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Dynamics of world economic developement Kiuchi, Takashi 1960

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DYNAMICS OF WORLD ECONOMIC DEVELOPMENT by TAKASHI KIUCHI B. A., Keio Gijuku University, 195S A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in the Department of Economics and P o l i t i c a l Science We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA Apri l , I960 In presenting t h i s t h e s i s i n p a r t i a l f u l f i l m e n t of the requirements f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I agree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r reference and study. I f u r t h e r agree that permission f o r extensive copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the Head of my Department or by h i s r e p r e s e n t a t i v e s . I t i s understood that copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be allowed without my w r i t t e n permission. Department of PQ&A.UJL %o^sJL^ The U n i v e r s i t y of B r i t i s h Columbia, Vancouver 3, Canada. Date kfidJL J , U 6 0 :: Abstract Each of us i s s o l i t a r y . Each of us dies alone. That i s a fate against which we cannot struggle, but there i s plenty i n our condition which i s not fate, and against which we are less than human unless we do struggle. The people i n the i n d u s t r i a l i z e d countries are getting r i c h e r , and those i n the non-industrialized countries are at best standing s t i l l : the gap i s widening every day. I n d u s t r i a l i z a t i o n i s the only hope of the poor. Health, food, education; nothing but i n d u s t r i a l i - zation could have made them available to the very poor. Economists are in c l i n e d to be impatient i n attempting to ameliorate t h i s s o c i a l condition; and are in c l i n e d to think that i t should be done. The lessons which the present underdeveloped countries can learn may l i e as much i n the past as i n the contemporary h i s t o r y of t h e i r developed forerunners. Such common problems as c a p i t a l accumulation, economic d i v e r s i f i c a t i o n , balance of payments, technolo- g i c a l development, population, labour, employment, land d i s t r i b u t i o n , colonialism, dualism or pluralism, p o l i t i c a l a f f a i r s and s o c i a l ideology are of importance. However, what are absolutely necessary are systematic comparisons of the processes of economic growth and of the economic structures of d i f f e r e n t countries by l i n k i n g non-economic - i i - factors to the structure of modern economics. Thereby i t w i l l be possible to c l a r i f y the character of the process of economic growth and to disclose the r e l a t i v e importance of the various factors. Without o v e r - s i m p l i f i c a t i o n , dynamic theory can be divided into two categories; economic dynamic approach and s o c i o l o g i c a l i n s t i t u t i o n a l approach. No "dynamics of world economic development" i s as simple as to be f u l l y explained by one of these approaches. As a re s u l t of the inevitable process being a synthetic theory from d i f f e r e n t opinions founded on di f f e r e n t bases, the theory of Professor Walt Whitman Rostow must be considered. I t seems that his theory i s cogent, and successful i n establishing a sequence of cause and effect i n the f i e l d of economic growth. A matter of f a c t u a l history observed i n the l i g h t of economics i s f u l l y discussed by using i l l u s t - rations of sixteen countries i n the world. The process of economic development i s ascertained. The dynamics of Professor Rostow indicates the ways of m o l l i f y i n g the dangerous ch a r a c t e r i s t i c s of the Union of Soviet S o c i a l i s t Republics, of coping with the vast number of underdeve- loped countries, and of c l a r i f y i n g the meaninglessness of Marxism. Here, our s o c i a l hope can f i n d the basis on which p o l i c i e s should be dependent. - i i i - The t r i c k of getting r i c h i s no secret and the world cannot survive h a l f r i c h and half poor. - i v - CONTENTS :: Abstract :: Acknowledgement I. Introduction Purpose of the Study Method of Treatment I I . Emergence of "Dynamic" Theory 1. I d e n t i f i c a t i o n of Problems 2. Dynamics i n Economic Theory 3. I n s t i t u t i o n a l i s m and S o c i o l o g i c a l Considerations 4. Professor Rostow's Formulation of Conclusions from the above I I I . The Theoretical Basis of Professor Rostow's Inter- pretation 1. The Basic Theory 2. The Process of Development 3. I l l u s t r a t i o n s from Various Countries IV. The Application of Professor Rostow's Interpretation 1. P o l i c y Views 2. C r i t i c i s m of the Marxian Standpoint V. Conclusions Prognosis :: Bibliography :: Acknowledgement The separation between Canada and Japan i s much more bridgeable today than i t has ever been. S t i l l , on the one hand, i t i s a l l very wel l f o r Canadians, i n t h e i r complacency) to think that material standards of l i v i n g are of minor consequence. On the other hand, i t i s evident that the Japanese are not eating better than at the subsistence l e v e l and are at present working harder than Canadians. Dean Geoffrey C. Andrew extended to me the very generous offer of coming to Canada. L i v i n g i n a foreign country imposes many new hardships, yet I s h a l l always c a l l to mind the experiences of these two years with the most pleasant memories. Professor John J. Deutsch decided my whole programme at the University of B r i t i s h Columbia. His guidance made my post-graduate studies substantial. Dr. Joseph A. Crumb afforded me the most enjoy- able one-to-one lectures f o r a year. Dr. E. Stuart Kirby did everything to enable me to complete t h i s t h e s i s . With a deep understanding of both Japanese and English patterns of thought, he checked every single word i n t h i s work. His kindness was of major importance to my thesis. Dr. Robert M. Clark was the professor from whom - v i - I learned about the Canadian economy. Dr. Robert M. w i l l added stimulus to my work. I appreciated his patience with me, as I f u l f i l l e d the mere requ i s i t e s of a poor student for one year and of a poor assistant f o r another. Mr. A. Milton Moore took the leadership i n our seminar and never f a i l e d to comment on our reports. Dr. John S. Conway proved to be an i n s p i r i n g l e c t u r e r to whom no one could l i s t e n d i s i n t e r e s t e d l y . His benevolence i s one of the things which I w i l l not e a s i l y forget. Professor Ronald P. Dore had been helping me a l l along. Thanks to his profound comprehension of Japan, I did not f a l l behind during these two years. There i s no excuse f o r my not knowing the difference between Canada and Japan. The f i r s t task, i s for me to save the poor from poverty. T. K. Acadia Camp, U. B. C. A p r i l I960 CHAPTER I. INTRODUCTION Purpose of the. Study Method of Treatment "There is no way of studying social reality other than from the viewpoint of human ideals. A 'disinterested social science' has never existed and, for logical reasons, cannot exist. The value connotation of our main concepts represents our interest in a matter, gives direction to our thoughts and s i g n i f i - cance to our inferences." Gunnar Myrdal I. Introduction Purpose of the Study Method of Treatment For better or for worse, recent developments of economic growth theory have tended to shift discussion of "dynamics of world economic development" from broad deliberation by social scientists to the specific assess- ments by practical technicians. There are five reasons why this thesis i3 to be written: F i r s t : systematic comparison of the course of economic growth and of the economic structure of different countries at varying stages of their development i s needed to understand the process of economic growth and to assess the importance of the factors which accelerate or retard economic growth. Second: there is a pronounced dearth of systematic thorough studies of comparative economic growth and structure, although a large amount of work has been and is being done by individual scholars, by research i n s t i - tutions, and by governments. Third: i t is necessary to have an effort to link non- economic factors to the structure of modern economics, and, primarily, the economic aspects of economic growth and structure and the effects of noneconomic factors on economic l i f e must be considered. Fourth: the main contribution which economists seem to be able to make is to cla r i f y the character of the process of economic growth and to lay bare the relative importance of the various factors which accelerate or retard i t , because the areas most important for under- standing the process of economic growth and differences in economic features among countries are lik e l y to be those that are most significant from the point of view of economic policy. Fift h : the main lessons which the underdeveloped countries of today can learn from the more developed countries may l i e as much in the early as in the contemporary history of forerunners. Starting with the consideration of the problems of "dynamic" theory, i t becomes clear that there have been two approaches to "world economic development." However, neither the economic dynamic approach nor the sociological institutional approach is more cogent than the theory of Professor Walt Whitman Rostow. "What oft was thought, but ne'er so well expressed." In Chapter II, the main trend of dynamic theory is traced to throw a new light on Professor Rostow's theory. Having established a historical background, a striking - k - characteristic of the new theory might be understood from a deeper perspective. The theoretical basis of Professor Rostow's interpretation i s analysed in Chapter III which consists of three sections: ideological, theoretical and practical. "No more calamitous notion than that abstract economics was economics proper." A matter of factual history seen in the light of economics is f u l l y discussed. Although, many economists have f e l t dissatisfied with the deductive basis of dynamics, serious attempts to get to grips with the facts of world economic development have seldom been successful. What must be done is to establish a sequence of cause and effect in the f i e l d of economic growth. Chapter IV i s devoted to the application of Professor Rostow's dynamics. In I960, every educated, decent, intelligent son of Western c i v i l i z a t i o n is facing three massive problems: the Union of Soviet Socialist Republics, the underdeveloped countries and Marxism. Not only to save the world, but also to save our own souls, we desperately need theoreticians based on facts, planners based on theories, and fighters based on policies, who would take upon themselves important social functions in democracy. - 5 - Practically, the world is ruled by the ideas of economists. "The promotion of knowledge is the most powerful policy." Here, I would like to get the facts straight and think things out stringently to make known a new dynamics of world economic development. CHAPTER I I . EMERGENCE OF "DYNAMIC" THEORY 1. Identification of Problems 2. Dynamics in Economic Theory . 3 . Institutionalism and Sociological Considerations 4. Professor Rostow's Formulation of Conclusions from the above "Our trouble is not ignorance. It is just that we know so many things that are not true." Josh Billings - 7 - II. Emergence of "Dynamic" Theory Making a systematic firsthand survey of "dynamic" theory requires a great deal of work because as one of the growing theories, dynamic theory consists of an enormous number of arguments among American^British economists and Continental economists, Harvard School and Chicago School, and economists who belong to international organizations such as the United Nations, and free lancers. As a matter of fact, i t is a melee involving hundreds of theorists and practical men. I would like to summarize the discuss- ions concerning dynamic theory to deduce a striking characteristic of Professor Rostow's theory. x 1. Identification of Problems After World War II, the American position in the world economy had drawn great interest from economists. In 1947, the Council on Foreign Economic Relations and the Twentieth Century Fund elaborated a study of America's role in foreign trade and investment. Norman S. Buchanan of the University of California and Friedrich A. Lutz of Princeton University published "Rebuilding the World Economy." The Council on.Foreign,Economic Relations was 1 This i s not a comprehensive survey of dynamic theory. What I w i l l do here i s to trace the main trend of the theory and throw a new light on Professor Rostow's:theory. 2. Norman.S. Buchanan & Friedrich A. Lutz, Rebuilding the World Economy; America's Role in Foreign "Trade and Investment, New York, Twentieth Century Fund, 1947. organized by seven members, including Winfield W. Fie f l e r of Princeton University as the chairman, Winfield W.Bidwell of the Council on Foreign Relations., and.Paul G. Hoffman who was the president of the Studebaker Corporation as well as the chairman of the Committee for Economic Development. The main purpose of the Council was to reconsider American foreign economic policy. Finally, they brought forward a recommendation on multilateral trade and re- construction of the world economy with special emphasis on elimination of international economic unbalance by international capital movement. Also, in connection with the strong influence of changes in the American domestic economy on the world economy, they advocated some domestic economic policies, such as the establishment of a buffer stock system with respect to raw materials which could be reserved, and the abolition of t a r i f f barriers to increase imports. Afterwards, Norman S. Buchanan wrote a book, "Approaches to Economic Development" with Howard S. E l l i s of Harvard University.^ Thus he contributed a great deal to the pioneering f i e l d of dynamie theory. His approach was very practical and p o l i t i c a l , because of his previous career in journalism.^ 3 Norman S.,Buchanan & Howard S. E l l i s , Approaches to Economic Development, New York, Twentieth Century Fund, 1955. k Kiyoshi Matsui, Koshinkoku Kaihatsu Riron no Kenkyu, Tokyo, Yuhikaku, 1953, pp. 32-55. - 9 - Previously i n 1945, A l v i n H. Hansen analysed the fundamental inequality of the world economic structure i n his work, "America's Role i n the World Economy.1^ In the works of both Norman S. Buchanan and A l v i n H. Hansen, we f i n d a strong element of Keynesian thought. At that time, Cleona Lewis wrote "The United States and Foreign Investment Problems," i n which she broke down the effects of foreign investment on in t e r n a t i o n a l and national economies.^ On the other hand, without any connection with modern economics, the type of study which analysed the s o c i a l economic structure of underdeveloped countries as such, had been carried on mainly i n the United Kingdom and the Netherlands whose colonies presented problems not only to t h e i r mother countries but also to the world economic development. J u l i u s H. Boeke of the Netherlands, who had continued an enormous amount of research on Indonesian society since 1910 and had advocated the 'dual economy' theory, wrote "The Interests of the Voice- l e s s Far East; Introduction to Oriental Economics" 1948? as a stepping stone to his following r i c h volume: "Economie van..,Indonesie" i n 1953*8 I t s English version, "Economics 5 ^ A l v i n H. Hansen, America's Role i n the World Economy, New York, Norton, 1945. '.. .7: 6 Cleona Lewis, The United States and Foreign Investment Problems, Washington, D.C.,.Brookings^ Institution,.1948. 7 7Julius H. Boeke.,_.The Interests of the Voiceless Far East: Introduction to Oriental Economics, Leiden, Univer- s i t a i r e - Pres Leiden, 1948. ; 8 J u l i u s H. Boeke, Economie van Indonesie, Haarlem, vierde herziene druk, 1953. - 10 - and Economic Policy of Dual Societies as Exemplified by Indonesia," appeared in the same year.^ Deriving Sugges- tions from Julius H. Boeke's theory, John S. Furnivall published a series of works, in 1939 "Netherlands India; Welfare in Southeast Asia; A Comparison of Colonial Policy and Practice," 1 1 and in 194# "Colonial Policy and Practice; A Comparative Study of Burma and Netherlands India." 1 2 Nowadays he makes an effort to analyse the p o l i t i c a l and economic situation of Burma.1^ A professor of Oxford University, Sally H. Frankel, who was born in the Union of South Africa and graduated from the London School, had been continuing his work on South Africa and built up the foundation of his 'multiracial society' theory. 1^ 9 Julius H. Bbeke, Economics and Economic Policy oT Dual Societies as Exemplified by Indonesia, New York; International Secretariat, Institute of Pacific Relations, 1953. ~ . . 10 John S. Furnivall, Netherlands India; A Study of Plural Economy, Cambridge,.The:University Press, ±939• 7 — s-r—' • - • • • • 12 John S. Furnivall,,, Colonial Policy and Practice; A Comparative Study of Burma and Netherlands India, Inter- national Secretariat, Institute of Pacific Relations, Cambridge, The" University Press,„ 194iL - 13 John S.. Furnivall, An Introduction to the P o l i t i c a l Economy of Burma, Rangoon,Peoples' Literature.Committee and.House, 1957. The Government of Modern Burma, New York, International Secretariat, Institute of Pacific Relations, 1958. . " - :. ..r , . . . . ~ . : 14 Sally H... Frankel, The Economic Impact on Undefdeyelope Society; Essays on International Investment and Social Change, Oxford, Blackwell. 1953. A Study of Plural Economy, rtlO in 1941 "Progress and - 11 - Hence, after 1948 "dynamic" theory has, roughly- speaking, been developed dualistically; one is the economic dynamic approach that, having i t s start in the traditional theory of economic development, is primarily concerned with economic adjustment through an international capital movement, and another i s the sociological institutional approach which originated from studies of the social structure of underdeveloped countries. The economic dynamic approach had i t s basis in the thoughts of classical economists, Adam Smith, Thomas R. Malthus, and Giovanni Botero,^ and has been brought up in the f i e l d of economics as a theory dealing with economic development and growth as well as the population problem. In this category, we might include a l l such distinguished theories as the followings: Adam Smith's formulation of development with natural harmony, the pessimistic population theory of Thomas R. Malthus, David Ricardo's theory of extinction of investment incentive and international specialization based upon comparative costs, Karl H. Marx's philosophy of revolutionary develop- ment which is founded on historical materialism, Alfred Marshall's. trade cyele„ theory and formulation of economic 15 Giovanni Botero was an Italian predecessor of anti- mercantilists , In his book, Delle cause della grandezza e magnificenza delle c i t t a , 1589, he compared the unlimited generative powers of human beings with the limited produc- tive powers of land. • - 1 2 - development without harmony, Joseph A. Schumpeter's theory of dynamic growth, and J . Maynard Keynes' theory of imperfect employment and theory of secular stagnation. The s o c i o l o g i c a l i n s t i t u t i o n a l approach has arisen from the study of the s o c i a l structure of colonies which was necessary f o r c o l o n i a l administration. I t includes not only S a l l y H. Frankel's idea of 'economic impact' on underdeveloped society, J u l i u s H. Boeke's theory of 'dual economy,' John S. F u r n i v a l l ' s ' p l u r a l society' theory and Rupert Emersonfs pessimistic i n t e r - pretation of backward society, but also Bert F. Ho s e l i t z ' consideration of environmental conditions i n underdeveloped countries, and Charles Wolf's i n s t i t u t i o n a l i s m , to which I s h a l l r e f e r l a t e r . This approach i s lacking i n synthetic t h e o r e t i c a l system, but i s worthy of attention. These two approaches have originated separately, not only from the h i s t o r i c a l difference i n t h e o r e t i c a l background, but more important, from the difference of problems which economists have discussed with s p e c i a l emphasis. Here I would l i k e to set f o r t h a l l our major questions: ( i ) Problem of c a p i t a l accumulation and economic d i v e r s i f i c a t i o n —-which contains such problems as under- saving, hoarding of gold, s i l v e r and gems, — ^ - shortage of productive investment opportunities, imperfection of the banking system, and usury. ( i i ) Problem of balance of payments -—which mainly means price i n s t a b i l i t y of primary products, therefore i t implies f l u c t u a t i o n of foreign reserves, d e f i c i t i n trade balance and deterioration of terms of trade. ( i i i ) Problem of technological development which indicates lack of s k i l l e d workers, operators, entrepreneurs, and low l e v e l of productivity. ( i v ) Problem of population, labour and employment which means over- and under-population, emigration, and disguised employment. (v) Problem of land d i s t r i b u t i o n which implies land reform. (vi) Problem of inheritance from colonialism and of dual or p l u r a l society which includes imperfection of governmental bureaucratic organizations, i l l i t e r a c y , provincialism, conventionalism, lack of co-operative s p i r i t and lack of w i l l to work. ( v i i ) Problem of p o l i t i c a l a f f a i r s and ideology - Ik - -—which comprises p o l i t i c a l i n s t a b i l i t y , i d e o l o g i c a l c o n f l i c t , backwardness of p o l i t i - c a l parties and trade-unionism. In f a c t , among these problems are some which do not cause any trouble i n certain countries; and sometimes they appear i n d i f f e r e n t forms, ( i ) and ( i i ) are economic problems, ( v i ) and ( v i i ) are p o l i t i c a l s o c i a l problems, and ( i i i ) , ( i v ) and (v) belong to both categories, economic and s o c i a l . Fundamentally, the economic dynamic approach deals with the f i e l d s from ( i ) to (v ) , and the s o c i o l o g i c a l i n s t i t u t i o n a l approach analyses the points from ( i i i ) to ( v i i ) . The problems of population and land are the oldest questions i n economics. P a r t i c u l a r l y , the population problem has recently made tremendous strides i n i t s dynamic analysis and s t a t i s t i c a l consolidation through contributions of the United Nations, demographers, and s t a t i s t i c i a n s . The r e a l substance of the population problem l i e s i n the consequence of an unceasing race between production and population, which was raised as an issue a hundred and s i x t y years ago by Thomas R. Malthus. In other words, i t i s a question of increase and decrease i n per capita consumption. The so-called Harrod-Domar formula has been to some extent adopted as a t o o l to analyse economic development, and since then the argument concerning the - 15 - growth rate of the economy and the growth rate of population has been getting more and more heated. However, we should not ignore the fact that the population structure i n a country, especially age d i s t r i b u t i o n , i s an absolutely important datum f o r forecasting the future employment s i t u a t i o n and calculating f l u c t u a t i o n of productivity. To those countries that depend p r i n c i p a l l y upon primary products, land reform and i t s various accompanying problems are the prerequisites to economic development from an i n s t i t u t i o n a l i s t point of view. With respect to t h i s aspect, we must take account of the following regional studies: those on Indonesia by Ju l i u s H.. Boeke, 1? Eastern and Southern Europe by Wilbert E. Moor,1** Eastern Europe and the Middle East by Doreen Warriner, 1^ and China by 20 J. Lossing Buck, v as w e l l as a report e n t i t l e d "Land Reform;.Defects i n Agrarian.Structure.as an Obstacle to 16 Roy F., Harrod,.Towards a Dynamic Economics; "Some Recent Development of Economic Theory and Their Application to Po l i c y , London. McMillan. 1948. Evsev D. Domar. "Cap i t a l Expansion,'Rate of Growth and Employment," Econometrica, v o l . 