Economic development ideologies of the 1950s to 1973 and their relevance to developing nations’ economic development paths today

Three development ideologies shaped the paths of developing nations and new nations of the world from the 1950s to 1973. There was enough trust placed in the transferring power of indigenous governments through national ‘planning’; much importance was given to capital accumulation, independently of the way the capital would be used, and autarky – self-sufficiency (Clunies-Ross, Forsyth, & Huq, 2009). These economic ideologies spurred economic growth, despite their inherent problems. Development experts have classified the period as the golden age of economic growth. As developing nations including Ghana continue to unearth economic miracles to their development agenda, I am tempted to recap the ideologies of the period and examine their relevance to today’s economic development paths of developing nations, with special emphasis on Ghana.

  • Capital accumulation independently of the way the capital would be used

Capital accumulation was considered as vital for development, though little thought was given to the way the accumulated capital would be used for development for its maximum benefits to be realized by recipient countries.

The inability of developing countries and new nations to raise sufficient domestic capital for development meant that they were to look outwardly for foreign aid and grants to augment the total amount of capital needed for development. Capital accumulation traces its root to the Linear Growth Stages theorists – spearheaded by the Rostow’s Stages of Growth and Harrod-Domar Growth Models.

Rostow postulated that, the transition from underdevelopment to development can be described in terms of a series of steps or stages through which all countries must proceed. According to Rostow, it is possible to identify all societies in their economic dimensions, as lying within one of the five categories: the traditional society; the pre-condition for take-off into self-sustaining growth; the take-off; the drive to maturity, and the age of high mass consumption. Again, the economic mechanism by which more investments could lead to more growth was explained by the Harrod-Domar growth model. More specifically, the Harrod-Domar growth model says that in the absence of government, the growth rate of national income or output would be directly or positively related to the saving ratio – the proportion of income that is saved (that is, the more an economy is able to save and invest- out of a given GDP, the greater the growth of its GDP will be) and inversely or negatively related to the economy’s capital-output ratio (Todaro & Smith, 2006). Where domestic savings were insufficient to generate the right amount of growth, the respective country is expected to borrow from outside. Hence, one key principal strategy of development necessary for any takeoff was the mobilisation of domestic savings and foreign capital to generate sufficient investment to accelerate economic growth.  It was hoped that these growth models, coupled with the success story of the Marshal Plan could be the magic wand for developing nations’ development.

The America’s Marshall Plan was in support of the rapid reconstruction of Western Europe and Japan after the Second World War in which these regions were brutally battered. With little goods to export to balance their terms of trade, financial capital and surplus foods from the United States of America (USA) government, which had very liberal interest rates and repayment mechanisms, was believed to have played a crucial role in the recovery of Western Europe and Japan. So, international aid to countries short of capital seemed to have almost miraculous potential to transform their economies (Clunies-Ross, Forsyth, & Huq, 2009; Peterson, 1984).

The emphasis on capital – envisaged primarily as financial capital and economic capital such as plant, equipment, machinery, and complemented by human capital (regarded mainly as the result of education and training, often treated as an additional factor of production). Past and current governments in developing nations such as Ghana have pursued foreign aid and grants for budgetary supports, and attracted foreign direct investments to bridge the gap in domestic capital accumulation. Both in the past and present, developing nations have borrowed from governments and international development organisations including the World Bank and its affiliates – the International Monetary Fund (IMF) and the International Development Association (IDA).

The World Bank in July 13, 2018 approved two International Development Association (IDA) credits of $60 million for the Ghana Energy Sector Transformation Initiative Project and the Ghana Tourism Development Project. Specifically, Ghana Energy Sector Transformation Initiative Project received $20 million to strengthen the capacity of the energy sector, implement sector reforms, and improve energy sector planning and co-ordination in Ghana. The Ghana Tourism Development Project received financing of $40 million to improve the performance of tourism in targeted destinations.

The project will enhance the tourism sector’s offerings, diversify its impact, and help increase the contribution of the tourism sector to the Ghanaian economy. The project will also support micro, small, and medium enterprises, which will benefit from improved access to markets, better public goods provision in the targeted tourism destinations, and better skilled workers. Again, the Government of Ghana and the Kuwait Fund for Arab Economic Development have signed a concessional loan agreement of Kuwaiti Dinar 7.0 million (US$24.0 million) for the Expansion and Development of 26 existing Senior High Schools Project. The Project aims to support the social and economic development of Ghana, by supporting Government’s plans to increase access, improving the quality of Senior High School Education and meet the growing demand for student enrolment in underserved areas in Ghana under the Education Sector Plan (ESP) 2010-2020 (Ministry of Finance, 2016).

