distributional aspects of economic growth were first brought into open discussions and the first dividing line was drawn between economic growth and economic development. The question of distribution of income did not receive any serious attention in earlier literature. It was believed that distributional aspects will be taken care of by the ‘trickle down effect’ of growth. However, by the middle of the 1970s, it became clear that growth did not automatically guarantee more equal distribution of its fruits. Indeed, without corrective measures, economic growth in the sense of a higher rate of increase in GDP would normally tend to accentuate inequalities of income and wealth at least in the shortterm. In the longer term sustained economic growth could of course lead to structural