14, A p r i l 1946, pp. 137-147. . ~ ^ " — 17 J u l i u s H. Boeke, The Structure of Netherlands Indian Economy, New York, International Secretariat, I n s t i t u t e of P a c i f i c Relations, 194?. Id.Wilbert E. Moor, 'Economic Demography of^Eastern and Southern Europe, Geneva, League of Nations, 1945 ' 19 Doreen Warriner, Land arid Poverty In the Middle East, London, Royal I n s t i t u t e : o f I n t e r n a t i o n a l . A f f a i r s , 1948. . 20 J . Lossing Buck, Some Basic A g r i c u l t u r a l Problems of China,"Secretariat Paper No. 1, Tenth Conference of the In s t i t u t e of P a c i f i c Relations, Stratford-on-Avon, September 1947, International Secretariat, I n s t i t u t e of P a c i f i c Relations, 1947. 21 Economic Development" by the United Nations. The problems of c a p i t a l accumulation and balance of payments are closely related with each other; on t h i s a tremendous number of arguments have been presented by a great many economists, whose motivations and propositions are so d i f f e r e n t , that the situations are s u r p r i s i n g l y complicated. I should not enquire especially into them here, however, I should mention several the names of note- worthy scholars: Ragnar Nurkse, 2 2 Jacob ¥iner,2^ Hans W. Singer, 2^ Norman S. Buchanan,2^ John H..Adler, 2^ Henry C. 21 United. Nations, Department' of Economic A f f a i r s , . Land Reform• Defects i n Agrarian Structure as an Obstacle to Economic Development,. New York, 1951. "̂ "̂  ~. : 22 Ragnar. Nurkse, Problems of Capital Formation i n Underdeveloped Countries, Oxford,'Basil B&ackwell,"1953. "Trade Fluctuations and Buffer P o l i c i e s of Low Income Countries A Symposium; The Quest f o r a S t a b i l i z a t i o n P o l i c y i n Primary Producing Countries," Kyklos, v o l . 11, Fascicle 2, A p r i l 1958, p. 141. ; 23 Jacob Viher, International Trade and Economic Develop- ment , Lectures delivered at the National University of B r a z i l , Glencoe, Free Press, 1952. "24 Hans W. Singer, ^The D i s t r i b u t i o n of Gains Between Investing and Borrowing Countries," American Economic Review, v o l . 40, No. 2, May 1950, pp. 473-485. "The Mechanics of Economic.Development; A Quantitative Model Approach," Indian Ecohomic^Revlew, August 1952. "Obstacles to Economic Development," S o c i a l Research, v o l . 20, Spring 1953, pp. 19-31. "Problems of I n d u s t r i a l i z a t i o n of Under- developed Countries," International S o c i a l Science B u l l e t i n , v o l . 6, No. 2, 1954. 25 Norman S. Buchanan, International Investment and Domestic Welfare. New York, Holt, 1945. " ~ ~ " 26 John H. Adler, "The F i s c a l and.Monetary Implementation of Development Programsy" -American Economic Review, v o l . 42, No. 2, May 1952, pp. 584-6075: - 17 Wallich, 2? and Peter T. Bauer.2^ Generally speaking, Ragnar Nurkse and Jacob Viner put importance on inter- national economic factors, and, on the other hand, John H. Adler and Peter T. Bauer emphasize domestic factors such as domestic capital accumulation. In addition to these works, some publications of the United Nations 2^ have to be referred to. As I w i l l explain in detail afterwards, the theory of economic development is in considerable confusion at present, mainly because of unclarity about the purpose of the theory. The main question i s , whether the purpose is industrialization of countries, rise in per capita income or increase in social welfare. The indispensable conditions for industrialization are not only favourable situations of labour, capital and land, but also soundness in the credit system, potentialities of domestic and inter- national markets, existence of basic industrial f a c i l i t i e s and promotion of progressive.entrepreneurship. These , 2 7 Henry C. Wallich, Monetary Problems of ah Export Economy:^The Cuban Experience,,Cambridge.,Harvard. University Press, 1950. Money, Trade and Economic Growth, New York, McMillan, 1951~ "Stabilization of Proceeds from Raw Material Exports," Round Table Conference. International Economic Association, Rio de Janeiro, September 1957. 28 Peter T. Bauer & Frank W. Paish, "The Reduction of Fluctuations in the Incomes of Primary Producers," Economic Journal, vol. 62, December 1952, pp. 750-780. 29 United.Nations,;Department of Economic Affairs, Domestic Financing of Economic Development, New York, 1950. Instability in Export Markets of Underdeveloped Countries, New York, 1952. - 18 - factors should always be applied f i r s t . At the same time, we must notice that i n d u s t r i a l i z a t i o n i s not necessarily the best way to raise national income per capita or to increase national welfare. I t depends upon the growth needed, the proportion between population and land, or the r e l a t i v e d i f f i c u l t y of c a p i t a l financing, and we may even imagine a case i n which a g r i c u l t u r a l i z a t i o n i s more recommendable as a tentative measure. The problem of s o c i a l welfare often comes into c o n f l i c t with c a p i t a l accumulation, from a short term view-point. Preference between them changes our point of view on various aspects; f o r instance, the population problem. Without a conscious- ness of purpose, we could not understand the substance of a problem. After a l l , i n d u s t r i a l i z a t i o n and r a i s i n g per capita income aim to increase the s o c i a l welfare of the inhabitants. Then we r e a l i z e that dynamic theory has to be based on broad p o l i t i c a l , economic and s o c i a l analyses, leading to the o v e r a l l improvement of countries. I t becomes completely necessary to analyse the economic development of each country separately, and we might say that general t h e o r e t i c a l studies, of inte r n a t i o n a l c a p i t a l movement and economic relationship among underdeveloped and developed countries, are not very cogent unless they have certain r e a l i s t i c backgrounds. But t h i s does not - 19 - mean that s o c i o l o g i c a l analysis can be dynamic theory. Dynamic theory i s growing i n the d i r e c t i o n of a p o l i t i c a l - economic theory which i s based upon a l l the ideas I have mentioned above. Our present dynamic theory i s t r y i n g to analyse economic development by looking at societies from the inside. 2. Dynamics i n Economic Theory Among those economists who take the economic dynamic approach, we notice several schools. One of them i s a school which i s t r y i n g to establish dynamic theory by f i g u r i n g out the purpose of economic development through consideration of in t e r n a t i o n a l p o l i t i c s and economy. Beside Norman S. Buchanan, whom I mentioned before, are Eugene Staley of Stanford University, Raymond F. M i k e s e l l , a s p e c i a l i s t i n the Middle East a f f a i r s , and several more who might be ragarded as members of t h i s school. Dynamic theory i s such a changeful, varying subject, that i t i s quite dangerous to c l a s s i f y a l l the economists concerned with i t . For instance, Norman S. Buchanan used to be an enthusiastic Keynesian, however, nowadays he i s establishing a more general method. And I would l i k e to say that even Raymond F. M i k e s e l l , judging from his p r a c t i c a l work i n the diplomatic f i e l d of the Middle East and i n editing the Middle East Journal, and his t h e o r e t i c a l researches, - 20 - p a r t i c u l a r l y about foreign exchange and balance of pay- ments,^° i s expected to establish a s i g n i f i c a n t theory i n the future. Eugene Staley expresses his thought i n his stimulating book, "The Future of Underdeveloped Countries." He begins to define basic human wants: a person wants an adequate l i v i n g , a sense of security, a sense of freedom and p a r t i c i p a t i o n , creative opportunities, a sense of belonging, and a sense of purpose. Successful development should be taken to mean: "Within the developing country 1. Higher l e v e l of production and r e a l income, widely shared. 2. Progress i n democratic self-government, reason- ably stable arid at the same time responsive to the needs and wishes of the people. 3 . Growth of democratic s o c i a l r e l a t i o n s , including broadly shared freedoms, opportunities f o r self-development, and respect f o r i n d i v i d u a l personality. 4. Less v u l n e r a b i l i t y to Communism and other t o t a l i t a r i a n i s m s , by reason of foregoing. In external r e l a t i o n s 1. Growth of attitudes that make f o r a more peace- f u l world, and f o r freedom both from external oppression and from use of power to oppress others. 2. Growth of mutually b e n e f i c i a l i nternational trade and investment. 3. Strengthening of the o v e r - a l l resources of the free world and the c o l l e c t i v e defense capacity of free peoples against any aggression."31. .30 Raymond F. M i k e s e l l , Foreign Exchange, i n the Postwar World, New Yqrk,;Twentieth Century Fund, 1954. Postwar B i l a t e r a l Payments Agreements, New Jersey, Princeton University, 1955. 31 Eugene Staley, The Future of Underdeveloped Countries; P o l i t i c a l Implications' of Economic Development, New York, Council on Foreign Relations, 1954, pp. 92-95. - 21 - He analyses the development, problem from a free world point of view and presents basic questions i n a very clear-cut form. He thinks economic development means change i n s o c i a l i n s t i t u t i o n s . "Economic development i s a massive problem i n human education and s o c i a l readjustment. We are least l i k e l y to go wrong when we think of i t i n these terms rather than as a problem i n mechanical equip- _ ? ment and mechanical s k i l l s , important as these are."-*^ He admits the importance of the s o c i o l o g i c a l i n s t i t u t i o n a l approach from the beginning. On the other hand, Maurice Dobb discusses the problem from a d i f f e r e n t angle. He regards economic development as a broad p o l i t i c a l and economic proposition, and stresses the s u p e r i o r i t y of s o c i a l i s t i c planned economy. After studying Soviet economic development f o r years i n the United Kingdom, he gave three lectures at the University of Delhi i n India i n 1951 on economic development. In these he analysed the motivations towards economic growth through three factors: d i v i s i o n of the labour force, c a p i t a l accumulation, and technological innovation, and indicated the diminishing trend of the rate of p r o f i t i n c a p i t a l i s t i c economy, as w e l l as the superiority of the s o c i a l i s t i c economy i n coercive absorption of unemployment and in.organizing the.economy. Norman S. 32 Eugene Staley, The Future of Underdeveloped Countries; P o l i t i c a l Implications of Economic Development, New York, Council on Foreign Relations, 1954, pp. 388-389. - 22 - - Buchanan and Howard S. E l l i s c r i t i c i z e his proposals about r e - d i s t r i b u t i n g farm population, s l i g h t i n g the l i g h t industry and u t i l i z i n g the surplus labour force, as one- sided. J J He i s a Marxist (or a t y p i c a l Ricardian s o c i a l i s t ) and most of the c r i t i c i s m of his interpretations i s concerned with t h i s aspect. However, aside from his one- sided ideology, his analysis has contributed considerably to dynamics i n economic theory. I have to mention two groups very i n f l u e n c i a l with respect to dynamics i n economic theory: the Harvard group and the M. I. T. group. In Harvard University, there have been s i x prominent professors: three Keynesians, Seymour E. H a r r i s , A l v i n H. Hansen, Howard S. E l l i s ; an o r i g i n a l economist, Joseph A. Schumpeter; a Schumpeterian, Gottfried yon Haberler;^4 and Gunnar.Myrdal who has 33 Norman S. Buchanan & Howard S. E l l i s , Approaches to Economic Development, New York, Twentieth Century Fund, 1955. 34 The admiration of"Gottfried von Haberler to Joseph"A. Schumpeter i s beyond our comprehension. He s t a r t s , "Joseph A. Schumpeter was one of the greatest economists of a l l time," and continues, "the time for a complete and detailed appraisal of Joseph A. Schumpeter*s s c i e n t i f i c achievements and of his place i n the history of economics has not yet arrived. F u l l appreciation of a work of such magnitude and complexity requires greater time distance f o r proper perspective." He says he would l i k e to be a founder of the Schumpeterian School, but he concludes, "the main reason why no Schumpeterian School developed i s that Joseph A. Schumpeter was neither a reformer nor ah enthusiastic p a r t i s i a h of capitalism, socialism, planning, or any other 'ism,' he was a sholar and an i n t e l l e c t u a l . " - Henry W. Spiegel, ed., The Development of Economic Thought: Great Economists i n Perspective, New York, John Wiley, 1952. PP. 73$, 749 & 761. - 23 - established the theory of cumulative process of causation through c r i t i c i z i n g the unilateral characteristic of the classical static equilibrium theory and i t s trade theory. Among them, Gunnar Myrdal belongs to the Swedish School and has no direct connection with the Harvard School. The main figures in the Harvard group have been Joseph A. Schumpeter and Gottfried von Haberler who were also influenced by the Vienna School. Although Alvin H. Hansen is certainly to be called a Keynesian, he has based his original interpretation on a broad point of 35 view.-'-' The classical system which we find i n the Harvard group has been severely cr i t i c i z e d . In this sense, we can set up a clear distinction between the Harvard group and the next M. I. T. group, although the latter has also been influenced considerably by the economics of J. Maynard Keynes. In connection with economic dynamics, we could pick out the following economists: Charles P. Kindleberger, Paul N. Rosenstein- Rodan, Max F. Millikan, Harvey Leibenstein, Everett E. Hagen, Wilfred Malenbaum, and Francis M. Bator. A l l of them are members of the Center for International Studies of the Massachusetts Institute of Technology. 35 Alvin H. Hansen, "Post-Keynesian Economics," American Economic Review, vol. 45, No. 3 , June 1955, pp. 360-372. - .- 24 - -r In 1953, Ragnar Nurkse became remarkable as an economist in the f i e l d of economic dynamics, by publishing a book entitled "Problems of Capital Formation in Underdeveloped C o u n t r i e s . P r e s e n t l y , he is a professor at Columbia University. Besides being loosely connected with Gunnar Myrdal through the theory of the vicious c i r c l e , he is isolated as far as schools 6 r sects are concerned. Ragnar Nurkse was born in Estonia in 1907, and after studying at Vienna University from 1926 to 1934, he worked for the Department of Economic Finance of the League of Nations for more than ten years. During this time, he handled several publications of the League of Nations, which were concerned with the problem of international currencies during the two World Wars. He explains his thought on economic development in the book "Problems of Capital Formation in Underdeveloped Countries" which i s originally based upon his three lectures at the Economic Research Institute of Brazil in Rio de Janeiro, the National Bank of Egypt in Cairo, and the American Economic Society in 1951 and 1952. In this book he emphasizes the necessity of capital formation to realize economic development by blocking off the vicious circle.of poverty. According to him, this could be done 36 Ragnar Nurkse, Problems of Capital Formation i n Underdeveloped Countries, Oxford. Basil Blackwell. 1955. only by effective exploitation of disguised unemployment. To raise the inducement to invest, which is supposed to be very rare in underdeveloped areas, i t is absolutely important to create external economies by public invest- ment. On the other hand, i t is equally necessary to lower the propensity to consume, which is raised by the so-called demonstration effect. For making saving available, we have to adopt certain control policies with international co- operation, rather than adopting the traditional policy of economic isolation. Thus capital formation might be practicable without foreign aid. This is the outline of his view. One of his contributions is to generalize James S. Duesenberry's demonstration effect,^7 but he stresses the demonstration effect on the consumption side too strongly, and his theories of the buffer stock system and the buffer fund, could not avoid being c r i t i c i z e d by such practical economists as Sir Sydney Caine, John H. Adler and Peter T. B a u e r . S i n c e Ragnar Nurkse proposes the establishment of a buffer fund by general taxation measures, which could be attained by domestic policy, therefore he has a different approach than the others. 37 James S. Duesenberry, Income, Saving and the Theory of Consumer Behavior, Cambridge, Harvard University, 1949. 38 Ragnar Nurkse, "Trade Fluctuations and Buffer Policies of Low Income Countries A Symposium; The Quest for a Stabilization Policy in Primary Producing Countries," Kyklos, vol. 11, Fascicle 2, April 1958, p. 141. - 26 - _ In t h i s respect we should not forget Albert 0. Hirshman who writes h i s unique idea of 'development strategy' i n his recent work, "The Strategy of Economic Development. Jacob Viner, an- international economist at. Princeton University, has a wide perspective. In 1958 he was invi t e d as a guest to the Mont P e l e r i n Society to which I w i l l r e f e r l a t e r . He has done a noteworthy amount of work i n both f i e l d s , academic and p r a c t i c a l . He has given lectures at the following u n i v e r s i t i e s ; the University of Chicago (1916-1917, 1925), the Hautes Etudes Internationales i n Geneva (1930-1931), Stanford University (1937), Yale University (1942-1943), the London School (1946), Cambridge University (1946), and Princeton University (1946.-present), and worked f o r the United States T a r i f f Commission (1917-1919), the United States Treasury Department (1939, 1942), the United States Department of State (1943-1952), and the Economic Council of the League of Nations (1933). In 1952, he published "International Trade and Economic Development"^ and thereby entered the f i e l d of economic dynamics. His point of view, i s r e l a t i v e l y conservative and since he leaves the 39 Albert 0. Hirschman, The Strategy of Economic Develop- ment , New Haven, Yale University Press, 1958. ~~r"' ^~ 40 Jacob Viner, International Trade and Economic Develop- ment , Lectures delivered at the National University of B r a z i l , Glencoe, Free Press, 1952. „ ' ..... , - 2 7 - .:• hope of development to various forces, he i s close to Ragnar Nurkse and the group of economists of the United Nations. In addition to these economists, I must touch on the economic s p e c i a l i s t group of the United Nations as a group taking the economic dynamic approach. This group has published "Measures f o r the Economic Develop- ment of Underdeveloped Countries,"4-1 as w e l l as a few books on land reform, domestic financing of economic development, and i n s t a b i l i t y i n export markets, which I have mentioned previously. These publications have decided the d i r e c t i o n of dynamics i n economic theory. They present domestic and international p o l i c i e s i n order to provide f o r the unemployed, who are c l a s s i f i e d i n t o four categories: t r a d e - c y c l i c a l , seasonal, tech n i c a l , and disguised, and to promote economic development. We should pay attention to the fact that they spend quite a number of pages analysing such intangible obstacles as t r a d i t i o n s and long-established s o c i a l customs. They bring together a l l the p r a c t i c a l problems such as very d i f f i c u l t and delicate choices: consumption or investment, human investment or material investment, public work or other productive a c t i v i t y , autarchy or foreign trade, manufacturing industry or agriculture. They.also analyse 41 United Nations, Department;of Economic A f f a i r s , Measures f o r the"Economic Development of Underdeveloped Countries, New fo r k , 1951. - 28 - proportion of government and private work, method of procuring domestic c a p i t a l , r e c t i f i c a t i o n of trade p o l i c y of developed countries, required amount of foreign c a p i t a l , and so f o r t h . However, because they of f e r many interpretations of various questions, lack of t h e o r e t i c a l consistency i s t h e i r chief drawback. Hans W. Singer, who i s active i n the Economic Department of the United Nations, i s an i n f l u e n t i a l f i g u r e , having written many a r t i c l e s since 1950.^ 2 His economic model of growth i s , i n short, set up i n order to f i n d a meeting point, through the marginal e f f i c i e n c y of c a p i t a l , between the p r i o r i t y f o r manufacturing industry and the necessity of maintaining equilibrium among l o c a l industries. As a concrete proposal to r e a l i z e such a meeting point, he calculates the required amount of c a p i t a l under a few suppositions; i f a l l the increase i n a g r i c u l t u r a l population were absorbed into non-agricultural sections and given c a p i t a l equipment, i n the a g r i c u l t u r a l section productivity might be raised without an increase i n i t s population (that i s , c a p i t a l deepening i s carried out) and external economies would be developed. In order to calculate the 42 Hans W. Singer, "The Dis t r i b u t i o n ; of Gains between Investing and Borrowing Countries," American Economic Review, v o l . 40, No. 2, May 1950, pp. 473-485. "The Mechanics of Economic Development; A Quantitative Model Approach," Indian Economic Review, August 1952. "Economic Progress i n Under- developed Countries" & "Problems of I n d u s t r i a l i z a t i o n of Underdeveloped Areas," Round Table on Economic Progress. International Economic Association, Santa Margherita Ligure. - 29 - v e l o c i t y of economic growth from three data the saving r a t i o , the c a p i t a l c o - e f f i c i e n t , and the rate of increase i n population he uses the Harrod-Domar formula. Mainly from the p r a c t i c a l aspect of technological development, Norman S. Buchanan and Howard S. E l l i s 4 3 c r i t i c i z e Hans ¥. Singer's theory by reducing i t to the following three points: the infant industry argument the view that s p e c i a l i z a t i o n i n exporting raw materials hinders the progress of other industries; the theory of external economies the view that the most important gain from i n d u s t r i a l development i s not the product i t s e l f but the benefit which the whole society receives; and a theory of the terms of trade the view that the terms of trade of countries specialized i n primary industry w i l l i n e v i t a b l y deteriorate. "World r e a l income per capita, and with i t the standard of l i v i n g of the average human being, i s probably lower now than twenty-five years ago, and perhaps lower than i n 1900," indicates Hans W. Singer i n his "Economic Progress i n Underdeveloped Countries." Sta r t i n g from t h i s point, Gurmar Myrdal analyses inequality i n the i n t e r - national economy and points out the shortcomings of existing.trade theory. He i s t r y i n g to establish a new 43 Norman;S. Buchanan & Howard S. E l l i s , Approaches t o ~ Economic Development, New York, Twentieth Century Fund, approach to the problem-of economic development.^*- He was born in Sweden in 1898, and after graduating from the department of law of the University of Stockholm, he received honorary degrees from Harvard University, Columbia University and the New School for Social Research in New York. During 1938 and 1942, he was invited by the Carnegie Foundation to investigate the American Negro problem and made public "An American Dilemma"4-5 i n 1944. Afterwards, he f i l l e d various government posts in Sweden, such as member of the Upper House, Minister of International Trade and Industry (1945-1947), and Executive Secretary of the Economic Commission for Europe (1947-1957). Then he visited India in order to make a study of. economic develop- ment and economic planning in the region of South and Southeast Asia which was sponsored by the Twentieth Century Fund of New York.