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Unfortunately, the emphasis on capital accumulation has ended in an endless cycle of borrowing among developing nations with its attendant negative effects on development. In most cases capital have been acquired without due regard for how it would be used. Too many governments of developing nations borrow money and receive grants from development partners without ensuring how efficiently the monies would be used and how to track the returns on those investments. Government officials are alleged to steal monies meant for development.

Many government projects are left uncompleted and left to deteriorate. Many have attained Highly Indebted Poor Country (HIPC) status, but still remain underdeveloped. China is accused of leveraging massive loans it holds over small states worldwide to snatch assets and increase its military footprint. Sri Lanka owes Chinese companies to the tune of more than $1billion (£786million). Sri Lanka handed over a port to companies owned by the Chinese government on a 99-year lease (City News Room, Aug 28, 2018). Gill & Pinto (2005), as far back as thirteen years ago reported that “Over the past 25 years, significant levels of public debt and external finance are more likely to have enhanced macroeconomic vulnerability than economic growth in developing countries. To add salt to injury, Cajetan & Orbunde (2015) writing on the Impact of Foreign Debt on Developing Nations: A Case Study of Its Effects on Nigerian Economy reports that, “Most developing nations have become victims of foreign debts which has rendered their individual economies frail and prone to the dictatorship of foreign donors… strong and well-maintained economies of the past that ventured into foreign loans are being relegated to severe poverty and economic disintegration, leading to increased corruption and money laundering. Nigeria’s economy in the 60’s could boast of stability and development. Conversely, she has been experiencing development drawbacks since the introduction of foreign loans geared towards increased development”.

Ghana’s public debts, expressed as percentage of GDP (are the cumulative total of all government borrowings less repayments that are denominated in the country’s home currency) from 2005 to 2017, as shown in the table below.

Ghana’s Public debts expressed as percentage of GDP

Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2016 2017
Public debt (% of GDP) 75.9 38.6 58.5 62.3 55.2 59.9 36.2 49.3 53.1 73.7 76.8

Source: Index Mundi, 2018.

Developing nations should be critical about how borrowed funds are used and tracking the expected benefits from the projects borrowed funds are used for.

  • Autarky (Self-Sufficiency)

There was the ideology of autarky (self-sufficiency) aimed at minimizing interdependence with the rest of the world. The success of the Soviet planning had a strongly autarkic bias, so it was considered natural for developing countries to promote the growth of secondary industries and the development of import substitution industries rather than export promotion – looking inward rather than outward. Import substitution is the production of kinds of goods that have previously been imported. These have mostly been successful where governments have offered sufficient protection through direct government subsidies, imports tariffs and quotas. The infant industry argument was initiated by Alexander Hamilton in 1791 where he argued for the protection of industries in the United States from imports from Great Britain. The lack of doubt expressed about the success story of exports of goods and services, influenced by memories of the Great Depression, implied that new businesses in manufacturing must produce largely for the domestic market (imports substitution), which meant that each new industry would need to grow at just the right rate to satisfy the demand for its products generated by rising domestic income. Among the economic benefits of the import substitution ideology are; to encourage and stimulate domestic production, to promote national security and reduce over reliance on goods from abroad, to increase government revenue in the future once the infant industry reaches maturity, to create employment and develop the domestic market, to encourage the consumption of domestically produced goods and services, and to prevent trade dumping.

For many years, developing nations including Ghana have depended on imported goods leading to underproduction of goods and services in domestic economies causing high exchange rates against the currencies of development partners, high rates of unemployment, and high rates of inflation. Commodities like rice, tomatoes, onions, fish, dairy products, poultry products, cars, cloths, refrigerators, televisions sets, fruit juice, etc. are always imported to our detriment. It is in the light of this that the government of Ghana’s idea of One District, One Factory comes handy and more opportune than ever before. However, the question one may ask is “Are we going to be inward looking – produce for the domestic market first – to address the challenges of our imports or we are going to be outward looking to earn foreign exchange to compound our problems? It is better to pursue the development of factories that will produce what we currently import, and try to export the excess which we cannot consume or store.