^ He has handled a number of controversial problems. His criticism of the classical theory of international trade could be summed up as follows; 44 Gunnar Myrdal, Development and Underdevelopment; A Note on"the Mechanism^of National and International Economic'Inequality, Cairo, National Bank of Egypt, April 1957. Rich Land"and Poor; The Road to World Prosperity. New York, Harper, 1958. " . ' ' ' 45 Gunnar Myr.dal, An American Dilemma; The Negro Problem and Modern Democracy, New York. Harper, 1944. 46 He has not made public his idea after publishing "Rich Land and Poor; The.Road to World Prosperity," therefore we could see his recent thought only by a pamphlet, Indian Economic Planning; In Its Broader Setting, New Delhi, Secretary, Congress Party in Parliament, 1958. i n the c l a s s i c a l theory, international mobility of labour and c a p i t a l i s not a necessary condition f o r balancing factor prices, namely, averaging national incomes of various countries. The theory of international trade has been developed from the abstract premise of in t e r n a t i o n a l immobility of productive factors. This i s not necessarily wrong, but i t i s p o s i t i v e l y u n r e a l i s t i c and impossible to explain from t h i s the actual unbalance of the world economy. As f a r as t h i s problem i s concerned, the c l a s s i c a l theory i s 'unrelated, 1 and i f we apply t h i s theory without considering i t s premise, i t might be 'wrong.' The most f a t a l premise of the c l a s s i c a l theory i s the premise of stable equilibrium. In other words, a f t e r a primary change, an economic system always adjusts towards a stable point where equilibrium can be attained, unless the next change i s caused. Gunnar Myrdal opposes t h i s thought. According to him,^7 economic changes are accumulative i f we leave economic process alone. The second change w i l l work i n the same d i r e c t i o n as the f i r s t , therefore inequality instead of equality has been growing i n the world economy. 3. I n s t i t u t i o n a l i s m and S o c i o l o g i c a l Considerations k7 Gunnar Myrdal, Development,and Underdevelopment; X Note on the MechariisnTof National and International Economic Inequality, Cairo, National Bank of Egypt, A p r i l - 32 - F i r s t of a l l , I must refer to the Chicago School as a group taking the s o c i o l o g i c a l i n s t i t u t i o n a l approach. Being i n the wake of F r i e d r i c h A. von Hayek, many d i s - tinguished economists with new view-points have got to- gether since the end of World War I I . The chief active members are M i l t o n Friedman and Bert F. H o s e l i t z , however, the School also includes Peter T. Bauer of Cambridge University, F r i t z Machlup who was naturalized i n the United States i n 1940 a f t e r graduating from Vienna University and now at Johns Hopkins University, and Charles Wolf, J r . of the University of C a l i f o r n i a , who has recently become an economic consultant of the Rand Corporation. These people are on the same l i n e as the following c o l o n i a l s o c i o l o g i s t s : S a l l y H. Frankel, J u l i u s H. Boeke and John S. F u r n i v a l l , whom I mentioned before. This group opposes strongly the ' m a t e r i a l i s t i c ' approach, which seems to be quite popular i n the United Nations. For example, S a l l y H. F r a n k e l ^ goes so f a r as to say that ' r e a l welfare' and 'increase i n national income per capita' are completely d i f f e r e n t things. At the back of t h i s thought, he has empirical fact showing that there i s no close r e l a t i o n s h i p between the s t a t i s t i c s of national income and the l i v i n g standard of various countries. His 48 S a l l y H.,Frankel, The,Economic Impact on Underdeveloped Society; Essays on International Investment and S o c i a l Change, Oxford, Blackwell, 1953. - 33 - theory of 'economic impact' regards the process of s o c i a l s t r u c t u r a l change by external economic impact as the process of far-reaching s o c i a l economic re-adjustment. His theory i s f i l l e d with a number of complicated factors which cannot be explained i n terms of such formulary concepts as in t e r n a t i o n a l investment, c a p i t a l accumulation or income. Without analysing the pattern of s o c i a l welfare i n respective countries, he continues, economic growth cannot be discussed and here we have to pay attention to s o c i a l t r a d i t i o n s , i n s t i t u t i o n s , and various characteristics of 'dual economy' and ' p l u r a l i s t i c r a c i a l society* which have been brought about by r a c i a l difference and r a c i a l mixture. I t i s one of the conspicuous i n c l i n a t i o n s of dynamic theory to study the relationship between s o c i a l i n s t i t u t i o n s and economic development, and obviously they have taken the hint from the studies which I have mentioned previously. The pivot of the study ha£ J moved from Europe to the United States, mainly because a f t e r World War I I , the United States has been obliged to grapple with the d i f f i c u l t problem of economic development i n underdeveloped countries. I t has become absolutely necessary to re- examine the significance and meaning of the t r a d i t i o n a l abstract economic concepts. Charles Wolf, J r . , who i s an economist with the Rand Corporation, Santa Monica, - 34 - C a l i f o r n i a , conducted research under a grant from the Ford Foundation on the problem of the s o c i a l system i n underdeveloped countries, while he was at the University of C a l i f o r n i a at Berkeley, j o i n t l y with Chandler Morse of Cornell University. He made public one of the result s of the research project i n the American Economic Review.^9 According to Charles Wolf, J r . , while inadequacies of ex i s t i n g technology and investment invariably characterize underdeveloped economies, these characteristics are perhaps co r r e l a t i v e rather than causal. The inadequacy of technology and c a p i t a l formation may be due less to the shortage of information about techniques or of po t e n t i a l savings, than to the shortage of the 'right* kinds of i n s t i t u t i o n s — ' r i g h t ' implying those kinds of i n s t i t u t i o n s which permit or stimulate, rather than impede, the adop- t i o n of new techniques and the formation of productive c a p i t a l . In other words, i n s t i t u t i o n s , as w e l l as c a p i t a l and technology, are productive. Growth-promoting i n s t i - tutions may so b u i l d up the environment i n which factors of production meet, that the rate at which combinations occur i s accelerated. Charles Wolf, J r . writes, " I n s t i t u t i o n refers to 49 Charles Wolf, J f . , ; " I n s t i t u t i o n s and Economic Develop' ment," American Economic Review, v o l . 45, No. 5, December 1955, pp. 867-883. He i s also a coauthor with Sidney C. S u f r i i i of Capital Formation and Foreign Investment i n Underdeveloped Areas, Syracuse University Press. 1958. • - 35 — organizations and p o l i c i e s , both governmental and private," and i n s t i t u t i o n s may stimulate or impede various behaviours leading to economic-growth by t h e i r effect on " ( i ) the di r e c t c a l c u l a t i o n of costs and benefits; ( i i ) r e l a t i o n - ships between production and d i s t r i b u t i o n (output and income); ( i i i ) the order, p r e d i c t a b i l i t y and p r o b a b i l i t y of economic r e l a t i o n s h i p s ; (iv) knowledge of economic opportunities; and (v) motivations and values," For example, the i n i t i a t i o n s and enforcement of prot e c t i o n i s t commercial p o l i c i e s , such as the imposition of t a r i f f s , foreign exchange taxes, subsidies, or low interest loan, to stimulate investment i s a case of ( i ) ; the mercantile g u i l d or certain types of insurance systems belong to ( i i i ) . By using these f i v e items, Claries Wolf, J r . c l a s s i f i e s f u n c t i o n a l l y the various i n s t i t u t i o n s which have been developed i n underdeveloped countries and stresses the importance of t h e i r roles i n economic growth. Bert F. Hoselitz of the Chicago School goes a step further i n t h i s problem,5° and analyses the r o l e of noneconomic factors i n the economic change which occurs i n an economy as leaves a state of r e l a t i v e l y slow growth of stagnation and s t a r t s a process of rapid growth. He t r i e s to analyse the problem of how to account f o r the explosive change which has so aptly been.called an i n d u s t r i a l 50 Bert F. Hbs e l i t z , "Economic Growth and Development; Noneconomic'Factors in-Economic Development," American Economic Review, v o l . 47, No. 2, May 1957, pp. 28-41. - 36 - revolution. What i s most important to him about the s t r u c t u r a l changes taking place during the explosive change period i s the adoption of previously e x i s t i n g i n s t i t u t i o n s f o r new ends, especially for c a p i t a l formation. Bert F. Hoselitz notices a big difference i n the rate of investment a f t e r the explosive change i n an economy and explains t h i s phenomenon by asking whether or not general 'environmental conditions' have been created to make an increase i n net c a p i t a l formation a t t r a c t i v e and achievable. The 'environmental conditions,' which enable the rapid growth, must be sought c h i e f l y i n noneconomic aspects of the society,, continues Bert F. H o s e l i t z . Apart from the build-up of economic overhead c a p i t a l , such as communications and transport system and investment i n harbour f a c i l i t i e s , some warehouses, and s i m i l a r i n s t a l - l a t i o n s favouring es p e c i a l l y foreign trade, most of the innovations introduced during the preparatory period are based upon changes i n the i n s t i t u t i o n a l arrangements i n the l e g a l , educational, domestic or motivational orders. Once these new i n s t i t u t i o n s have been created, they operate as g i f t s from the past, contributing f r e e l y to the vigorous spurt of economic a c t i v i t y i n the period of explosive growth. To be concrete, the need for c a p i t a l requires the a v a i l a b i l i t y of i n s t i t u t i o n s through which savings can be collected and channeled into projects. - 37 - : Hence a banking system or i t s equivalent, i n the form of a state agency c o l l e c t i n g revenue and spending i t on development projects, i s required. On the other hand, he emphasizes the significance of the a v a i l a b i l i t y of s k i l l e d labour of various kinds and i l l u s t r a t e s the difference of economic growth between Japan which was interested i n Dutch studies, and China which had no tech n i c a l knowledge. He also analyses s o c i a l marginality which i s a c t u a l l y a driv i n g force to the i n s t i t u t i o n a l i z a t i o n of entrepreneurship, and concludes that the role of s o c i a l marginality which might be regarded as s o c i a l deviance i s extremely manifest. From t h i s simple presentation we see that S a l l y H. Frankel's theory of s t r u c t u r a l change i s modernized and made concrete by Bert F. Hoselitz. One of the groups, using the s o c i o l o g i c a l i n s t i t u t i o n a l approach, i s the Mont P e l e r i n Society which has a close r e l a t i o n s h i p to the Chicago School. This society has a d i f i n i t e purpose, to study and develop the philosophy of Fri e d r i c h A. von Hayek who made public his idea of pure individualism by the book e n t i t l e d "The Road to Serfdom."51 i n 1944, when the opinions on the post-war economic system were sharply d i v i d i n g into l i b e r a l economists and planning economists, F r i e d r i c h A. von 5l~Frlearich A. von Hayek, The Road to Serfdom, Chicago, University of Chicago Press, 1944. _ - . - 38 - , _ Hayek published t h i s book, i n which he censures planned economy as t o t a l i t a r i a n i s m , from a purely i n d i v i d u a l i s t i c point of view. Among the members of the Society are the l a t e Walter Eucken of Germany, Ludwig Erhard, Minister of Economics f o r Germany, Henry H a z l i t t of the New York Times, Wilhelm Ropke of Switzerland, Peter T. Bauer of Cambridge Uni v e r s i t y , Milton Friedman of the University of Chicago, S a l l y H. Frankel, F r i t z Machlup, a number of distinguished people from the United States, the United Kingdom, Germany, France, I t a l y , Switzerland, Japan and so f o r t h . Recently, the Mont P e l e r i n Society has shown a deep interest i n economic growth, and p a r t i c u l a r l y Peter T. Bauer i s worth watching. To Peter T. Bauer, what i s called the 'new orthodoxy* represented by Gunnar Myrdal, Ragnar Nurkse, a part of the M. I. T. group and the United Nations group, suffers from many misunderstandings and f a l l a c i e s i n various aspects. The discussions of the 'new orthodoxy' are based on the theme of the vicious c i r c l e of poverty and backwardness, however, although there are certain differences i n ways of expression, these arguments simply repeat the same theme. For instance, according to the "Economics** of Paul A. Samuelson-*2 which i s the most popular text book i n north America: 52 Paul A. Samuelsbn, Economics; An. Introductory Analysis, 2nd e d i t i o n , New York, McGrow-Hill, 1951, p. 49. "Backward nations cannot get their heads above water because their production is so low that they can spare nothing for capital formation by which their standard of l i v i n g could be raised . J 1 Ragnar Nurkse says in his "Problems of Capital Formation in Underdeveloped Countries"^ that: "In discussions of the" problem of economic development, a phrase that crops up frequently is 'the vicious c i r c l e of poverty.' It implies a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty." And the same idea is expressed in Gunnar Myrdal's "An International Economy"^ a s follows: "It i s , iii fact, the richer countries that are" developing while the poorer areas, with the large population, are stagnation or progressing much more slowly. - — For mankind as a whole there has actually been no progress at a l l * As Mr. Hans W. Singer has rightly pointed out," world real income per capita, and with i t the standard of living of the average human being, is probably lower now than twehty-five years ago, and perhaps lower than in 1900, because'the nations that have rapidly raised their economic standards have been a shrinking proportion of the total world population." Furthermore, the arguments follow this theme continuously to cut off this vicious c i r c l e , private investment is insufficient, and inter-governmental donations on a large scale and loans with subsidy by 53 Ragnar Nurkse, Problem's of Capital Formation in Underdeveloped Countries, Oxford, Basil Blackwell. 1953, p. 4. '"" ~ ~' 54- Gunnar Myrdal, An Interhati onal Ecbhomy; Problems and Prospects, New York, Harper, 1956, pp. 1-2; : ' ' 55. Hans W. Singer, "Economic Progress in Underdeveloped Countries," Round Table bri Economic Progress, International Economic Association, Santa Margherita Ligure. - 40 - developed countries are needed. Peter T. Bauer- believes that most of these discussions are fundamentally mistaken.56 According to Peter T. Bauer, these discussions find underdeveloped countries a l l in poverty, however, they usually use the term, underdeveloped countries, to cover the whole of Asia (with the possible exception of Japan), Africa, Latin America (with Argentina sometimes omitted) and parts of Eastern and Southern Europe. Defined in this way, the underdeveloped areas contain about three-quarters of the population.of.the.world.57 These areas are diverse 56 His belief is shown in the following lines. "Over the past two decades there has grown up on both sides of the Atlantic a new orthodoxy of thought regarding the ancient problem of economic development an orthodoxy that is based largely on fallacy. "--r- I do believe that the new orthodoxy has tended to promote some very mislead- ing doctrines and delusions. Specifically, I hold that the doctrine of an unbreakable vicious circle of poverty in the underdeveloped areas is largely a myth. Lastly, I would stress that economic development in a meaningful sense is not jiist an increase in the" volume of goods and services a nation produces. It is an increase in goods and services that people Want and have freely chosen. It is a widening of human options. ' It is not true that the younger nations are caught in a vicious circle of poverty. It is not true that they have stagnated or must stagnate. What is true is that their further advance depends fundamentally on their adoption of measures that w i l l free up rather than constrict exchange, individual effort, the division of labour, and private capital formation, and w i l l give play to what are sometimes slightly referred to as the middle-class of •bourgeois' virtues." Peter T. Bauer, "Economic Growth- and the New Orthodoxy," Fortune, vol. 57, No. 5, May 1958, pp. 142-.198. •  . 57 Peter T. Bauer & Bersil S. Tamey, The Economics of Under-developed Countries, Cambridge, Cambridge University Press, 1957. - 41 - i n many aspects, such as i n density and growth- of popula- t i o n , p o l i t i c a l and s o c i a l i n s t i t u t i o n s , economic growth, and economic qu a l i t y of people. In spite of t h i s d i v e r s i t y , most of the theories bring them up together f o r discussions. This i s completely wrong. The presently developed countries used to be underdeveloped, and they have accomplished prosperity with l i t t l e external c a p i t a l and no donations. Peter T. Bauer c r i t i c i z e s the theory of the vicious c i r c l e by using a number of facts and s t a t i s t i c s . Peter T. Bauer puts s p e c i a l emphasis on the investment i n cash crops at the beginning of c a p i t a l formation. This sort of investment i s very e f f i c i e n t and has played a noticeable role i n the process of economic development i n a good many countries, but i t i s ignored even by the s t a t i s t i c s of the United Nations. And the 0 fact that rubber plants and cocoa trees are e x i s t i n g as cash crops i n Malaya and i n Ghana, denies the premise of the Tnew orthodoxy* that the natives are incapable of establishing long-run economic programmes. There i s no reason to say that manufacturing industry i s the only measure to promote economic development, and the study of economic history does not j u s t i f y the idea that governmental a i d on a large scale s o l e l y makes i n d u s t r i a l i - zation possible. It seems to me that Peter T. Bauer's theory i s brought up from the antagonism to Ragnar Nurkse*s buffer policy which was revealed at the symposium of Kyklos in Apri l 1958,p and his theory is the same as the idea of, Sir Sydney Gaine, who is an authority on Malayan aff a i r s , besides being- Director of the London School of-Eeonomics. Thus, Peter T. Bauer, who strongly objects to the development projects based upon the 'new orthodoxy' theory, inevitably takes up the problem of priority in national schemes in assessing the gains of private enterprise, which is explained by Gunnar Myrdal.59 The 'new orthodoxy' leaves no doubt that the increase in governmental investment by compulsory saving is absolutely necessary to raise national product, however, Peter T. Bauer believes i t is not necessarily important.^ We find several cases of economic development without compulsory saving, and besides, nobody can be sure that forced saving effects capital accumulation or increase in output. Compulsory saving is merely a money shift 58 Ragnar Nurkse, "Trade Fluctuations and Buffer Poliriies of Low Income Countries A Symposium; The Quest for a Stabilization Policy"in Primary Producing Countries," Kyklos, vol. 11,Fascicle 2, April 1958, p. 141. In this symposium, ten economists were in attendance: Peter T. Bauer, Frank W. "Paish, John H. Adler, Sir Sydney Caine, Roy F. Harrod, etc. 59 Gunnar Myrdal, Development and Underdevelopment; A Note on the MechanisnTof National and International Economic Inequality, Cairo, National Bank of Egypt. April 1957, P P. 66-67, 73. 60 Peter T. Bauer & Bersil S. Yamey, The Economics of Under-developed Countries, Cambridge, Cambridge University Press, 1957, PP. 190-208. ; - -43 - • from the private sector to the public sector, and i f we take account of i t s effect on private c a p i t a l formation, we would know compulsory saving makes l i t t l e contribution to c a p i t a l supply. Whatever measures of investment we formulate, the increase i n output i s not simple function of investment and even though an increase i n output i s brought about, i t i s not always a desirable output. In b r i e f , before discussing the problems of compulsory saving, development project or inter-govern- mental loan, Peter T. Bauer thinks, consolidation of organization f o r r a i s i n g r a c i a l c a p i t a l by underdeveloped countries themselves, and removal of r e s t r i c t i o n to the induction of foreign c a p i t a l , should be done. He i s a l i b e r a l i s t who advocates the natural economic development through free a c t i v i t y of private enterprise. In h i s "Economic Analysis and P o l i c y i n Under- developed Countries," Peter T. Bauer says we have to remember the d i s t i n c t i o n s between positive economics, normative economics and the art of p o l i t i c a l economy. Propositions of po s i t i v e economics refer to what i s , those of normative economics to what ought to be, and those of the art of p o l i t i c a l economy to the means f o r obtaining specified r e s u l t s . To him, po s i t i v e economics has primacy i n the sense that the most s i g n i f i c a n t and d i s t i n c t i v e contributions the economist can make to normative economics and to the art of p o l i t i c a l economy stem from the generalizations established by p o s i t i v e economics. At l a s t he declares, "I;.,shall deal almost e n t i r e l y with p o s i t i v e economics."^l He continues, when we understand the r e a l conditions of underdeveloped countries, such economic generalizations as the law of demand, the law of supply, Gresham's Law, the dependence of the d i v i s i o n of labour on the extent of the market, the tendency of individuals to turn to a c t i v i t i e s y i e l d i n g the highest net advantage within the opportunities open 62 to them, become very useful. Peter T. Bauer and M i l t o n Friedman, the members of the Cambridge School of Economics, are frequently confronted with the 'Keynesians* of Harvard University and M.-.I. T. with respect to concrete problems 61 Peter T. Bauer, Economic Analysis'and P o l i c y i n Under- developed Gouhtries, Cambridge, Cambridge University Press, 1957, PP. 6-7. ' 62 Peter T~. Bauer, Economic Analysis and P o l i c y i n Under- developed Countries, Cambridge, Cambridge University Press, 1957, PP. 8-9 . 63 The Cambridge Economic Handbooks, to which both of them j o i n , were organized by J. Maynard Keynes f i r s t l y , and succeeded by S i r Dennis H. Robertson i n 1936 and"by Claude W. Guillebaud i n 1946. In the o r i g i n a l introduction, J . Maynard Keynes wrote, "The writers of these volumes believe themselves"to be"orthodox members of the Cambridge School of Economics. At any rate, most of t h e i r ideas about the subject, and even t h e i r prejudices, are traceable to the contact they have enjoyed with the writings and lectures of the"two economists who have c h i e f l y influenced Cambridge thought f o r the p a s t " f i f t y years, Dr. Marshall and.Professor Pigou." Peter T. Bauer~& B e r s i l S. Yamey, The Economics of Under-developed* Countries, Cambridge, Cambridge Univer- s i t y Press, 1957, p. v. -;. ... ~ 45 - of approaches. The at t i t u d e of the Cambridge School to examine closely various premises about national income, labour force, natural resources, human resources, and the r e l a t i o n s h i p between c a p i t a l and economic growth, i s a f r o n t a l challenge to the 'new orthodoxy' who seem to be t r y i n g to apply a n a l y t i c a l tools without consideration of those premises. Milton Friedman i s the nucleus of the Chicago School and his a c t i v i t y i s now noticeable. He was born i n Brooklyn i n 1912 and during World War I I , he worked f o r the National Bureau of Economic Research as a member of the research s t a f f . At that time, he collaborated with Carl Shoup and Simon S. Kuznets and recently he started the study on Keynes with a new approach. Pr i m a r i l y , the Chicago School has been i n c l i n e d to take a new look at the post-Marshallian economics brought up i n Europe. Milt o n Friedman follows i n the wake of t h i s basic trend. For instance, he admits the usefulness of the u t i l i t y theory which was b u i l t up by Lion Walras and others, however, he makes a searching inquiry into the problem of u t i l i t y measurement and t r i e s to formulate a more r e a l i s t i c system. He c r i t i c i z e s Leon Walras; "His problem i s the problem of form, not of content: of di s p l y i n g an idealized picture of the economic system, not of constructing an engine f o r analysing - 46 - concrete problems."^ Therefore, as f a r as pure theory i s concerned, he i s completely d i f f e r e n t than Joseph A. 65 Schumpeter. y 4. Professor Rostow*s Formulation of Conclusions from the above As I explained at the beginning, the f i n a l determination of the genealogy of various approaches to economic development requires greater time f o r proper perspective. Different opinions, seemingly founded on dif f e r e n t bases at a t r a n s i t i o n a l period, usually become a broad system by improving each other at a synthesizing period. This process has been started i n the f i e l d of dynamic theory by Professor Walt Whitman Rostow. F i r s t of a l l , I should l i k e to i l l u s t r a t e his pos i t i o n with respect to the whole dynamic theory. ° 64 M i l t o n Friedman, "Leon.Walras and His Economic System,** American Economic Review, v o l . 45, No. 5, December 1955, P . wr. •• - ••- - ™"" 65 Joseph A; Schumpeter, History of Economic"Analysis, New "York, 1954, p. 827. He says; "So f a r as pure theory i s -concerned, Walras i s ~ the"greatest of a l l economists." 66 This i l l u s t r a t i o n i s simply designed to show the general positions of a l l the economists I have mentioned previously i n order to trace the main trend of dynamic theory and throw a new l i g h t on Professor Rostow's theory. I t i s neither a complete schematization of the approaches nor a comprehensive survey of the' theories. Since a thought of each economist i s many-sided, a s t r i c t class- f i c f i t i o n of the theories i s very misleading and i t should be c a r e f u l l y avoided. - 47 - DYNAMIC THEORY Economic Dynamic Approach -Harvard Group hS.E.Harris -A.H.Hansen -H.S.Ellis L-G.HaberlerA LM. I. T. Group ~ -C.P.Kihdleberger -P.N.Rbsehstein-Rodan -M.F.Millikan -H.Leibenstein -E.E.Hagen " -W.Maleiibaum -F.M.Bator (-U. N. Group L-H .W. Singer N.S.Buchanan E.Staley R.F.Mikesell •R. Nurkse -A.O.Hirs chman -J.Viner LG. Myrdal M.Dobb V S o c i o l o g i c a l I n s t i t u t i o n a l Approach Chicago School C.WolfJr.- J.H.Boeke- J.S.Furhivall- S.H.Frankel- B.F.Hoselltz- F.Machlup- /Mont P e l e r i n Society f F. A. Hayek-] Cambridge School- P.T.Bauer-1 M.FriedmanJ V Walt Whitman Rostow Professor Walt Whitman Rostow was born i n New York i n 1916. After having made his doctor's degree i n Yale University i n 1940, . - •' .}.• > he began his career as an ins t r u c t o r of economics i n New York. During these twenty years, he has done such works as follows: - 48 - Walt Whitman Rostow (Year) (Career) (Publications) 1938 • ---Investment & the Great Depression-^" 1939 ---Investment & Real Wages; 1 8 7 3 - 1 8 8 6 0 8 1940 Explanations of ', "the Great Depression; l 8 7 3 - l £ 9 6 o 9 Instructor of Economics Columbia University 1941 The Growth & Fluctuation of ' the B r i t i s h Economy; 1 7 9 0 - 1 8 5 0 / u Business Cycles; m Harvests & P o l i t i c s ; 1 7 9 0 - 1 8 5 0 ' 1 1942 Adjustments &"Maladjustments a f t e r the Napoleonic Wars72 1943 1944 1945 Assistant Chief German-Austrian Economic D i v i s i o n , Dep Tt of State 1946 Professor of U.S. History Oxford University 1947 — T h e American Diplomatic Revolution 7 3 Assistant to Economic Secretary Economic Commission for Europe 1948 B r i t i s h Econ.omy of the Nineteenth Century7*«' (d i t t o ) 1949 Professor of U.S. History Cambridge University 1950 — T h e United Nations» Report on F u l l Employment'5 The Terms of Trade , i n Theory & P r a c t i c e ' 0 Professor of Economic History M. 1: T.' - - 1951 The"Historical Analysis of the Terms of T rade77 Some Notes on Mr. Hicks & History7° (dit t o ) S t a f f Member Center for I n t ' l Studies M. I. T. " - - 1952 The Process of Economic Growth 79 ( d i t t o ) < • - -1 3 Dynamics of S viet S o c i e t y 8 0 - 49 - 1953 1 9 5 4 1955 1 9 5 6 1 9 5 7 1 9 5 8 1 9 5 9 I 9 6 0 ( d i t t o ) ( d i t t o ) ( d i t t o ) ( d i t t o ) ( d i t t o ) ( d i t t o ) ( d i t t o ) •The Prospects f o r Communist China •Trends "in-the " A l i o cat ion r <*o of Resources i n Secular Growth 5^ •An American Po l i c y i n Asia°3 •The"Take-off into Self-sustained Growth45^ -A Proposal; Key to an Effective Foreign P o l i c y •Rostow on Growth; A Non^Communist Manifesto t f D 8 1 85 67 Walt Whitman Rostow, "Investment and the Great =~~ Depression," Economic History Review, v o l . 8 , Wo. 2 , May 193-8. 6 8 Walt Whitman Rostow, "Investment and Real Wages; 1 8 7 3 - 1 8 8 6 , " Economic History Review, v o l . 9 , No. 2 , May 1 9 3 9 , P P . 144-159. ~~ -69 Walt Whitman Rostow, "Explanations of the Great Depression; 1873-1896;"An Historian's View of Modern Monetary Theoryy" Economic History, v o l . 4 , No. 15, February 1940, PP. 356-370. " "70 Walt Whitman Rostow, Arther'D. Gayer & Anna J . Schwartz, The Growth and Fluctuation of the B r i t i s h Economy; 1 7 9 0 -1850 ; An H i s t o r i c a l , S t a t i s t i c a l , and Theoretical Study of the B r i t a i n ' s Economic Development, Oxford, The Univer- s i t y Press, 1941. • • -• • = • "71." Walt Whitman Rostow, "Business Cycles, Harvests and p o l i t i c s ; 1 7 9 0 - 1 8 5 0 , " Journal of Economic History, v o l . 1, No. 2 , November 1941, pp. 206-221. 72 Walt Whitman Rostow, "Adjustments and Maladjustments a f t e r the Napoleonic Wars," American Economic Review, v o l . 3 2 , No. 1, Part 2 , March 1942, pp. 13-24. .".73' Walt Whitman Rostow, The American Diplomatic Revolu- t i o n , Ah inaugural lecture delivered before the University of Oxford on November 12, 1946, Oxford, Clarendon Press, 1947. " " 74"Walt Whitman Rostow, B r i t i s h Economy of - the Nineteenth Century; Essays, Oxford, Clarendon Press, 1948. _ - - 50 - Judging from h i s career and publications, we could see that-his dynamic theory i s based upon a broad study of Europe, the United States, the Communist area, and Asia as w e l l as a h i s t o r i c a l perspective. He commenced extensive contribution to dynamic theory by "The Process 75 Walt Whitman Rostow, "The United Nations' Report on F u l l Employment," Economic Journal, v o l . 55, June 1950, P P . 3 2 3 - 3 5 0 . ~ ~ " 76 Walt Whitman Rostow, "The Terms of Trade i n Theory and'Practice," Economic History Review, v o l . 3, No. 1, 1950, pp. 1-20. " - ' 77 Walt Whitman Rostow, "The H i s t o r i c a l Analysis of the.Terms of Trade," Economic History Review, v o l . 4, No. 1, 1951, PP. 73-76. 78 Walt Whitman Rostow, "Some Notes on Mr. Hicks and History," American Economic Review, v o l . 41, No. 3, June 1951, PP. 316-324. • 79 Walt Whitman Rostow, The Process of Economic Growth, New York, Norton, 1952. ..;..80;.w~a.ltWhit;manRostow,; Alfred Levin & others, The Dynamics of Soviet Society, Center f o r 'International studies, M. I. TV, New York, Norton, 1953. 81 Walt Whitman""Rostow, Richard W. Hatch, Frank A. . Kierman, Jr.., Alexander Eckstein & others, The Prospects f o r Communist China, Center for International Studies, M. I. T., Cambridge-New York, Technology Press of M. I. T. & Wiley, 1954. " 82 Walt Whitman Rostow, "Trends i n the A l l o c a t i o n of Resources i n Secular Growth," Economic Progress, ed., L. H. Dupriez, Louvain, I n s t i t u t de Recherches Economiques et Sociales, 1955. " 83 Walt Whitman Rostow & Richard W. Hatch, An American Po l i c y i n Asia, Cambridge-New York, Technology Press of M. I. T. & Wiley", 1955. 84 Walt Whitman Rostow, "The Take-off into S e l f - sustained' Growth," Economic Journal, v o l . 66, March 1956, pp. 25-48. " 85 Walt Whitman Rostow, Max F. M i l l i k a n , Paul N. Rosen- stein-Rodan & others, A Proposal; Key to an E f f e c t i v e Foreign P o l i c y , Center f o r International Studies, M. I. T., New York, Harper, 1957. "86"Walt Whitman Rostow, "Rostow on Growth; A Non- Communist Manifesto," Lectures delivered at the University of Cambridge, Economist, August 15, 1959, pp. 409-416. Economist, August 22, 1959, pp. 524-531. of Economic Growth" i n which he suggested that variations i n the behaviour of people relevant to economic development can be summed up i n a number of propensities propensities to seek material gain, to propagate and rear children, to s t r i v e f o r material advance, to pursue pure science, to apply science to the material world, and he divided the growth process into the accomplishment of certain preconditions the achievement of the appropriate combi- nations of those propensities, and the process of develop- ment i t s e l f , which follows when the preconditions have been met. His second di r e c t contribution i s "Trends i n the a l l o c a t i o n of Resources i n Secular Growth" which emphasizes s t r a t e g i c sectors of economic development i n which concentrated investment and other inputs lead to rapid growth. He makes a d i s t i n c t i o n between primary growth, stimulated by increase i n demand p a r t l y and by innovations mostly, and the p a r a l l e l growth of supple- mentary growth sectors, needed to supply the intermediate products and factor inputs f o r the primary sector. The increase i n income produced by these sectors s p i l l s over into derived growth sectors, selected by the dictates of income e l a s t i c i t y . Those two works are regarded as his preparatory stage. He has become one of the most stimulating economists since World War I I , because of the following works. "The - 52 - Take-off into Self-sustained Growth" i s an epoch-making a r t i c l e i n the f i e l d of dynamic theory. Not only by his induction of the theory of take-off from wide p r a c t i c a l f a c t s , but also by taking account of s o c i a l structure and i n s t i t u t i o n a l organization as w e l l as economic factors, the new movement to f i l l up the gap between economic dynamic approach and s o c i o l o g i c a l i n s t i t u t i o n a l approach has been brought out. On the one hand, he gives the fundamental idea to Bert F. Hoselitz who modernizes and makes concrete the theory of s t r u c t u r a l change of S a l l y H. Frankel by applying his theory. 8? On the other hand, i t i s developed i n his next work with Max. F. M i l l i k a n "A Proposal; Key to an Effe c t i v e Foreign P o l i c y " which recommends the reconsideration of the essential intention of foreign a i d , usually based upon the simple hope of preventing communization by g r a t i f y i n g the hunger of the poor masses of underdeveloped countries. His take-off theory, which he made public i n 1956, was f i r s t l y adopted by both approaches, the M. I. T. group of the economic dynamic approach and the Chicago School of the s o c i o l o g i c a l i n s t i t u t i o n a l approach, and hence he was situated i n the middle of the two approaches. His position was passive at t h i s stage. However, during 87 Bert F. H o s e l i t z , "Economic Growth and Development; Nohecbnomic Factors i n Economic Development," American Economic Review, v o l . 47 , No. 2 , May 1957. - 53 - the f a l l of 1958, a f t e r one year s i l e n c e , he made the most s t r i k i n g lectures, "An Economic Historian's Way of Envisaging the Sweep of Modern History," at Cambridge University, which were summarized i n 'The Economist' under the t i t l e of "Rostow on Growth; A Non-Communist Manifesto." The c r i t i c i s m of Peter T. Bauer to the 'new orthodoxy' or those text-book-litoe-works by Charles P. Kindleberger,^ Geral M, Meier and Robert E. Baldwin,^ 9 and Benjamin H. H i g g i n s 9 0 could be regarded as the attempts to synthesize the d i f f e r e n t approaches to dynamic theory, but t h e i r arguments are either very narrow and r e s t r i c t e d or simply c o l l e c t i v e . As I w i l l discuss i n d e t a i l a f t e r - wards, Walt Whitman Rostow has recently made a synthetic dynamic theory based upon actual facts by using the economic dynamic technique under the consideration of s o c i o l o g i c a l i n s t i t u t i o n a l i s m . His attitude i s no longer passive but active. In "A Non-Communist Manifesto," we f i n d the char a c t e r i s t i c s of Charles Wolf, J r . , S a l l y H. Frankel, Bert F. Ho s e l i t z , Peter T. Bauer, as we l l as Ragnar Nurkse, Eugene Staley, and the M. I . T. group. In a sence, he 88 Charles P. Kindleberger, Economic Development, New York, McGraw-Hill,"1958. 89 Gerald~M. Meier & Robert E."Baldwin, Economic Develop- ment; Theory. History, P o l i c y , New York, Wiley, 1957. 90 Benjamin,H.Higgins, Economic Development; P r i n c i p l e s , Problems and P o l i c i e s , New York, Norton, 1959. ; - 54 - sets down many f a m i l i a r truths i n a new and int e r e s t i n g formulation, however, as 'The Economist' says, his broad understanding of e x i s t i n g theories and his o v e r a l l research of p r a c t i c a l facts make me believe that h i s dynamic theory represents one of the most stimulating contributions made to economic and p o l i t i c a l thought since World War I I . CHAPTER I I I . THE THEORETICAL BASIS OF PROFESSOR ROSTOWS INTERPRETATION 1 . The Basic Theory 2. The Process of Development 3. I l l u s t r a t i o n s from Various Countries "We must not picture to ourselves an unreal world as i t might, or ought to be, and make schemes f o r i t . That way l i e s s o c i a l madness, leading to a f a i l u r e of hot aspirations and thence to cold reaction. Our f i r s t duty as economists i s to make a reasoned catalogue of the world as i t i s . " Alfred Marshall - 56 - I I I . The Theoretical Basis of Professor Rostow's Inter- pretation We have noticed that economic development i s to some extent dependent upon the p o l i t i c a l , s o c i a l and c u l t u r a l framework of s o c i e t i e s , however, no e f f o r t has been successful i n l i n k i n g such non-economic variables to the structure of modern economics. The pursuit of the problems of c a p i t a l accumulation, balance of payments, technological development, population, land, colonialism, and p o l i t i c a l a f f a i r s respectively i n di f f e r e n t countries has a meaning i n i t s e l f , but now the time has come to integrate them and b u i l d up a synthetic dynamic theory of economic growth on a global basis. The f i r s t dynamic attempt i s being made by Professor Walt Whitman Rostow. 1. The Basic Theory The s o c i a l s c i e n t i s t cannot afford to lag i n hi s s c i e n t i f i c formulations too f a r behind the events and problems ©f the active world, because i n t e l l i g e n t democratic action i s related to the degree to which problems are understood and the public i s informed, and i t i s i n t h i s underlying function of perception and education, that the s o c i a l s c i e n t i s t most importantly serves society,^ Because Professor Rostow believes i n I Walt Whitman Rostow, The Process of Economic Growth, Oxford, Clarendon Press, 1953 , p. 260. - 57 - • t h i s idea, actual h i s t o r i c a l facts and economic a n a l y t i c a l techniques are aptly combined i n his dynamics. To Professor Rostow, as an economic h i s t o r i a n , i t i s absolutely necessary to avoid making a disembodied response to an abstract set of Hegelian ideas, and, as an economic t h e o r i s t , he could not be s a t i s f i e d with economics i n the conventional market sense. Actual events should be emphasized and over - s i m p l i f i c a t i o n must be avoided. In the process of economic development, he sees a set of stages of growth f i v e economic categories i n one of which a l l s o c i e t i e s in,the world can be placed. "They are a matter of f a c t u a l h i s tory seen i n the l i g h t of 2 economics," t h i s shows his basic a t t i t u d e . A long period:Establishing the pre-conditions f o r take-off; I The t r a d i t i o n a l society- Stagnation I I The t r a n s i t i o n a l society Consolidation A few decades:The c r u c i a l process; . . . . I I I The society i n take-off A long period:Making growth normal and automatic; IV The maturing society Adolescence V The mass consuming society Consummation Roughly speaking, the economic development of a n y country can.be divided into three periods: a long 2" Walt Whitman;Rostow, "Rostow on Growth;"A Kon-Commun- i s t Manifesto," Economist, August 15, 1959, p. 409. - 58 - - period of a century or more during which the pre-conditions f o r take-off are established; a few decades into which the take-off i s compressed; and a long period when economic growth becomes normal and automatic through the f l u c t u a t i n g years of sustained economic progress. More precisely, the f i r s t and the l a s t periods consist of two stages each, therefore there are f i v e stages: the t r a d i t i o n a l s o c i e t i e s i n which the i n a c c e s s i b i l i t y of modern science puts a c e i l i n g on productivity; the t r a n s i t i o n a l s o c i e t i e s which are created once a country i s r i c h enough to devote more than about f i v e or ten per cent of i t s national income to investment and once a new leading & l i t e has emerged which has the urge.and scope to begin b u i l d i n g a modern i n d u s t r i a l society; the societies i n take-off which s t a r t to transform themselves so that economic growth becomes more or less automatic; the maturing s o c i e t i e s i n which, dangerously enough, the imperatives of d i f f u s i n g the new technology lose t h e i r obsessive control over people's minds; and the mass consuming so c i e t i e s which are i n some dilemma between three options, high mass consumption, welfare state, or external expansion. Professor Rostow's theory i s based upon three kinds of sector. F i r s t , primary growth sectors associated with p a r t i c u l a r l y favourable opportunities f o r inno- - 59 - . ~ vation and resource discovery. Second, supplementary growth sectors which expand as a response to, or require- ment of, advance i n the primary sectors. Third, derived growth sectors where advance responds to growth of national income, population, output and so f o r t h . 3 The main feature of his dynamics i s the theory of take-off which i s defined as follows:* 4" "The i n t e r v a l during which the rate o f Investment increases i n such a way that r e a l output per capita r i s e s and t h i s i n i t i a l Increase carries with i t r a d i c a l changes i n production techniques and the disposition" of income flows which perpetuate the new scale of investment and perpetuate thereby the r i s i n g trend i n per capita output." In' t h i s s theory we f i n d the basic ch a r a c t e r i s t i c s of his e a r l i e r work, "The Process of Economic Growth," i n which he analyses economic development by using s i x propensities: the propensities to develop fundamental science, to apply science to economic ends, to accept innovations, to seek material advance, to consume, and to have children,^ and divides the growth process into two parts, namely, the accomplishment of certain pre- conditions and the development process i t s e l f . But the Professor Rostow of seven years ago and his present thought.are d i f f e r e n t . As a matter.of f a c t , he has , . 3 Benjamin H., Higgins , Economic Development;' P r i n c i p l e s , Problems"and P o l i c i e s , New York, Norton, 1959, p. 237. 4 Walt. W h i t m a n Rostow., "The Take-off "into Self-sustained Growth, ""Economic J our r i a l , . v o l . . 66, March .1956,. p. 2 5 . : . 5" Walt Whitman Rostow, The Process of Economic Growth, Oxford, Clarendon Press, 1953, p. 11. - 60 - developed h i s o r i g i n a l theory to the utmost extent i n order to make answers to the following questions. 4 How, and under what impulses, do t r a d i t i o n a l , a g r i c u l - t u r a l s o c i e t i e s begin moving towards modernization? 4 When and how does regular growth come to be a b u i l t - i n feature of each society? 4 What forces drive t h i s growth along and determine i t s contours? 4 How should the t r a d i t i o n a l society react to the i n t r u s i o n of a more advanced power? With cohesion, promptness and vigour? By making a v i r t u e of fecklessness? By slowly and r e l u c t a n t l y a l t e r i n g i t s t r a d i t i o n a l c h a r a c t e r i s t i c s ? 4 When independent modern nationhood i s achieved, how should the national energies be used? In external agression, to r i g h t old wrongs or to exploit new p o s s i b i l i t i e s f or enlarged national power? In completing the p o l i t i c a l v i c t o r y of the new national government over regional interests? In modernizing the economy? 4 Once the take-off i s successfully achieved and growth i s under way, how f a r should the aim of d i f f u s i n g technology and maximizing the rate of growth be modified by the - 6 1 - desire to increase consumption per head and welfare? ft What r e l a t i o n does the r e l a t i v e sequence of growth bear to outbreaks of war? ft When technological maturity i s reached, and the nation has at i t s command a modernized i n d u s t r i a l machine, to what ends should i t be put, and i n what proportion? To increase s o c i a l security, through the welfare state? To expand mass consumption into the range of durable consumer goods and of services? To gain stature and power on the world scene by m i l i t a r y adventure? To increase leisure? ft Where i s compound interest taking us? To communism? To the affluent suburbs? To destruction? To the moon?° Benjamin H. Higgins writes that Professor Rostow's conception of the stages of growth does corres- pond roughly to the data and general information about economic development of various countries, however d i f f i c u l t the dating of these stages may be. 7 In replying to t h i s , 6 Walt Whitman Rostow, "Rostow on Growth;"A Non-Commun- i s t Manifest o , n"Economist, August 15, 1959, P» '409. 7. .Benjamin H..Higgins, Economic Development; P r i n c i p l e s , Problems and P o l i c i e s , New York, Norton, 1959, p. 237. - 62 - Professor Rostow says, i n surveying the broad contours of each stage of growth, we are examining not merely the secto r a l structure of economies transforming themselves, but a succession of str a t e g i c choices made by whole societies.® With respect to t h i s point, W. Arthur Lewis gives us a superb paragraph 9-in his "Theory of Economic Growth." "Every"economist goes through a phase where he i s d i s s a t i s f i e d with the deductive basis of economic theory, and feels sure that a much better insight into economic process could"be obtained by studying the facts of his t o r y . The i n s t i n c t i s sound; yet the enthusiasms of t h i s phase seldom survive any serious attempt to get to grips with the facts of"history. This i s because there are very few facts i n the relevant senses. We mean by t h i s , i n the f i r s t instance, t h a t " i t " i s only"for a few countries and f o r very recent periods that any adequate quantity of h i s t o r i c a l records e x i s t s ; and even when there are "plenty of records we can- not "always be certain exactly what happened. We mean also, more s i g n i f i c a n t l y , that the facts which would interest the theorist are hot what happened but why'it happened; and while history may record what happened, i t i s seldom able to record why i t happened." 2. The Process of Development No two of the countries are a l i k e , and the problems of economic development are shaped i n each by i t s resources, i t s c u l t u r e , . i t s h i s t o r y , and i t s p o l i t i c a l 8 Walt Whitman Rostow, "Rostow on Growth; A Non-Commun- i s t Manifesto," Economist,.August.15, 1959,;pp. 409-410. 