The Minister for Finance of Ghana stated in the 2019 Budget Statement read to the Parliament of Ghana, on November 15, 2018, page 59, that as priority objectives for the 2019 fiscal year and the medium-term, the government intended to modernise Ghana’s agriculture and increase productivity and output in the real sector to increase incomes of farmers, improve food self-sufficiency and exports, and create a viable supply base for agro-industry; industrialisation, based particularly on adding value to Ghana’s  agricultural produce and natural resources. Again, the government intended to utilise Ghana’s comparative advantage; build its human capital through improved access to quality education and health to ensure that its growing labour force is employable and competitive. It also wanted to provide efficient infrastructure including roads, railways, and energy to drive its industrialisation and agricultural modernisation programmes. In addition, there would be efficient public service delivery and major improvements in the general business environment to encourage investment, production, and job-creation in the private sector as well as maintaining and sustaining macroeconomic stability and improving expenditure efficiency and domestic resource mobilisation to create more fiscal space and provide additional resources to fund its growth-oriented and employment-generating development programmes. The question is “where will the money for the fulfilment of these agenda come from”?

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Autarky requires the development of import substitution industries which are nurtured through subsidies and trade protectionism. However, most import substitution firms have failed to grow overtime and collapsed through managerial inefficiencies, corruption, and lack of competition. Other nations have also overtime retaliated with the implementation of similar protective measures.

  • The transferring power of indigenous governments through national planning

The transferring power of indigenous governments through national planning explains that the underlying cause of governments’ interventions in economic activities was ‘market failure’, though the term was not known to development economists in those days. Market failure is the inability of the forces of demand and supply to allocate resources efficiently for development. It was, therefore, imperative for governments to extract resources and allocate them efficiently in order to succeed where markets had failed to cause a positive change in the lives of people. National planning is deliberate attempt by governments to develop comprehensive national strategic development plans that focus on the objectives, priorities and needs of nations in relation to the available financial, economic and human resources for national development. This had also been cemented by the success story of the Stalin system of governance and development practised by the former Soviet Union. This type of planning embraced the overall development of education, healthcare, manufacturing, agriculture, transportation, and telecommunication, etc., spearhead by the states. The private sector’s role in national development was relegated to the background.

Today, many developing countries practice mixed economic system. This combines both the state and the private sector in resource allocation. Notwithstanding, the partnering role of the private sector in a modern sphere of life as a mixed economy, the huge capital outlay that underlie the development of  major infrastructure and economic policies are developed and implemented by governments. The government after making development and regulatory policies and providing the needed infrastructure must also provide the conducive environment for private sector participation and growth. These investments by the government would help increase the rate of human capital development, increase revenue mobilisation and increase production to promote economic growth and development in the long run.

The relevance of the role of governments in mixed economies is supported by the recent banking sector crisis in Ghana that occurred between 2017 and 2018 and the eventual consolidation of five banks (Beige Bank, Construction Bank, Royal Bank, UniBank and Sovereign Bank) into one single bank to become Consolidated Bank Ghana (CBG) Ltd, and the absorption of two other banks (UT Bank and Capital Bank) by the Ghana Commercial Bank. A mixed economy allows private participation in production while the government ensures that society is protected from the negative effects of the market. In the recent case in Ghana, customers’ deposits which would have been lost have been kept intact by the bank of Ghana and the government of Ghana for that matter. It allows competition between producers with regulations in place to protect society as a whole. This protection helps maintain a stable economy. The Minister for Finance of Ghana stated in the 2019 Budget Statement read to the Parliament of Ghana on November 15, 2018, pages 59 and 60, that, efforts would be made to consolidate and expedite the implementation of government’s flagship programmes initiated in both the 2017 and 2018 as part of means to expand the economy and create more decent jobs. These included: Free SHS and Technical and Vocational Education and Training (TVET); Planting for Food and Jobs; One-District One-Factory (1D1F); Integrated Poverty Eradication Programme (IPEP), Development Authorities, One-Village-One-Dam; Zongo Development Fund initiative; the National Builders Corps (NABCo); and National Entrepreneurial Innovation Programme (NEIP).

The Neoclassical Counter Revolutionists’ argue that underdevelopment results from poor resource allocation due to incorrect pricing policies, too much states interventions by overly active developing-nation governments, corruption, inefficiencies and lack of economic incentives that permeate the economies of developing nations. Also, governments must help competitive markets to flourish, privatise state-owned enterprises that incur losses, promote free trade and export expansion, welcome direct foreign investments from the developed world, eliminate excessive government regulations and price distortions in factors, products, and financial markets to stimulate economic efficiency and economic growth. Thus, governments virtually do nothing good to promote economic development (Torado & Smith, 2006). We will, however, conclude that governments must develop and implement appropriate policies, engage in private-public partnerships and provide a conducive environment for the private sector to develop so as to promote balanced growth.

The author is a Senior Lecturer, Dean, Faculty of Humanities and Social Sciences of Wisconsin International University College, Ghana.

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