9 W. Arthur Lewis, The Theory of Economic Growth, London, A l l e n and Unwin, 1955, p. 15. . - 63 - r - i n s t i t u t i o n s . Nevertheless, we have a general recognition that there are common elements in- the growth patterns of various countries. Professor Rostow formulates the process of economic growth into f i v e stages which are "a matter of fa c t u a l h i s t o r y seen i n the l i g h t of economics." ( i ) The Tr a d i t i o n a l Society The t r a d i t i o n a l society i s characterized by the existence of a c e i l i n g on productivity. I t contains an economy mainly a g r i c u l t u r a l , using more or less unchanging production methods, saving and investing productively l i t t l e more than i s required to meet depreciation. Food production absorbs more than seventy-five per cent of the working force, s o c i a l hierarchy i s r i g i d , s o c i a l values are l i m i t e d , r e l i g i o u s feasts and ceremonies, monuments and wars constitute the greater part of consumption, family and clan connections play a large r o l e , and p o l i t i c a l power i s extremely regional. Professor Rostow says as under: 1 0 " I m p l i c i t i n these ch a r a c t e r i s t i c s i s the need for a many-sided transformation before growth can be established and lead on to maturity. A predominantly a g r i c u l t u r a l society must be transformed into one predominantly occupied i n industry, communications, trade and"services. Man must come to regard his physical environment hot as v i r t u a l l y a factor given by nature and providence, but as an ordered world that can be manipulated i n ways which y i e l d productive change." 10 Walt Whitman Rostow, "Rostow oh Growth; A Non-Commu- n i s t Manifesto," Economist, August 15, 1959, p. 410. -64 To be concrete, a society must orient i t s commerce and thought to the nation, the propensity to have children must decline, income above munimum le v e l s of consumption must be spent on transportation, education and industry, and people must come to be valued f or t h e i r i n d i v i d u a l a b i l i t y to perform increasingly s p e c i a l - ized functions. What i s important i s that some of them must be w e l l advanced before growth can set i n at a l l . We cannot expect any simultaneity or sequence i n these changes. ( i i ) The Trans i t i o n a l Society The t r a n s i t i o n a l society i s the process of establishing pre-conditions f o r take-off. In most general case the achievement of pre-conditions requires major change i n p o l i t i c a l and s o c i a l structure and i n c u l t u r a l values, which are the matter of the propensities. In another case the pre-conditions are i n i t i a t e d by a narrowly economic process, that i s , by the high l e v e l s of welfare which can be achieved by exp l o i t i n g land and natural resources. This i s a matter of the y i e l d s . The formula of growth to become self-sustained can be explained economically by using the rate of invest- ment and the stock of c a p i t a l per capita. According to Professor Rostow, the economic difference between a t r a d i t i o n a l and a modern society i s a question of whether - 65 - i t s rate of investment i s low r e l a t i v e to i t s rate of population growth or not. Under f i v e per cent of national income i s low and over ten per cent i s high. In order to r a i s e the rate of investment, the manipulation of modern technology, the introduction of inventions productively i n t o the c a p i t a l stock, the preparation f o r lending money on long term to back the innovating entrepreneur- ship, and the opportunity to educate the people to operate an economic system, are needed. "Capital formation i s not merely a matter of maximi- zing p r o f i t ; i t i s a matter of a society's e f f e c t i v e attitudes towards science, applied science, and r i s k - t a k i n g as w e l l as the adaptability of the working force. Of s p e c i a l importance here are the problem of increased productivity i n agriculture and the extractive in d u s t r i e s , and the problem of s o c i a l overhead c a p i t a l . " H We must watch the facts that agriculture and the extractive industries make up accessible natural resources. The increase i n productivity needs a great amount of working c a p i t a l which must be financed by increasing output, loans, c a p i t a l imports, and the unexploited back- log of innovations. Agriculture must supply more goods to meet the r i s e i n population, more markets f o r the future leading i n d u s t r i a l sectors, more sources of taxation from which the government functions are financed, and more loanable funds to the modern sectors. _Social overhead 11 Walt Whitman Rostw; "Rostow on Growth; A Non-Commu- n i s t Manifesto," Economist, August 15, 1959, p. 410. - - 66 - -; c a p i t a l , which takes a long time to be brought up, and y i e l d s the o v e r a l l returns to the community as a whole although i t i s lumpy, must occupy a very high percentage of t o t a l investment. In the non-economic side of the pre-conditions, a new leading € l i t e who supersede the old land owners and b u i l d an i n d u s t r i a l society, xenophobic nationalism which i s the strongest motive force to be modernized, a demon- s t r a t i o n effect which has two sides i n the c o l o n i a l world the positive type demonstrates the r e a l e f f e c t i v e power of an a b i l i t y to wield modern technology; the negative type creates an accumulating resentment against more i n d u s t r i a l i z e d foreigners, and the movements of the s o l d i e r s , the p o l i t i c i a n s , the merchants and the i n t e l l e c t - u a l s , talce the major role s . "The soldiers bring much more to the job than resentment of foreign domination or dreams of future national glory i n b a t t l e , " the p o l i t i c i a n s drive home the triumph of the centre over the regions, the merchants f i n d i n modernization the prospect, and the i n t e l l e c t u a l s bring about s o c i a l , p o l i t i c a l and l e g a l reform because they see i n modernization ways of increas- ing the dignity and value of human l i f e f o r individuals and f o r the nation as a whole. F i n a l l y we must say that, i n the period of pre- conditions, the most important thing i s the establishment of an e f f e c t i v e modern government which i s capable of organizing the nation so that u n i f i e d commercial markets develop. A tax and f i s c a l system to divert resources i n t o modern uses must be created, the stock of s o c i a l c a p i t a l must be assured, and the r a d i c a l changes i n productivity i n agriculture and extractive industries must be brought about. ( i i i ) The Society i n Take-off During the stage of take-off, the country makes the complex t r a n s i t i o n to a position where sustained economic growth becomes possible. In his o r i g i n a l publication about the theory of take-off, Professor Rostow defines the take-off as requiring a l l three of the following conditions: x "(a) A r i s e i n the rate of productive investment from (say) f i v e par cent or less to over ten per cent of national income; (b) The development of one or more substantial manufacturing sectors, with a high rate of growth; (c) The existence or quick emergence of a p o l i t i c a l , s o c i a l and i n s t i t u t i o n a l framework which exploits the impulses to expansion i n the modern sector and the p o t e n t i a l external economy effects of the take-off and gives to growth an on-going character." The r i s e s i n rate and productivity of investment, and self-reinforcement of the developing process are r e a l i z e d by many d i f f e r e n t human motivations which are 12 Walt Whitman Rostow, "The Tafce-orr into Self-sustained Growth," Economic Journal, v o l . 6 6 , March 1956, p. 3 2 . - 68 - technological, economic, p o l i t i c a l , s o c i a l and c u l t u r a l . The e s s e n t i a l problem i s the fact that the p r i o r develop- ment of the society and i t s economy re s u l t i n a p o s i t i v e , sustained and s e l f - r e i n f o r c i n g response to i t . The r e s u l t i s not a once-over change i n the production function or i n the volume of investment, but a higher proportion of p o t e n t i a l innovations accepted i n a regular flow, and a higher rate of investment. ... W. Arthur Lewis describes t h i s s i t u a t i o n as f o l l o w s : 1 3 . "The central problem i n the theory of economic development i s to understand the process by which a community which was previously saving and invest- ing four or f i v e per cent of i t s national income or l e s s , converts i t s e l f into an economy where volun- tary saving i s running at about twelve to f i f t e e n per cent of national income or more. This i s the central problem because the central fact of economic development i s rapid c a p i t a l accumulation (including knowledge and s k i l l s with c a p i t a l ) . We cannot explain any i n d u s t r i a l revolution (as the economic historians pretend to do) u n t i l we can explain why saving increased r e l a t i v e l y to national income." No matter how important i t i s to analyse the take-off i n terms of national income, the proportion of output invested, and an aggregate marginal capital-output r a t i o , we must consider what ac t u a l l y happens and the causal processes at work i n a take-off. There i s no single.pattern. S t i l l as "a matter of f a c t u a l h i s t o r y 13 W. Arthur Lewis, "Economic Development"with Unlimited Supplies of Labour," Manchester School of Economic and S o c i a l "Studies, May 1954. - 69 - seen i n the l i g h t of economics," we can point out several aspects. The loanable funds required to finance the take-off come from two types of sources: from s h i f t s i n the control over income flow, including income-distribution changes and c a p i t a l imports, and from the plough-back of p r o f i t s i n r a p i d l y expanding sectors. One of the oldest and most fundamental notions i n economics i s the notion of economic development occurring as the r e s u l t of income s h i f t s from those who w i l l spend, hoard or lend less productively to those who w i l l spend or lend more product- i v e l y . As a matter of f a c t , the supply of finance during the take-off period has three p o i n t s : 1 ^ f i r s t , as a pre- condition, i t i s necessary that the community's surplus above the mass-consumption l e v e l does not flow into the hands of those who w i l l s t e r i l i s e i t by hoarding, luxury consumption or low-productivity investment outlays; second, as a pre-condition, i t i s necessary that i n s t i t u - t ions are developed which provide cheap and adequate working c a p i t a l ; and t h i r d , as a necessary condition, i t appears that more than one sector: of the economy must grow r a p i d l y , and that the entrepreneurs i n such sectors plough-back a substantial.proportion o f . t h e i r p r o f i t s i n 14 Walt Whitrnan Rgstow, "The Take-off into Self-sustained Growth," Economic Journal, v o l . 6 6 , March 1 9 5 6 , p. 4 1 . - 70 - further productive investment. The existence and successful a c t i v i t y of entre- preneurs are required f o r take-off, with s i g n i f i c a n t power over aggregate income flows and i n d u s t r i a l invest- ment decisions. The propensity to accept innovations depends more or less on entrepreneurship. Undoubtedly, most take-offs are preceded or accompanied by r a d i c a l change i n a g r i c u l t u r a l techniques and market organization. A requirement f o r take-off i s a class of farmers w i l l i n g and able to respond to the p o s s i b i l i t i e s opened up f o r them by new techniques, land-holding arrangements, transport f a c i l i t i e s , and forms of market and credit organization. Land reform creates two impulses to take-off. One i s the use of the flow of payments not from landlords but from peasants f o r a c t i v i t y which encourages economic development, and another i s the use of the investment of the more enterprising landlords f o r commerce and industry. In any case, the feudal landlords suffer a certain con- f i s c a t i o n e f f e c t . Capital formation i s aided by price i n f l a t i o n , which s h i f t s resources from consumption to p r o f i t s , Banks and c a p i t a l markets help t h i s s h i f t too. The existence of more than one growing sector, from which entrepreneurs plough-back a very high proportion - 71 - of p r o f i t s into new capacity i s another necessary- condition. With respect to t h i s problem, the demand side of the investment process must be taken into account because i t may be the decisive element i n the take-off, rather than the supply of loanable funds. Substantial improvements i n the machinery of c a p i t a l supply cannot i n i t i a t e a take-off. Foreign trade i s an extremely important source of plough-back p r o f i t s . From the natural resources, developing economies create major export industries, and the expanding y i e l d of these industries finances the import of c a p i t a l equipment. Of course, c a p i t a l formation i s not guaranteed by the development of export sectors. The key r o l e i n the take-off process i s played by the various sectors which Professor Rostow divides into three parts. 1-* "(a) Primary growth;sectors, where p o s s i b i l i t i e s f or innovation or f o r the e x p l o i t a t i o n of newly p r o f i t a b l e or hitherto unexplored resources y i e l d a high growth rate and set i n motion. (b) Supplementary growth sectors, where rapid advance occurs i n direct response to of as a requirement of—-advance i n the primary growth sectors; e. g., coal, iron "and engineering i n r e l a t i o n to r a i l r o a d s . These sectors may have to be tracked many stages back into"the economy. (c) Derived growth sectors, where advance occurs i n some f a i r l y steady r e l a t i o n to thegrowth of t o t a l r e a l income, population, i n d u s t r i a l production or some other o v e r a l l , modestly increasing parameter. Food output i n r e l a t i o n 15 Walt Whitman Rostow, "The Take-off into Self-sustained Growth," Economic Journal, v o l . 66 , March 1956, p. 4 3 . - 7 2 - to population, housing i n r e l a t i o n to" family formation are c l a s s i c derived r e l a t i o n s of t h i s order." Changes i n "Supply are a matter of primary and supplementary growth sectors and changes i n demand are linked to derived growth sectors. I t i s evident that primary growth sectors always play the main part i n the process of economic development. The establishment of cotton t e x t i l e i n d u s t r i e s , the introduction of railways, and the modernization of armed forces can constitute the leading sectors. Sometimes, raw material industries and foodstuff industries play the r o l e of leading sectors. "History i s f u l l of v a r i e t y , " and "there i s no one pattern or sequence f o r the take-off." ( i v ) The Maturing Society The take-off requires a massive set of pre- conditions going to the heart of a society's economic organization and i t s e f f e c t i v e scale of values. The rapid growth of more than one new manufacturing sectors i s a powerful and e s s e n t i a l engine of economic develop- ment. For the take-off to be successful, i t must lead on progressively to sustained growth which implies further deep and slow-moving changes i n the economy and the society as a whole. Although the maturing society i s greatly influenced by the nature of the take-off, we can discover - 73 - several c h a r a c t e r i s t i c s of i t s long, f l u c t u a t i n g story of sustained economic progress. As the economy matures, o v e r a l l c a p i t a l per capita increases, the i n i t i a l key industries decelerate as diminishing returns operate, the pioneering entre- preneurs give way to less single-minded i n d u s t r i a l leaders, the average growth rate i s maintained by a succession of new growing sectors, the proportion of population i n r u r a l pursuits declines, and the i n t e r - national aspects become more important. Here we must be careful not to confuse being technologically mature with being r i c h . In t h i s maturing society, some proportion of the national income i s s t e a d i l y ploughed back into expanding productive capacity and as technique improves the structure of the economy changes continuously. I t means the economy may face d i f f i c u l t balance of pay- ments problems and makes i t s terms with the requirements of e f f i c i e n t production. With the lapse of time, the demand for foreign c a p i t a l slackens and domestic savings become abundant. 1 0 Professor Rostow emphasizes the importance of non-economic aspects of. the maturing s o c i e t y . T h e new 16 Walt Whitman Rostow, Max F. M i l l i k a n , . P a u l N.Rdsen- stein-Rodan & others, A Proposal; gey to an E f f e c t i v e Foreign PolicyV Center f o r International Studies, M. I. T., New York, Harper, 1 9 5 7 , p. 4 8 . 17 Walt Whitman.Rostow, "Rostow on Growth; A'Non-Commu- n i s t Manifesto," Economist, August 1 5 , 1 9 5 9 , p. 4 1 4 . - 74 - t • modern elements are i n f u l l and confident power, with t h e i r opponents i n retreat of disarray. Generally, the power of those who control c a p i t a l and technology i s not strongly opposed. But, the s i t u a t i o n i s neither s t a t i c nor decisive. Because of three reasons: f i r s t l y , a change i n the working force comes. The highly trained techni- cians and professionals perceive that they can achieve higher r e a l wages and greater security although t h e i r r e a l wages are l i k e l y to be r i s i n g . Therefore, the maturing process generates the kind of s o c i a l pressures which enforce humane modifications to the process of economic development. Secondly, a change i n the character of the leadership appears. I t i s the changing process from primitivism to the e f f i c i e n t manager of a highly bureaucratized and d i f f e r e n t i a t e d machine. Thirdly, a change i n the idea which believes i n the merits of i n d u s t r i a l i z a t i o n i n e v i t a b l y comes out. People get t i r e d of the miracle of the efficiency-almighty society. "These changes i n the structure, ambitions and outlook of the society lead up to a set of searching choices concerned with future objectives. — - Maturity, l i k e middle age, i s a time of dangerous as w e l l as promising choices."1° (v) The Mass Consuming Society "History i s f u l l of va r i e t y , " and " c i v i l i z a t i o n ' s 18 wait Whitman.Rostow,... "Rostow oh Growth; A Non-Commu- n i s t Manifesto," Economist, August 15, 1959, pp. 414-415. progress as a consequence of response to some challenge" w i l l not be stopped, however, when the values of the market place and the imperatives of d i f f u s i n g the new technology lose t h e i r monopolistic control over people's minds, "what happens next?" Geography, resources, values and the p o l i t i c a l leadership may determine the pattern of high maturity. According to Professor Rostow, the society has four broad objectives which decide the s o c i a l balance. F i r s t , the national pursuit of external power and influence; second, the welfare state i n which the a l l e v i a t i o n of the business cycle, the increase of s o c i a l s e c u r i t y , the r e d i s t r i b u t i o n of income, and mitigation of harshness are given a higher p r i o r i t y ; t h i r d , the expansion of mass consumption levels from basic food, shelter and clothing to durable consumer goods and services and fourth, the increase i n l e i s u r e . The high consumption comes by no means to an end, but the balance among these four objectives varies over time and between d i f f e r e n t s o c i e t i e s . "There i s bound to be v a r i e t y i n the patterns of consumption that w i l l emerge as compound interest grinds on and as the income e l a s t i c i t i e s of demand, i n t h e i r widest sense, reveal themselves.in d i f f e r e n t . s o c i e t i e s . n l 9 19 Walt"Whitman .Rostow,.. "Rostow on Groxvth; A Non-Commu- n i s t Manifesto," Economist, August 15, 1959, p. 416. When the people lose t h e i r interest i n gaining food, shelter and clothing which have taken up the. l i f e of most human beings since the beginning of time, "what happens next" besides the arms race and the threat of war? Some believe that poverty and c i v i l s t r i f e are a necessary condition f o r a l i v e l y human existence. The great majority hope f o r better solutions. In the end, i t i s the problem of a sense of the community of human destiny. "One thought ever at the fore That i i i the Divine Ship, the World, breasting Time and Space, A l l peoples of the globe together s a i l , s a i l , the same voyage, Are bound to the same destination." 3. I l l u s t r a t i o n s from Various Countries The s c i e n t i f i c formulation should be based upon the events and problems of the active world. Professor Rostow's dynamics of economic development i s a matter of fa c t u a l h i s t o r y seen i n the l i g h t of economics. I would l i k e to i l l u s t r a t e the economic growth of th i r t y - n i n e countries through-out the world with s p e c i a l emphasis on what Professor Rostow has used to formulate his theory. These i l l u s t r a t i o n s do not intend to cover the whole h i s t o r y of economic development. 20 Walt Whitman Rostow, Max.F. M i l l i k a n , Paul N. Rosen- stein-Rodan & others, A Proposal; Key to an Effe c t i v e Foreign P o l i c y , Center f o r International Studies, M. I. T. New York, Harper, 1957, p. 151. Selection of Countries ft North America ft South America- ft Western Europe- ft A f r i c a Canada United States Mexico (Puerto Rico) (Panama) (Venezuela) (Colombia) ( B r a z i l ) Argentina (Chile) • Sweden Denmark Germany Belgium United Kingdom (Ireland) France (Switzerland) (Ethiopia) (Kenya) (Belgian Congo) (Nigeria) (Southern Rhodesia) ft Eastern Europe ft Middle East -C Union of Soviet S o c i a l i s t Republics Turkey (Israel) ft Asia • Japan China (Hong Kong) (Indo-China) (Philippines) (Indonesia) (Thailand) (Burma) India (Ceylon) (Pakistan) 1— (Afghanistan) ft Oceania -C A u s t r a l i a - 7 8 - ( i ) North America A Canada B United States C Mexico - 79 - Canada Capital imports s t a r t to represent an important increment to domestic c a p i t a l sources /Substantial economic progress / before a. t r u l y s e l f - r e i n f o r c i n g / growth process / To r a i s e the rate of productive investment, the s i g n i f i c a n t p o l i t i c a l & s o c i a l r e s t r a i n t s must be reduced ^Due to the abnormally large ihvest- ' ment i n railways for a nation of t h i s population, & to r e l a t i v e l y heavy foreign investment, the gross investment proportion i s extremely higher than appears to mark other period /Substantial railway building f a i l s f to i n i t i a t e a take-off because of / the absence of the general pre- conditions /The take-off i s i n i t i a t e d by a / narrow economic process because of / the r i c h land & natural resources by which high l e v e l s of welfare can" be achieved A sharp r e l a t i v e r i s e i n export prices & large new c a p i t a l imports create a newly favourable i n t e r - national environment -—-"18,000 miles of railway l i n e $1 b i l l i o n net balance of foreign indebtedness The take-off i s aided by the world r i s e i n grain prices. This r i s e off makes a t t r a c t i v e the laying of vast railway networks. - SO— •19'10- <-•- |-Take-off ! t r i World War ; -1920-4 — k Export of' grain i s " a source of ploughed-back "prof i t s Foreign c a p i t a l flows are important as lumpy overhead c a p i t a l "construction, of long gestation period, i s required The development of railroads serves to enlarge the export sector which generates c a p i t a l f o r i n t e r n a l development Great — Depression-1930- - T-1940- Secoiid • World War. -- 1 •1950- -1960- •H igh mass c bnsump- t i o n Maturity The era of high consumption i s s t i l l gathering momentum." The pattern of consumption depends upon the income e l a s t i c i t i e s of demand i n t h e i r widest sense - 81 - ~ United States -1790— -1800- -1810- -The pre-conditions are e x p l i c i t l y - b u i l t up The creation of the pre-conditions i s an economic & technical matter, comprising the building of s o c i a l overhead c a p i t a l & the finding of an economic se t t i n g i n which" a s h i f t to industry i s p r o f i t a b l e Napoleon's - — Invasion of -- Russia -1820- Mohroe— - Doctrine •-The i n d u s t r i a l boom To raise the rate of productive investment, the significant~" p o l i t i c a l & s o c i a l r e s t r a i n t s must be eliminated i n the South -There i s no impact of an external challenge -1830- — The t a r i f f s on - i cotton t e x t i l e s I L They play an I important r o l e I i n the take-off /The t a r i f f s on / r a i l i r on i ! / -1840- "/"~-A sharp r e l a t i v e r i s e i n export prices & large new c a p i t a l imports create a newly favourable i n t e r - national environment -1850- -' --Export of grain i s a source of ploughed-back p r o f i t s The upshot i s marked by railway & manufacturing development mainly confined to the "East", •• ' -- while the West & the South digest -Take-off the extensive " a g r i c u l t u r a l expansion of the previous decade Crystal Palace Exh i b i t i o n -1850- - \ - \ |\ -1860-J ' ~ The upshot i s marked by a heavy -Take-off inflow of foreign c a p i t a l , while the great railway push i s carried out"into the Middle West Foreign c a p i t a l flows are impor- tant "as "lumpy overhead"capital construction, of long gestation period,"is required Ca p i t a l formation i s aided by price i n f l a t i o n which s h i f t s ^ resources from consumption to \ p r o f i t s C i v i l War- — — \ The economy i s run by men who know • \ where they are going: Confident ] v period -1870- >̂'The post-failway-building Age of Steel s t a r t s European Slump -The Pennsylvania & Mid-Western coal-iron complexes are brought to l i f e -1880- The rate of development, r e l a t i v e l y to the United Kingdom, i s raised because a big backlog of unapplied technology i s available -1900- - 83 - T. Roose-T v e l t Prdgres- -j sive Era -1900- The r i s e of s t e e l i s the central symbol of the movement to maturity i n the post-railway age The process of moving towards maturity generates the kind of s o c i a l pressures which enforce humane modifications to that process A s h i f t of s o c i a l objectives, rather than a d r a s t i c r e a l l o c a t i o n of resources, i s brought about The progressive income tax, which i s the most revolutionary of a l l forms of economic policy,""Is accepted. Big business curbs I t s e l f or i s curbed. The trade unions are e x p l i c i t l y given this r i g h t to organize. The federal banking system i s created, p a r t l y to exercise a degree'of control over the business cycle. The -1910- Maturity public interest wins" new recog- n i t i o n i n the policy of conser- vation, national parks & reser- vations. F i r s t World War1!- — ( The muck-rakers: the doubt of i n d u s t r i a l maturity The so-called Large View f a i l s to take hold The resources increasingly flow into the dimensions of consump- t i o n The trend of high mass consumption i s damped by the r i s e i n urban l i v i n g costs -1920,r - 84 - -1920- t i o n Great Depression The trend of high mass consumption becomes palpable. The e g a l i t a - r i a n bias & the t r a d i t i o n a l " h i g h wages make the trend decisive The r i s e of a" new middle class: the era of the professional -High mass technicians & the white & blue consump- co l l a r " workers The people flow to the c i t i e s & to the suburbs The r i s e of the automobile A" vast"migration into new sin g l e - family houses i n the suburbs, f i l l e d increasingly with radios, r e f r i g e r a t o r s & other gadgetry of a society", "whose s o c i a l mobility & productivity have a l l but" wipe out personal service." Food consumption i s sh i f t e d to N high grade foods" NT. Dreiser: the doubt of i n d u s t r i a l maturity -1930- F. Roose-T ve l t Second World WarH-1940- \ \ — T h e Great Depression breaks the hold of a generation of p o l i t i c a l lead- ers whose desire i s to re-create a pre-1914 normalcy. I t brings to power leaders who i n s t a l l a version of the welfare state \ • - - • - • -- - - NThe Great Depression: i t s length i s related d i r e c t l y to "the" stage of growth. When investment comes to be centred on industries & services based on expanding consumption, f u l l employment i s needed to support f u l l employment. Unless consumption l e v e l s press outward, capacity i n consumers' goods industries & those supplying them w i l l be under-used, & the impulse to invest w i l l be weak -—The industry i s s t a b i l i z e d at a lower l e v e l Secohd World War L1940- I U t u -1950- -1960- —The contours of the s o c i a l welfare state are rounded out (k resumption of the boom of the / 1920s, with a resumed inarch to the / outer suburbs & a resumed exten- ' / sioh of ownership f o r cars, r e f r i - ' gerators & gadgets / The"ebbnomic growth can no longer "High mass continue to be based so heavily on cbnsump- the d i f f u s i o n of standard consumer t i o n / durables.- In a l l sectors growth curves are subject to long run deceleration The prospect, to t i d y up the s i t u a - t i o n a l i t t l e & enjoy the benefits of affluence with a four day work- ing week, i s altered by the decision to have more babies. The consequent changes i n the age structure of the population & i n the rate of family formation are of major economic significance l I I I I l I I /The society i s less affluent than / i t looks / The people behave with curious new / obsession with family l i f e , / privacy, do-it-yourself, getting / away"in caravans &~motor boats, & w r i t i n g impiously about the Organization Man The era of high consumption does not come to an end, because ef f e c t i v e demand i s sustained. Combined with the cumulative d e f i c i t i n s o c i a l c a p i t a l & the cost of the arms race, the i n - crease i n the r a t i o of depen- dents to producers i s l i k e l y to l i n k a vigorous expansion of output with a degree of auste- r i t y at the l e v e l of private consumption - 36 - Mexico F i r s t ! — World Wart -•- A series of revolutions i -1920- 5epression-l930- /The development of modern cotton / t e x t i l e industries i n su b s t i t u t i o n • ' f o r imports marks the pre-take-off U period ! - l % 0 - Seeohd World War I 1 L •__ -1950- I _ _ J P o l i t i c a l s t a b i l i z a t i o n " Nationalization of o i l s & minerals Revival of foreign investment helps the take-off Take-off The economy i s one of the underdeve- loped countries which have passed through the take-off process -I960- - 87 - ( i i ) South America ft. Puerto Rico ft Panama ft Venezuela ft Colombia ft B r a z i l D Argentina ft Chile - 88 - Argentina F i r s t j World War-j ! -Substantial railway building f a i l s \ to" i n i t i a t e a take-off because of \ the" absence of the general pre- \ conditions NA large "quantity of foreign c a p i t a l import does not i n i t i a t e the take- -1920 \ Off "The War'stimulates the "growth of the modern sectors which tend to slacken afterwards" ' The economy"seeks to return to a pre-1914"normalcy" To raise the rate of productive investment the s i g n i f i c a n t p o l i t i - c a l & s o c i a l r e s t r a i n t s must be reduced Great --' -- Depression-1930 A sharp f a l l i n terms of trade [-19U0- 1 Second -» -- World Warj -- -I95O- i-The challenges I which require I the rapid I development -of j manufactured I import sub-1 s t i t u t e s —A war-time block- 1 age"of foreign j t r a d e - J - ~ " ^The sustained take-off i s inaugu- rated" with the s t r u c t u r a l v i c i - -Take-off ssitudes of the economy •—Consumption goods produced i n substit u t i o n f o r "Imports play the role of leading sector -- The economy i s one of the'underdeve- loped countries which have passed -- through the take-off process -I960- - 39 - ft Puerto Rico The economy attemptihg take-off", where large i n j e c t i o n of" American funds i n substruction as"well"as i n industry takes"place, & the apparent savings & investment rates'come" to over f i v e per cent of net national product. Whether the take-off w i l l be success- f u l remains to be seen. ft Panama The economy attempting take-off, where the apparent savings & investment rates, including l i m i t e d net c a p i t a l imports, come to over f i v e per cent of net national "product'. Whether the take-off w i l l be success- f u l remains to be seen. ft Venezuela A large quantity of foreign c a p i t a l import does not i n i t i a t e the take-off, although i t contributes undoubtedly to creating the pre-conditions. The" economy "has been f o r some time an' 'enclave economy,' with a high invest- ment rate ~„c on cent rated i n a modern export sector whose growth does not generate general economic momentum i n the economy, but i n the past"few years, the economy may have moved^ over into the category of economy experiencing an authentic take-off. ft Colombia Growing economy," where the apparent savings & investment rates, including l i m i t e d net c a p i t a l imports, come to over ten per cent of net national product. ft B r a z i l The economy i s one of the underdeveloped countries which are i n the midst of the take-off process. The rate of develop- ment, r e l a t i v e l y to the"West, i s raised because a big backlog of unapplied technology i s available. ft Chile The economy" attempting take-off, where savings & investment rates, including l i m i t e d net c a p i t a l imports, come to over f i v e per cent of net national product. Whether the take-off w i l l be successful remains to be seen. - 90 - ( i i i ) Western Europe - E Sweden F. Denmark G Germany H Belgium I. United Kingdom A Ireland J France 4 Switzerland - 91 - Sweden Congress of Vienna -The great transformation starts, no warfare interrupts the economic progress -1820- -1830- -1840- -1850- A history of progressive l i b e r a - l i z a t i o n of government & of economic development -1860- - 9 2 - The opening of B r i t i s h &f French markets f o r timber creates a newly favourable i n t e r n a t i o - n a l environment „'The take-off i s i n i t i a t e d by^a narrow economic process of the r i c h land & natural resources by which the high l e v e l s of welfare can be achieved ' " The introduction of the r a i l r o a d plays an important part i n the take-off '""' - - Export of timber & pulp i s a source of ploughed-back p r o f i t s Foreign c a p i t a l flows are impor- tant "as lumpy overhead c a p i t a l construction of long gestation period i s required o f f H. lbsen(Norway): the doubt of i n d u s t r i a l maturity The timber industry, b u i l t oh the steam saw, plays" the rol e of leading sectors because i t i n v o l - ves the application of modern processing techniques •The turning point into maturity: /' the beginning of a phase of d i f f e r e n t i a t i o n of production. A depression i s marked by a sag- ging of the export markets. f-The take-off i s a surge"in output • i n a few sectors. I t i s i n the j nature of investment that these I sectoral"surges should be over- Idone. I t then becomes necessary !for the economy to re-group, f e - i a l l o c a t e i t s resources, & resume I growth In new leading sectors. One J of the measures of whether take- v [off"has been achieved i s a society's \ L a b i l i t y to redeploy i n t h i s way \ . . . . xThe posi t i v e response takes place. A s h i f t from timber into woodpulp, from the export of unplanned to planned board & to matches -The Norland ores begin to be exploited by modern methods - 93 - -1910- F i r s t i - World War-j - t - _1920 i Great' -The economy moves sharply towards the welfare state, b a s i c a l l y because i t i s not agrarian i n i t s p o l i t i c a l balance, & there i s the great weight of s o c i a l i s t doctrines &"ideals within the" i n d u s t r i a l " working force & among i n t e l l e c t u a l leaders There i s a Surge from pig iron into highly refined s t e e l & engineering industries Hydro-electric power i s exploited, laying the basis for"a highly s k i l l e d e l e c t r i c a l industry"which* i s to help the railways to convert to e l e c t r i c i t y from coal ""The economy faces severe problems of reconstruction & readjustment, & i t does not proceed straight away into the age of consumer durables Depression-1930-yMaturity vThe only period of normal prosperity -•- * v which restores 1913 l e v e l s of out- V Second -| World War] 1 T-1940-^ 1 1 w -195oT - 1 - t- -1960- put. This f a i l u r e to expand cor- responds to a f a i l u r e to make the l o g i c a l move into the normal stage of growth beyond maturity The Great Depression breaks the hold of a generation of p o l i t i c a l lead- ers whose desire i s to re-create a pre-1914 normalcy. The r i s e of the new regime imposes a quite d i f f e r - ent set of imperatives. Rearmament 1 N becomes a factor i n the recovery v Imports are substituted by domestic \ manufactured goods 'The economy i s ready f o r the welfare state or the age of durable con- \ sumer goods The lag i n the s h i f t to the road can be accounted f o r by lack of c a p i t a l f o r road bui l d i n g , by the monbpoli- fligh mass S t i c power of the railways & the Consump- pressure of the government t i o n The tech n i c a l , p o l i t i c a l & sociolo- g i c a l obstacles are cleared away & the society behaves i n a remarkably "American" manner The pattern of consumption depends on the income e l a s t i c i t i e s of demand i n t h e i r widest sense -94 - Denmark Congress of Vienna Formation of a modern national state -1820- -1830 , ' The pre-conditions are actively established by introducing modern techniques -1840- Prtisso- -- Danish War -- -1850- -1860- Close relationship to the other European nations - 95 - -1860- -1870- -1880- -1890- Th e end of subsistence economy -The s h i f t to meat & dairy products reinforces the development of a manufacturing sector i n the eco- nomy as w e l l as provides a major source of foreign exchange, because i t involves the application of modern" processing techniques H.Ibseh(Norway): the doubt of i n d u s t r i a l maturity •Take-off -1900- -1910- -The society moves sharply towards the welfare state, b a s i c a l l y because i t i s not agrarian i n i t s p o l i t i c a l balance, & there" i s the great weight of s o c i a l i s t doctrines & ideals within the*Industrial working force & among i n t e l l e c t u a l leaders" /The economy faces severe problems of reconstruction & readjustment, & it-does not proceed straight away into the age of consumer durables /The only period of normal prosperity which restores 1913"levels of out- put. "This f a i l u r e to expand cor- responds to a f a i l u r e to make the l o g i c a l move into the normal stage of growth beyond maturity The Great Depression breaks the hold of a generation of p o l i t i c a l lead- ers whose desire i s to re-create a pre-1914 normalcy. The r i s e of the new regime imposes a quite d i f f e r - ent set of imperatives. Rearmament becomes a factor i n the recovery ^-The government begins to create an environment of greater prosperity. Then income e l a s t i c i t i e s of demand express themselves i n a dispropor- tionate r i s e i n demand fo r consumer durables & services Because of the lack of strong e g a l i - t a r i a n bias & t r a d i t i o n a l high wages, the worker takes slowly to the idea that the gadgets, t r a v e l & other services are r e a l l y f or him /The t e c h n i c a l , p o l i t i c a l & sociolo- g i c a l obstacles are cleared away & the society breaks out into the phase of durable consumers' goods & services. The society behaves i n a remarkably "American" manner The era of high consumption i s s t i l l gathering momentum. The pattern of consumption depends upon the income e l a s t i c i t i e s of demand i n t h e i r widest sense Germany Congress of Vienna -1820- -1830- -1840- A nationalism based on past humili- ation & future hope makes the pre- conditions. Junkers & the West Germans share one solid common conviction that they have a stake in the creation of an independent modern state -1850-! Crystal -- v Palace -- ^ Exhibition -- -1860- -The introduction of the railroad is the strong i n i t i a t o r of the take- off - " ' ' '• •' ' • - The enlargement & modernization of armed forces constitute a leading N. sector xThe post-railway-building Age of Steel starts Take-off - 98 - -1860- " The r i s e of s t e e l i s the'central -Take-off symbol of the movement to maturity i n the post-railway age •1870- European Slump Bismarck'si Concess- ions Bismarck-J Era 1-1880- -, The Ruhr coal-iron complex i s j brought to* l i f e l The confident" period:"the economy j i s run by men who know where l they are going The rate of development, r e l a t i v e l y to the United Kingdom, i s raised because a big backlog of un- applied technology i s available ^^The process of moving towards maturity generates the kind of s o c i a l pressures which enforce humane modifications to that process 1-1890- -1900- -1910- Maturity - 99 - -1910- Maturity>The economy moves sharply towards — _ i F i r s t ( World Warn -1920- • — - j Great Depression-1930 1 / / v T - 1 9 4 0 - Secohd World War -1950- the welfare state, b a s i c a l l y because i t i s hot agrarian In i t s p o l i t i c a l balance, & there i s the great weight of s o c i a l i s t " d o c t r i n e s & Ideals within the i n d u s t r i a l " working force & among i n t e l l e c t u a l leaders ~ ' *--" " /The economy "faces severe" problems / of reconstruction & readjustment, & i t does not proceed straight away into the" age of consumer durables" ,-The only period of" normal "prosperity ' which restores" 1913"levels 'of out- put. This f a i l u r e to expand" cor- responds to a f a i l u r e to make the l o g i c a l move into the normal stage of growth beyond maturity __---The Great Depression breaks the hold of a generation of p o l i t i c a l lead- ers whose desire i s to re-create a pre-1914 normalcy. I t brings the breakdown of the system i m p l i c i t i n the V e r s a i l l e s Settlement & creates the regime which opts f o r a quite d i f f e r e n t use of the p o t e n t i a l i t i e s of mature economies; m i l i t a r y expansion The lag i n the s h i f t to the road can be accounted for by lack of c a p i t a l f o r road b u i l d i n g , by the monopo- l i s t i c power of the railways & the pressure of the governments, by the l a t e r s t a r t with the concept of the mass produced car f o r the mass market, by the shortage of cheap suburban housing s i t e s Because of the lack of strong e g a l i - t a r i a n bias & t r a d i t i o n a l high wages", the worker takes slowly to 1 the idea"that"the gadgets,"travel 1 & other services are r e a l l y f o r him 1 -The te c h n i c a l , p o l i t i c a l & sociolo- 1 g i c a l obstacles are cleared away & •High mass the society breaks out into the cbhsump- phase of durable consumers' goods t i o n The era of high consumption i s s t i l l gathering momentum - 100 - Belgium Congress of Vienna -1820- -1830- -Formation of a modern national state -1840- Cry s t a l Palace Exh i b i t i o n -1850- -1860- The perpetual n e u t r a l i t y i s guaranteed -Take-off Great str i d e s i n the mining industry promote the take-off - 101 - The rise of steel is the central symbol of the movement to maturity in the post-railway age The rate of development, relatively to the United Kingdom, is raised because a big backlog of un- applied technology is available -The rapid industrialization of the economy leads to labour unrest - 102 - The economy moves towards the welfare state, because i t i s not agrarian i n " i t s p o l i t i c a l balance & there i s the great weight of s o c i a l i s t doctrines & ideals within the i n d u s t r i a l working force & among i n t e l l e c t u a l leaders /The economy faces severe problems / of reconstruction & readjustment, & i t does not proceed straight away into the age of consumer durables /•The only period of normal prosperity which restores 1913 leve l s of out- put. This f a i l u r e to expand cor- responds to a f a i l u r e to make the l o g i c a l move into the normal stage of growth beyond maturity —The Great Depression breaks the hold of a generation of p o l i t i c a l lead- ers whose desire i s to re-create a pre-1914 normalcy. The r i s e of the new regime imposes a quite d i f f e r - ent set of imperatives. Rearmament becomes a factor i n the recovery ^The government begins to create an environment of greater prosperity. Then income e l a s t i c i t i e s of demand express themselves i n a dispropor- tionate r i s e in"demand f o r consumer durables & services Because of the lack of strong e g a l i - t a r i a n bias & t r a d i t i o n a l high wages, the worker takes slowly to the"idea that the gadgets, t r a v e l & other services are r e a l l y f o r him /The techn i c a l , p o l i t i c a l & sociolo- g i c a l obstacles are cleared away & the society breaks out into the phase of durable consumers' goods & services. The Society behaves i n a remarkably "American" manner The era of high consumption i s s t i l l gathering momentum. The pattern of consumption depends upon the income e l a s t i c i t i e s of demand i n t h e i r widest sense - 103 - United Kingdom The development of the cotton- textile industry starts explicitly The pre-conditions are very f u l l y developed. Progress in a number of industries are considerable throughout the eighteenth century & the social & institutional environment is propitious Substantial earlier progress before a self-reinforcing growth - 104 - -1760- -1770- American Revolution — -1780- There i s no impact of an external challenge on the industry The creation of the pre-conditions i s an economic & technical matter, comprizing the building of s o c i a l overhead c a p i t a l & the fi n d i n g of an economic setting i n which a s h i f t to industry i s p r o f i t a b l e -The Black Country coal-iron complex i s brought to l i f e . Exhaustion of charcoal supply creates a need of s h i f t to new industries i n new d i s t r i c t s \- — The substantial improvements i n the | banking system do not i n i t i a t e a I take-off The ~ Younger P i t t -1790- -1800- The o r i g i n a l sector of primary growth i s cotton t e x t i l e which i s large i n r e l a t i o n to the whole economy, & of which evolution i s consequently a massive fact with wide secondary repercussions on the development of urban areas or the demand f o r coal, i r o n ; & -Take-off machinery, f or c a p i t a l & trans- port. I t s technological develop- ments bring a sharp reduction i n r e a l costs & prices,"therefore, 1 tap a source of ef f e c t i v e demand ( f o r rapid expansion The s t e e l industry r i s e s from the railways & the railways a r i s e from the requirements of cotton t e x t i l e K i \ i \ ! \ The take-off i s based almost wholly k oh domestic sources of finance Capital formation i s aided by price i n f l a t i o n which s h i f t s resources from consumption to production -1810- - 105 - -1810- Higher , — The economy i s run by men who know Corn Laws -- I where they are going: Confident | period •1820- -1830- -1840- Mines Act 1 l i i l i -The process of moving towards maturity generates the kind of s o c i a l pressures which i n t u r n ' enforce humane modifications to that process Ten Hours Act Cr y s t a l Palace Exhibition -1850- -1860- Maturity The Golden" Ageof V i c t o r i a n Indust- r i a l Prosperity. The post-railway- building Age of Steel s t a r t s - 106 - The r e l a t i v e rate of the develop- ment slows down, because only a rough approximation to the new technology created i n the previous year i s available. The l a t e comers have a big unapplied back- log of technology available 'The Fabian Society: the doubt of i n d u s t r i a l maturity The economy does not move fas t e r from technical maturity into the age of high consumption, because: (1) maturity i s a matter"of v i r t u - o s i t y & the spread of technique on the supply side. The r e a l income per capita r i s e s , but i n the form of more & better food, clothing, housing, public u t i l i t i e s & trans- port. The bi c y c l e boom begins the age of consumer durables, but i s then interrupted by the wars. (2) the country i s a major indust- r i a l region i n the world" economy. Capital '& manpower are drawn to the point of expected higher p r i - vate y i e l d & r e a l wages. In spend- ing c a p i t a l abroad to open up farm- ing t e r r i t o r i e s or building r a i l - ways , the economy obtains i n v i s i b l e imports i n the short run & cheaper supplies' of primary goods i n the long run, b u t " i t benefits mostly the whole world trading~area. (3) the timing of the stages of growth i s affected by i n t e r v a l s when resources are devoted to war, diverted to gold mining, or wasted because public p o l i c y f a i l s to create the conditions f o r a regular movement forward - 107 - -1910- F i r s t ( World War-J Lloyd H George's J • Reforms  1920- - j —The process of moving towards j maturity generates the kind of I s o c i a l pressures which i n turn" I enforce humane modifications to I that process — • G. B. Shaw: the doubt of indust- r i a l maturity Great" -- - Depres s ion-193 0- Second -, World War • 1940- -1950- -1960- The. Great Depression breaks the hold of a generation of p o l i t i c a l leaders whose desire i s to re-' create a pfe-1914 normalcy. I t brings to power governments that b u i l d prosperity of a sort on housing, the devaluation of 1931 & Empire Preference High mass consump- t i o n -1 I / Y t i ,/The technical, p o l i t i c a l & sociolo- g i c a l obstacles are cleared away & the society breaks out "into the phase of durable consumers* goods & services. The society behaves i n a remarkably""American" manner The era of high consumption i s s t i l l gathering momentum. The pattern of consumption depends upon the income e l a s t i c i t i e s of demand i n t h e i r widest sense - 108 - France Congress of Vienna -1820- An a g r i c u l t u r a l economy July Revo—1830^ l u t i o n -1840- -1850- Cr y s t a l -- \ Palace -- v E x h i b i t i o n -- The close r e l a t i o n s h i p to the United Kingdom makes the take- off early •Take-off -I860- NThe post-failway-building Age of Ste e l s t a r t s - 109 - The r i s e of s t e e l i s the central symbol of the movement to maturity i n the post-railway age -1870- Eurdpean Slump The rate of"development, r e l a t i v e l y to the United Kingdom, i s raised because a big backlog of un- -1880- applied technology i s available -1890- The "social structure & the family pattern hinder the economic growth ' '• Lack of coal-iron complex i s a f a t a l cause f o r a slow economic development -1900- -1910- Maturity - 110 - Firs t World War-! -1910- Maturity With stagnant population, a five per cent investment"fate yields substantial growth in real out- put per capita r — • The economy moves towards the 1 welfare state", because i t Is not agrarian"in i t s p o l i t i c a l balance &" there is"the great weight of socialist doctrines & ideals within the Industrial"working force ~& "among" intellectual leaders /The economy faces"severe" problems ' of reconstruction~& readjustment, & i t does not proceed straight away into the age of consumer durables' -1920 , Y I -—The only period of normal prosperity Great " "'- -- ' - Depression-1930- I 1 l I 1^-1940- Secbnd World War -1950- which restores 1913 levels of out- put. This failure to expand cor- responds to a failure to make the logical move into the normal stage of growth beyond maturity 'The Great Depression breaks the hold of a generation of p o l i t i c a l lead- ers whose desire is to re-create a pre-1914 normalcy. It brings to power a Popular Front government. The rise of the new regime imposes a different set of imperatives. Rearmament becomes a factor in the recovery The lag In the shift to the road can be accounted for by lack of capital for road building, by the monopo- l i s t i c power of the railways & the pressure of the government, by the later start with the concept of the mass produced car for the mass market, by the l i t t l e a v a i l a b i l i t y of cheap suburban housing sites 1 -The technical, p o l i t i c a l & sociolo- ! gical"obstacles are cleared away & High mass the society breaks but Into the consump- phase of durable consumers' goods tion The era of high consumption i s s t i l l gathering momentum — I l l - 4 Ireland In-the eighteenth century, making a v i r t u e of Recklessness, the'oppressed I r i s h react to*the i n t r u s i o n of a more advanced power. The economy i s regarded as the pre- take-off society, where the population pressure i s generated hot only by the easy spread of highly productive' measures of public health but also"by the easy acceptance of high-yield hew crops, permitting a fragmentation of land-holdings, e a r l i e r marriage & a r i s e i n the b i r t h .rate. 4 Switzerland The economy r e l i e s almost wholly on the s k i l l , motivation & energy of the people. The impetus comes from handicrafts and tourism. - 112 - ( i v ) A f r i c a 4 Ethiopia ft Kenya 4 Belgian Congo 4 ...Nigeria 4 Southern Rhodesia - 113 - 4 Ethiopia The pre-take-off economy, where the apparent savings &" investment rates, including l i m i t e d net c a p i t a l imports, come to under f i v e per cent of net national- product. 4 Kenya The pre-take-off economy, where the apparent savings"& investment rates, including"limited net c a p i t a l imports, come to under f i v e per cent of net national product. 4 Belgian Congo The enclavei"economy, where the apparent savings & investment rates, including substantial net c a p i t a l imports, come to over ten per cent of net national product, but the domestic pre-condi- tions f o r sustained growth have not been achieved. The economy, associated with major export ind u s t r i e s , lacks a p o l i t i c a l , s o c i a l & i n s t i t u t i o n a l framework which exploits the impulses to expansion i n the modern sector. Currently, a large quantity of foreign c a p i t a l import does not i n i t i a t e the take-off, although i t contributes undoubtedly to creating the pre-condi- t i o n s . 4 Nigeria The enclave economy, where net c a p i t a l imports are large. 4 Southern Rhodesia The enclave" economy, where the apparent savings & investment rates, including substantial net c a p i t a l imports, come to over ten per cent of net national product, but the domestic pre-condi- tions f o r sustained growth have hot been achieved. The economy, associated with major export industries, lacks a p o l i t i c a l , s o c i a l & i n s t i t u t i o n a l framework which exploits the impulses to expansion i n the modern sector. - 1 1 4 - (v) Eastern Europe K Union of Soviet S o c i a l i s t Republics - 1 1 5 - Union of Soviet S o c i a l i s t Republics -1790- r — Napoleonic Wars I-LS00- \ — v — \ \ i - i s i o - \ -1820- \ -1830- \ \ -1840- ^A series of m i l i t a r y intrusions / &~ defeats are the great engine / of change -1850- / Crimean -| War » l - -- / -1860- - 116 - -1860- -1870- -1880- -1890--/ -1900- Russo- Japanese War Tsarist Russia -1910- The pre-conditions s t a r t e x p l i c i t l y The t r a d i t i o n a l c o a l i t i o n s among the commercial middle class, the more enterprising c i v i l servants & soldiers share one s o l i d common conviction that they have a stake i n the creation of an independent modern state /The substantial economic progress ' before a t r u l y s e l f - r e i n f o r c i n g / growth process / K. H. Marx: the doubt of i n d u s t r i a l / maturity The substantial improvements i n the banking system do not i n i t i a t e a take-off /The introduction of the r a i l r o a d i s / the strong i n i t i a t o r of a take-off / T a r i f f s are imposed. They play an / important ro l e i n the"take-off t The take-off i s aided by the world / r i s e i n grain prices. This r i s e makes a t t r a c t i v e the laying of vast railway networks A sharp r e l a t i v e " r i s e i n export prices & large c a p i t a l imports create a newly favourable i n t e r - national environment Export of grain i s a source of ploughed-back p r o f i t s Foreign c a p i t a l flows are important as"lumpy overhead c a p i t a l const- ruction, of long gestation period, i s required The s u b s t i t u t i o n of government bonds f o r "the great" landholders f claim oh the flow of rent payments redistr i b u t e s income into the hands ' of'men more'inclined to"seek Take-off material advance & to accept innovations" I n d u s t r i a l output as a whole increases oh the average at about eight percent per annum The enlargement & modernization of armed forces constitute a leading sector - 117 - -1910- F i r s t World War-j •-• ^1920- Expulsiori -- of Trotskyr — G r e a t 1 — Depress ion'-193 0- F i r s t Five] -- Tear Plan j -- Ill940-l __ Second n --World War J - - 1 -_ 1 . , -1950- / / / -Take-off With i t s multiple impact on growth, the railway f i n i s h e s the take-off Coal, iron & engineering surge to meet the" expanded home demand. The Baku petroleum f i e l d expands to i t s natural l i m i t & the Ukrainian coal-iron complex i s brought to l i f e /The economy i s run by' men who" know I where' they are going---Confident / period: the broad pattern of economic growth under the commun- i s t leadership A drive to maturity: the"process of i n d u s t r i a l d i f f e r e n t i a t i o n The post-railway age: the age of s t e e l , machine t o o l s , chemicals & e l e c t r i c i t y /Three s p e c i a l aspects: / (1) The government damps the r i s e in"consumption & concentrates on c a p i t a l formation &"military items, giving a dispfoportibhate emphasis to the metal using industries as opposed-to housing,"textiles or transport; (2) Despite large c a p i t a l outlays i n ag r i c u l t u r e , c o l l e c t i v i z a t i o n damps productivity. (3) The surge to maturity comes when the backlog of accumulated technological p o s s i b i l i t i e s i n - clude developments, i n aeronautics, electronics & atomic energy S t a l i n ' s Death / / The rate of development, r e l a t i v e l y to the West, i s raised because a big backlog of unapplied technology i s available The process of moving towards maturity generates the kind of Maturity s o c i a l pressures which i n turn enforce humane modifications to the process •I960- - 118 - (vi ) Middle East L Turkey ft I s r a e l ' T U R K E Y I S R A E L - 119 - Turkey F i r s t T World War-l I L -1920- Great -- ' Depression-1930- -1940- Secoiid World War -Take-off -1950- Against the background of industria- l i z a t i o n , the take-off i s inaugu- rated" ' Consumption goods produced"in substit u t i o n f o r Imports play the r o l e of leading sector • r 1 1 1 -1960- Th e economy i s one of the underdeve- loped countries which have passed through the take-off process •Remarkable increase i n a g r i c u l t u r a l Income & productivity I t remains to be seen whether the take-off w i l l constitute a tran- s i t i o n to self-sustained growth, & whether the society can overcome i t s s t r u c t u r a l problems - 120 - The economy r e l i e s almost : wholly on the s k i l l , motivation &" energy of - the'pebple" as well" as on-huge" g i f t s & investments, from the United States & world-wide Jewish community. - 1 2 1 -' ( v i i ) A s i a M Japan N China A Hong Kong- k. Indo-China A Philippines A Indonesia A* Thailand A Burma 0 India A.. Ceylon A Pakistan A Afghanistan s I - 122 - Japan -1820- -1830- Opium WarJ-l840-\ s Admiral Perry's Seven Black - Ships -1850- / / / - / >Their demonstration effects cast / the die The t r a n s i t i o n a l c o a l i t i o n between the Samurai & the grain merchants, who share one s o l i d common con- v i c t i o n that they have a stake i n the creation of an independent modern state A g r i c u l t u r a l dynamism alone cannot l i f t the economy into take-off -1860- - 123 - -1860- r M e i j i Erart S i i i o - ~ .. Japanese War -1870 1 -1880- -1890- L _ -1900- Wlth cohesion, promptness & vigour, the Japanese react to the i n t r u - sion of a more advanced power /Capital formatIon is~aided by price i i n f l a t i o n which s h i f t s resources ' from consumption to"production The take-off is"based almost wholly on domestic"sources"of finance The s u b s t i t u t i o n of government bonds f o r the great landholders' claim on the flow of rent payments redistr i b u t e s Income into the hands of men more inclined'to"seek material advance & to accept innovations i ,̂ -A" whole series of new industries ^ J - " " take hold, i n i t i a l l y sparked by I government i n i t i a t i v e , but turned —1 over to private enterprise as new men emerge ready" to carry respon- s i b i l i t i e s & r i s k s — — The take-off i s b u i l t on railway, on shipbuilding, on cotton, oh s i l k c u l t i v a t i o n & manufacture, on coal & pig i r o n , & f i n a l l y on a surge of m i l i t a r y outlays helping to b u i l d up the engineering -Take-off industry Export of s i l k i s " a source of ' ploughed-back p r o f i t s . Moreover, the s i l k industry plays the role of leading sector, because i t involves the a p p l i c a t i o n of"modern processing techniques, & because of i t s secondary effect which requires f o r uniform high grade yarn i n developing modern produc- t i o n techniques *»» "•-Modern i n d u s t r i a l sector i s s t i l l small & la r g e l y dominated by t e x t i l e s -1910- - 124 - J-19-10- F i r s t i World War-J l r - -1920- Great Depression-1930 The remarkable purposeful forward surge to maturity, i n which a r e l a t i v e l y narrow array of natural resources i s harnessed by a d i l i g e n t population"to the best that modern," technology can o f f e r , i s brought about *~--World War I stimulates the economy. The modern i n d u s t r i a l sector s t a r t s ' t o fan out into chemical" f e r t i l i z e r s , s t e e l , & e l e c t r i c a l equipment /The Great Depression breaks the / / hold of a generation of p o l i t i c a l ' leaders whose desire i s to re-~ "create a pre-1914 normalcy. I t brings about the regime which fosters m i l i t a r y expansion The engineering industries come into t h e i r own, under the stimulus of Manchuria & of war outlays & preparations. The value of out- put i n metals, machinery & chemicals comes to outrank t e x t i l e s I Second -} World War 1 1 t " 1-1940- Maturity -1950- 1 /The society breaks out into the 1 phase of durable consumers' goods & services. The society behaves I i n a remarkably "American" manner J The era of high consumption i s s t i l l • — 1 gathering momentum. The pattern of consumption depends on the -High mass income e l a s t i c i t i e s of demand consump- i n t h e i r widest sense t i o n - I 9 6 0 - - 125 - China F i r s t i World WarH I L -1920- Great — Depres s i on-193 0- Secbhd World War 1 1 I K1940- 1 1 Communist Regime -j-1950- F l r s t Five] Year Plan 1 By"slowly & r e l u c t a n t l y a l t e r i n g i t s t r a d i t i o n a l c h a r a c t e r i s t i c s , the people react to the i n t r u s i o n of a"more-advanced power The population pressure i s generated not only by the easy spread'of high- l y productive measures of public health but also by the easy accep- tance of"high-yield new crops, per- mitting a fragmentation of land-"" holdings, e a r l i e r marriage & a r i s e i n the b i r t h fate Substantial railway building f a i l s to i n i t i a t e a take-off because of the absence of the general pre- conditions" " The development of modern cotton t e x t i l e industries i n s u b s t i t u t i o n f o r imports marks the pre-take-off p e r i o d " /The economy attempting purposefully / to take-off"under the national plan • The F i r s t Five Year Plan: the a g r i - c u l t u r a l p o l i cy may f a i l to produce the minimum s t r u c t u r a l balance required f o r a successful take-off, req u i r i n g " r a d i c a l r e v i s i o n of invest- ment allocations & p o l i c y objectives at a l a t e r stage / A l l noh-governmerital pools of c a p i t a l / i s systematically transferred into the hands of the state. I t i s draw- ing heavily .for c a p i t a l resources oh"the mass of"peasants Exports to the communist block wrung at great administrative & human cost from the a g r i c u l t u r a l sector, are a source of ploughed-back p r o f i t s The enlargement & modernization"of '/ armed" forces constitute a leading sector The rate of development, r e l a t i v e l y to" the West," i s raised because a big backlog of unapplied technology Take-off i s available / / We"cannot judge whether the take-off ef f o r t s are successful or not - 126 - India F i r s t | — World Warn -- I l -1920- Great — Depression-1930- l " - l % 0 - Second -| World War 1 -- / -1950-/ f , r — ' / F i r s t Five) — Year Plan 1 — / u — -1960- Th e development of export sectors does not create c a p i t a l formation because t h e i r proceeds are used to finance b u l l i o n imports Substantial railway building f a i l s to i n i t i a t e a take-off because of the absence of the general pre- conditions The development of modern cotton t e x t i l e industries i n s u b s t i t u t i o n f o r imports marks the pre-take-off period /The economy attempting purposefully / to take-off under the national plan I The F i r s t Five Year Plan: the take- off i s defined ex ante i n national product terms The sectoral composition of the process i s not f u l l y worked out To f u l f i l the f u l l requirements f o r take-off, the achievement of indust- r i a l momentum i s needed /To a limited' extent, the economy / r e l i e s on income transfer by the / route that a certain confiscation effect affects the feudal landlords and the r e a l value of the government bonds exchanged for land depreciates The rate of development, r e l a t i v e l y to the West, i s raised because a big backlog of unapplied technology i s available -Take-off The economy i s one of the underdeve- loped countries which are i n the midst of the take-off process We cannot judge whether the take-off ef f o r t s are successful or not - 127 - 4 Hong Kong 4 Indo-China 4 Philippines 4 Indonesia 4 Thailand 4 Burma 4 Ceylon 4 Pakistan 4 Afghanistan The economy r e l i e s almost wholly on the s k i l l , motivation & energy of the people who have performed a kind of economic rope t r i c k , climbing into i n d u s t r i a l i z a t i o n with v i r t u a l l y no v i s i b l e means of support. The pre-take-off economy, where the apparent"savings & investment rates, including l i m i t e d net c a p i t a l imports, probably come to under f i v e per cent of net national product. The economy attempting take-off, where savings & investment rates, including l i m i t e d net c a p i t a l imports, come to over f i v e per cent of net national product. Whether the take-off w i l l be successful remins to be seen. The pre-take-off economy, where the apparent savings & investment rates, including l i m i t e d net c a p i t a l imports, probably come to under f i v e per cent of net national product. The pre-take-off economy, where the apparent savings & investment f a t e s , including l i m i t e d net c a p i t a l imports, probably come to under f i v e per cent of net national product. The enclave economy, where net c a p i t a l imports are large. The pre-take-off economy, where the apparent savings & investment rates, including l i m i t e d net c a p i t a l imports, probably come to under f i v e per cent of net national product. The pre-take-off economy, where the apparent savings & investment rates, including"limited net c a p i t a l imports, probably come to under f i v e per cent of net national product. The pre-take-off economy, where the apparent savings & investment rates, including l i m i t e d net c a p i t a l imports, probably come to under f i v e per cent of net national product. - 128 - ( v i i i ) Oceania P A u s t r a l i a A U S T R A L I A a . o V - 129 - A u s t r a l i a F i r s t | -- World Warn — L. — -1920- Great ' Depress i o n - 1 9 3 0 — A sharp f a l l i n terms of trade Second -\ World War \ I \ \ K \ X — V \ X X N X X -1950- — v — X X •Take-off. v High Mass N N v vconsumption \ f-The challenges which require the rapid development of manufactured import sub- s t i t u t e s •A war-time block-1 age of foreign v trade _ l ---The take-off i s i n i t i a t e d N by a harrow economic process because of the r i c h land & natural resources by which the \ high levels of welfare \ can be achieved 'Meat industry i s a substan- t i a l manufacturing sector Consumption goods produced i n s u b s t i t u t i o n f o r imports play the role of leading sector -I960- - 130 - These case studies carry very important i m p l i - cations f o r today. The variety of sectoral patterns i n the drive to maturity needs emphasis i n the world where so many nations are seeking take-off. Very few nations have been endowed with a Pennsylvania, a Ruhr, a Black Country or a Ukraine. Most have some narrower range of natural resources. Some must r e l y almost wholly on the s k i l l , motivation and energy of t h e i r people. However, the minds of the leaders of the underdeveloped countries are l i k e l y to be f i l l e d with visions of the American, German and Russian patterns rather than the probably more relevant Swedish and Japanese patterns. CHAPTER IV. THE APPLICATION OF PROFESSOR ROSTOWS INTERPRETATION 1. Po l i c y Views 2. C r i t i c i s m of the Marxian Standpoint "The best decisions are neither bought nor sold. They are the res u l t of disagreement, where the l a s t word i s not f I admit you're r i g h t , ' but 'I've got to l i v e with the s. o. b., haven't I ? " Charles Curtis - .132 - IV. The Application of Professor Rostow's Interpretation The past i s on top of us and with us a l l the time, and there i s only one way of mastering i t , by knowing how these things have come to be. Professor Rostow's dynamic theory which helps to understand t h e i r nature, character, and t h e i r c o r r e l a t i o n to the present r e a l i t i e s of l i f e , u l t i m a t e ly gives us cogent ideas to provide a policy perspective on world economic development, and to counter- poise the Marxian interpretation of economic dynamics. 1. P o l i c y Views In a process of modern development, f i r s t the United Kingdom, then France, Belgium, the United States, Germany, Sweden, Denmark, Japan, Canada, A u s t r a l i a and the Union of Soviet S o c i a l i s t Republics have matured economically. Mexico, Argentina and Turkey are l i k e l y to be the followers. China, India and Yugoslavia may come next. Burma, Nigeria, the Belgian Congo, Southern Rhodesia, Colombia, B o l i v i a and Ecuador are not f a r behind the forerunners. Puerto Rico, Panama, Venezuela, •Peru, B r a z i l , Chile, Iran and the Philippines are ac t u a l l y attempting to "take-off," and even countries now i n the "pre-take-off" stage, such as Indo-China, Thailand, Indonesia, Ceylon, Pakistan, Afghanistan, Iraq, Egypt, Ethiopia, Kenya and Ireland w i l l sooner or l a t e r achieve - 133 - - •'i t h e i r "take-off." In s i x t y years' time, the world ought to contain many newly mature nations who are able to apply to t h e i r resources the f u l l range of science and technology. Compound interest w i l l continue to operate i n the mature s o c i e t i e s , however, f o r the f i r s t time the arena of power w i l l be l i k e l y to become t r u l y global. With respect to t h i s s i t u a t i o n , we have to face two d i f f i c u l t problems. On the one hand, i t i s a question of how to understand and how to deal with that great empire the Union of Soviet S o c i a l i s t Republics. And on the other hand, i t i s the problem of how to deal with a number of countries which are presently underdeveloped but are certain to become mature. ( i ) The Union of Soviet S o c i a l i s t Republics Technically, s t r u c t u r a l l y and psychologically, the Union of Soviet S o c i a l i s t Republics i s nowadays ready f o r the age of high mass consumption, which means i t s dangerous age. Seven years ago, Professor Rostow explained the s i t u a t i o n as under:^ "Without change or c o n f l i c t at the top of the' Soviet structure we can expect no dramatic overt r e f l e c t i o n of those forces, a l l of which have arisen from the dynamics of Soviet evolution but l i e outside the c a p a b i l i t i e s of the regime wholly to.control. The s t a b i l i t y of Soviet policy since. ,,1 Walt Whitman Rostow, Alfred Levin & others, fhH Dynamics of Soviet Society, Center"for International Studies, M. I. T., New York, Norton, 1953, PP- 258-259. r- 134 - the mid-1930's i s a r t i f i c i a l . I t represents a complete short-term t a c t i c a l success i n maintaining the" pattern of "Soviet rule"; but t h i s success has been achieved by holding"in check of f r u s t r a t i n g forces and attitudes which are not diminishing but are probably gaining i n strength as a secondary consequence of that pattern of r u l e . I t would be dangerous to underestimate the c a p a b i l i - t i e s of the Soviet regime to maintain domestic order so long as i t maintains a minimum unity at the top, and, i n p a r t i c u l a r , so long as the secret police continues i n existence as an ef f e c t i v e agent of the regime. Nothing i n t h i s analysis j u s t i f i e s ah easy optimism concerning the timing of a change i n the Soviet system or concerning the process of t r a n s i t i o n . Nor w i l l such change necessarily and automatically wofk i n the interests of the United States and common humanity everywhere. Oh the other hand, i t i s important to recognize the existence of these deeper forces and to take those actions which would maximize the change that t h e i r ultimate coming into'play contribute to"the develop- ment of a more peaceful and stable world, and thus accord with our own i n t e r e s t s . " In respect of both the s t a r t of t h e i r take-off and t h e i r a r r i v a l at maturity, the Soviets are about f i v e decades behind those of„the United States. By c a p i t a l i z i n g 2 For the sake of the f u l l understanding of t h i s problem, the following a r t i c l e s must be referred"to: U". S. Congress, Trends i n Economic Growth; A Comparison of the Western Powers and"the Soviet Bloc, A study pre- pared for the Joint Committee oh the Economic Repoft by the l e g i s l a t i v e reference service of the Library of Congress, 1955. U. S. Congress, Soviet Economic Growth; A Comparison"with the United States, A study"prepared f o r the Subcommittee on"Foreign Economic Po l i c y of the Joint Economic Committee by the l e g i s l a t i v e reference service of"the Library of Congress, 1957. G. Warren Nutter, "some Observations oh Soviet I n d u s t r i a l Growth," American- Economic Review, v o l . 47 , No. 2 , May 1957, pp. 618-630. G.'Warren Nutter, "Measuring Production i n the U. S. S. R:; I n d u s t r i a l Growth i n the Soviet Union,"'American Economic Review, v o l . 48 , No. 2 , May 1958, pp. 398-411". T. S. Khachatufov, "The Economic Effectiveness of'Capital Investment i n the U. S.S. R.,"; V. Ab o l t i n , "Economic Aspects of"Peaceful Coexistence-of Two Soc i a l Systems," American Economic Review, v o l . 48 , No. 2 , May 1958, pp. 368-392. - 135 - on a big unapplied backlog of technology, they have been developing at enormous speed. Their economic strength and p o t e n t i a l i t y must be very great, because to reach t h e i r present maturity they have surmounted the d i f f i c u l t i e s of a t r a d i t i o n a l society with intractable problems of land tenure, an i l l i t e r a t e serfdom, over-population on the land, the lack of a .free-wheeling commercial middle class, and a culture which i n i t i a l l y placed a low premium on modern productive economic a c t i v i t y . Moreover, they have done t h i s work with low per capita consumption, against a background of the two World Wars and the Great Depression. This rapid and strong economic accomplishment . has been carried out by constraints imposed by the state; and the concentration of i t s investment i n heavy industry and industry related to m i l i t a r y forces has made the development possible. Judging from Professor Rostow*s theory of growth, the Union of Soviet S o c i a l i s t Republics has been doing the same thing that Germany and Japan did a genera- t i o n ago, but possibly i n a s l i g h t l y larger scale. Now the Russian Government i s caught up i n the three-way choice: To expand high mass consumption into the range of durable consumer goods and services? To assert the status and power of the new mature society on the world scene by m i l i t a r y adventures? To enhance human dig n i t y and freedom? - 1 3 6 - ^ As discussed previously, usually maturity i s a time of dangerous as w e l l as promising choices. But - so f a r as the Union of Soviet S o c i a l i s t Russia i s concerned, the s i t u a t i o n i s more serious than ever. Professor Rostow explains i t as f o l l o w s : 3 "In terms of"the stages of growth, Russia i s seeking to convert i t s maturity- into wo"rld primacy "by postponing" the advent of high mass consumption. But i t i s doing so hot because""its prospects of victory:over the West are a l l that good; not because Its security could not"be more cheaply and e f f e c t i v e l y insured; not because i t i s i t is national interest to continue the arms race but because communism i s a curious form of society appropriate" only to the supply side of the growth problem, and l i k e l y to wither i n the age of high consumption." For making up a policy f o r dealing with t h i s great empire i n the time of danger, two aspects should have been taken into account. In the f i r s t place, the Union of Soviet S o c i a l i s t Republics has performed a s e l e c t i v e and purposeful feat, i n the matter of rates of growth, by devoting a r a d i c a l l y higher proportion of investment to heavy industry; but a variety of forces are making for deceleration. This new phenomenon can be observed i n t h e i r l a t e s t figures f o r projected expansion. In the second place, an enormous, fast-growing heavy industry i s not a goal i n i t s e l f , nor i s i t an i n t r i n s i c i n t e rnational advantage, therefore the composition of t h e i r output w i l l d e f i n i t e l y be changed. The a l l o c a t i o n of economic resources 3 W a l t Whitman Rostow, "Rostow on Growth; A Noh-' Communist Manifesto," Lectures delivered at the -University of Cambridge, Economist, August 22 , 1959, p. 526. • - .. - 137 - must change because of the i n f i l t r a t i o n of consumers' goods into the society. Then, the economic structure and the rates of growth w i l l move closer to those of the high mass con- sumption economies. With t h i s understanding i n mind, two p o l i c i e s are appropriate f o r making the Soviets give up "World power. The f i r s t p o l i c y i s to t r y to make t h e i r choice of attempted world dominion so unattractive to the Russians as to be unattainable. The second policy, i s to s t r i v e to make t h e i r choice of a high mass consumption economy as easy and as natural as possible. As a matter of f a c t , the West must demonstrate certain things, to persuade the Russians to face the fact of the d i f f u s i o n of power and accept the stage of high mass consumption. The West should not l e t them get f a r enough ahead to make a temporary m i l i t a r y resolution r a t i o n a l , and the West should help the underdeveloped countries to move into take- off within the democratic o r b i t . The Union of Soviet S o c i a l i s t Republics i s a big country to have come to material maturity so l a t e , but i t knows that other big countries are gradually coalescing towards single states. As with the leaders of Germany and Japan i n the l a s t generation, therefore, the leaders of the Union of Soviet S o c i a l i s t Republics may f e e l dimly and r e s e n t f u l l y aware that the only - 138 - r a t i o n a l a l t e r n a t i v e to bidding for world domination w i l l eventually be to accept a status as one middling nation- state among several. F i n a l l y , no s p e c i a l l y mysterious attributes must be ascribed to the Russian economy. From Professor Rostow's dynamism, i t i s simply a great nation with considerable endowments f o r creating modern economy and society. The organization's domestic imperatives and external ambitions have produced a version of the common experience of growth which i s abnormally focused on heavy industry and m i l i t a r y p o t e n t i a l . The question i s whether the West can mobilize Russian ample resources to do the tasks that must be done. In other words, i t i s a matter of s p i r i t , i n t e l l e c t , w i l l and insight. Whether the policy of the West f o r releasing Russian resources to increase human dignity and freedom, s o c i a l welfare and inte r n a t i o n a l security, i s bringing about good results or not, might be judged from the s t r u c t u r a l changes i n the Soviet economy. What should be watched are the s p e c i f i c a llocations of t h e i r resources, ( i i ) The Underdeveloped Countries We are i n the midst of a great world t r a n s i t i o n . Outside North America, Western Europe, Japan and Oceania, and even i n parts of those areas, u n t i l recently the pattern of society remained e s s e n t i a l l y f i x e d i n the mold of low- productivity r u r a l l i f e centred on isolated v i l l a g e s . • _ _ - 139 - Within the past f o r t y years the two world wars and enormous improvements i n communications have fundamentally altered the perspective of hundreds of m i l l i o n s of people. This revolution i s ra p i d l y exposing previously apathetic peoples to the possibity of change. The world community i s becoming both more interdependent and more f l u i d than i t has been at any other time i n our h i s t o r y , and at the same time i t presents both a great danger and a great opportunity. The danger i s that increasing number of people w i l l become convinced that t h e i r new aspirations can be r e a l i z e d only through violent change and the renunciation of democratic i n s t i t u t i o n s , and since the communists have recognized t h e i r opportunities to exploit the revolution of r i s i n g expectations by picturing com- munism as the road to s o c i a l opportunity or economic improvement, t h i s danger i s increased by the existence of communism. Thus, i t i s an urgent necessity to make up a p o l i c y on the problem of how to deal with a number of the presently underdeveloped countries. With respect to t h i s point we must notice that although China might be regarded as one of the exceptions, her future depends greatly upon the p o l i c y of the West. The next paragraph^ 4 Walt Whitman Rostow, Richard W. Hatch, Frank A"."" "" Kierman, J r . , A l e x a n d e r Eckstein & others, The Prospects f o r Communist China, Center for International Studies, M. I. T., Cambridge-New York, Technology Press of M. I. T. & Wiley, 1954 , pp. 313-314 . - 140 - indicates the s i t u a t i o n . "A unified,"confident, "ambitious group of men'deeply- committed" "tothe use of t o t a l i t a r i a n techniques have mastered"mainland'China. They" areTdriven" oh"by "their" internal" and external ambitions to "industrialize r a p i d l y and expand*the"modern"units o f " t h e i r armed forces. They are" driven oh by the requirements of these tasks combined with"their i d e o l o g i c a l commit- ment to" t o t a l p o l i t i c a l control to employ techniques which may of may not'be consistent with t h e i r aims. They face i n the coming years a decisive passage of modern his t o r y at a time of intense power struggle i n w hich they are caught up two ways: i n the Sino- Soviet A l l i a n c e , and i n the interaction of China and the rest of Asia. Thus, despite the unique powers the Communist regime exercises on the mainland, i t s fate rests s u b s t a n t i a l l y with the peoples of the Free World and t h e i r government." At the same time, t h i s p o l icy making i s absolutely important to persuade the Russians to face the fact of the d i f f u s i o n of power and accept the age of high mass consump- t i o n , because now the underdeveloped countries are the main focus of communist hopes. I f the West could be successful i n pushing them into take-off within the democratic o r b i t , the Union of Soviet S o c i a l i s t i c Republics would not be able to maintain i t s hope of world domination by communis- t i c m i l i t a r y aggression. Any detailed p o l i c y to serve the purpose of developing the underdeveloped economies must be based upon an understanding of the economic problems these countries face, and of the p o s s i b i l i t i e s and l i m i t a t i o n s of the influence outsiders can exert i n helping them to solve these problems. No two of these countries are a l i k e , and - 141 - the problems of growth w i l l be shaped i n each by i t s resources, i t s culture, i t s h i s t o r y , and i t s p o l i t i c a l i n s t i t u t i o n s . Nevertheless, as I have suggested, there i s a recognition that there are common elements i n the patterns of development of d i f f e r e n t countries, posing common implications for development policy everywhere. To establish the pre-conditions of growth and to make sure that growth i s maintained, the underdeveloped countries need c a p i t a l ; and to make ef f e c t i v e use both of t h e i r domestic meagre c a p i t a l and of c a p i t a l from abroad, they need technical assistance. One of the most note- worthy points i n the development policy f o r the under- developed countries i n connection with Professor Rostow*s dynamics i s that the c a p i t a l and technical assistance from the developed countries must r e f l e c t the d i f f e r e n t stages of growth of the policy objects. The economies i n a "traditional™ stage can make productive use of substantial outside c a p i t a l only i n a few f i e l d s l i k e transport, i r r i g a t i o n , mining, and power. The amounts of c a p i t a l absorbed i n agriculture and industry are very small. The economies i n a " t r a n s i t i o n a l " stage have more opportunities f o r productive investment, a l - though t h e i r capacity f o r c a p i t a l absorption i s l i m i t e d . This capacity depends on such factors as the technical and managerial capacity a v a i l a b l e , the s i z e , s t a b i l i t y - 142 - and motivations of the non-agricultural labour force, the l e v e l of s k i l l s and education, the development of markets, the state of basic f a c i l i t i e s f o r transport, communications, power, and community services. The economies i n the take-off phase have new problems; how much of i t s output i s the economy w i l l i n g to set aside f o r investment and how much can i t borrow i n normal in t e r n a t i o n a l c a p i t a l markets?^ In t h i s matter of the re l a t i o n s h i p between the stages of growth and in t e r n a t i o n a l as- sistance, several points have to be taken into account. The investment i n the production of raw materials for export depends f o r i t s productivity not on the domestic market but on the l e v e l of demand i n international markets. The r i s k s of investment i n the underdeveloped countries are related with the i;.question of whether the economy w i l l grow continuously i n the future. As a matter of f a c t , nobody can predict when the take-off w i l l occur. But as soon as the country succeeds i n taking-off, i t s own output can generate the substance to plow back into i t s own c a p i t a l formation, and favourable p r o f i t prospects emerge, so that the requirement f o r foreign c a p i t a l i s reduced.^ 5 Walt Whitman Rostow, Max F. M i l l i k a n , Paul N. Rosen- steih-Rodan & others, A Proposal; Key to an E f f e c t i v e Foreign P o l i c y , Center for International Studies, M. I. T., New York, Harper, 1957, pp. 50-51.'" 6 Walt Whitman Rostow, Max F. M i l l i k a n , Paul N. Rosen- stein-Rodan & others, A Proposal; Key to ah"Effective Foreign P o l i c y , Center f o r International Studies, M. I. T., New York, Harper, 1957, pp. 51-54. -143 - ~ Another s i g n i f i c a n t i n d i c a t i o n which Professor Rostow"s theory suggests i s that there i s a p a r t i c u l a r l y c r i t i c a l period i n the process of economic development of<'.every country which determines whether the country w i l l develop into a self-sustained growth with expanding le v e l s of welfare or sink back into economic stagnation. The former case creates the hope f o r the development of mature democracy, and the l a t t e r case induces economic i n s t a b i l i t y and p o l i t i c a l chaos. This c r i t i c a l difference between an upward development and a downward stagnation i s often determined by foreign c a p i t a l a i d . No doubt these are not the only things that have to be considered i n forming the p o l i c i e s , because there are many complex problems. For instance: "Most important, perhaps, the t o t a l problem of East- West relationships i s complicated by"deep, often unconscious, issues of race and colour. The i n t e n s i t y of certain anti-Western and anti-American reactions of the part of Asians i s undoubtedly caused by f i e r c e underlying resentment of r e a l of believed attitudes of r a c i a l s u p e r i o r i t y i n the West."7 Of, "Americans generally think of Communism as a purpose- f u l conspiracy to maintain i t s e l f i n power where i t has already seized power and to expand i t s power to the l i m i t compatible with the security of i t s e x i s t - ing bases. ----- I t i s essential f or us: to understand that the Asian image of Communism i s very different' from ours; and that an eff e c t i v e . e f f o r t to b u i l d and 7 Wajt Whitman Rostow & Richard W. Hatch, An American P o l i c y i n Asia, Cambridge-New York, Technology Press of M. I. T. & Wiley, 1955, p. 9. - 144 - • sustain an a l l i a n c e must" recognize and cope with these sp e c i a l attitudes of mind."° In summary, then, the Western policy towards the underdeveloped countries should aim at making the d i s s i p a - t i o n of the n a t i o n a l i s t impulse i n eventual external aggression as unattractive and d i f f i c u l t as possible, and making the building of the domestic economy on the smooth modernization of the society as easy as possible. For r e a l i z i n g these purposes, the needs are: much c a p i t a l a i d ; a continuing j o i n t organization f o r applying the aid funds and for giving opportunities to the leaders of the under- developed countries to be mixed up co-operatively with the developed countries' leaders; much tactfulness, because of the variety of the underdeveloped countries; the ap p l i c a t i o n of a free import policy to t h e i r manufact- ured goods, by reason of the urgency of t h e i r search f o r markets; and emancipation of c o l o n i e s . 9 Carrying out these p o l i c i e s i s not a matter for one single de- veloped country, therefore, a new international partnership program f o r world economic growth i s proposed. Judging from the previous study of dynamics of world economic development, the purposes of t h i s program must be threefold; making.available s u f f i c i e n t c a p i t a l to permit the under- ., 8. .Walt Whitman Rostow & Richard W. Hatch, An American" P o l i c y i n Asia/Cambridge-New York. Technology Press of M. I. T. & Wiley, 1955, p. 10. " .-- 9 "The Rostow Doctrine," An e d i t o r i a l comment, Economist, August 22, 1959, p. 512. - • . . - 145 - developed countries to launch an ultimately s e l f - s u s t a i n i n g process of economic development; stimulating and a s s i s t i n g the underdeveloped countries to overcome obstacles to t h e i r own development other than lack of c a p i t a l ; and creating a climate of int e r n a t i o n a l economic a c t i v i t y i n which the economies of the developed countries of North America, Western Europe, Japan and Oceania could continue to grow. According to Professor Rostow's theory, the under- developed countries would be divided into three categories. The countries i n the t r a d i t i o n a l stage should be offered an expanded volume of technical assistance and such c a p i t a l as they could demonstrate they are ready to use. What i s needed i s that the ai d would be on a grant basis. The countries i n the t r a n s i t i o n a l stage should be offered continuing technical assistance and as much c a p i t a l as they could absorb. As long as the aid meets the agreed c r i t e r i a of productivity, i t should be borrowed at favourable rates of interest on a long-term basis. The countries i n take-off should be offered foreign c a p i t a l , judging from the view-point of credit-worthiness, i n connection with i n t e r n a t i o n a l sources of c a p i t a l . And with respect to these p o l i c y views, ten char a c t e r i s t i c s might be pointed out: f i r s t , every request f o r assistance which meets the c r i t e r i a of productivity would - 146 - be granted; second, i t i s designed to provide maximum incentives to the governments of the underdeveloped countries to take the steps necessary to promote develop- . ment and thus make t h e i r countries e l i g i b l e f o r assistance; t h i r d , economic growth i n many countries would depend more on the development of absorptive capacity than on the a v a i l a b i l i t y of c a p i t a l funds, therefore, the program should provide f o r the expansion of absorptive capacity; fourth, the reci p i e n t countries must be convinced that the program does not have narrowly p o l i t i c a l or m i l i t a r y objectives; f i f t h , i t i s as important to have agreed p o s i t i v e c r i t e r i a of e l i g i b i l i t y as i t i s not to apply wrong c r i t e r i a ; s i x t h , sponsorship should be i n t e r - national rather than national; seventh, the incentive effects of the plan w i l l be much more pronounced i f i t i s applied on a world scale than i f i t i s l i m i t e d to one or two regions of the world; eighth, the program w i l l have very l i t t l e incentive effect i f i t i s not assured of continuity over a number of years; ninth, though the underdeveloped countries w i l l establish home industries and w i l l become somewhat more s e l f - s u f f i c i e n t , they must not develop as autarchies; and tenth, there are a g r i c u l t u r a l resources which with a l i t t l e . i n t e l l i g e n t planning could be made to play a much more important part i n in t e r n a t i o n a l effors to promote development than i t has done to date, e. g. - 147 - by the productive use of a g r i c u l t u r a l s u r p l u s e s . ^ It seems that a much-expanded long-term program of the developed countries' p a r t i c i p a t i o n i n the economic development of the underdeveloped countries i s one of the few concrete instruments available f o r achieving the two- f o l d r e s u l t s of increasing the awareness elsewhere i n the world that the goals, aspirations, and values of the developed countries' people are i n large part the same as those of peoples i n the underdeveloped countries, and developing v i a b l e , energetic, and confident democratic s o c i e t i e s through the whole world. 2. C r i t i c i s m of the Marxian Standpoint One century has passed since K a r l H. Marx made public his great theory. Actually i t had a v a l i d i t y i n a certa i n period of the world economic history, however, as J. Maynard Keynes said a year before the publication of "The General Theory of Employment, Interest and Money," Ka r l H. Marx surely "invented a certain method of carry- ing on and a v i l e manner of writing, both of which h i s successors have maintained with f i d e l i t y , " but we can . discover "nothing. but out-of-date controversialising"-'--'-. i n 10 Walt Whitman Rostow, Max.F. M i l l i k a n , Paul N. Rosen- stein-Rodan.& others, A Proposal; Key to ah E f f e c t i v e Foreign Policy , Center for"International Studies, M. I. T., New York, Harper, 1957, pp. 57-69. . 11 Roy F. Harrod, The L i f e - o f John Maynard Keynes, London, McMillan, 1951, p. 462. his theory, which has been regarded by a number- of people as a clue to the economic riddle. S t i l l Marxism has not been eliminated from our contemporary economics. Now is the time to make sure that the Marxist analysis is not a valid theory of society but simply furnishes a part of the mechanism for a theory of society. Such a theory does not now exist. To offset or replace Marxism, we need a theory which takes account of the multiple motivations of human beings, one in which economic forces, dynamically interacting over time, help determine other aspects of the society and are partially determined by themselves. Professor Rostow once wrote: "The author has by no means solved the problem of formulating" an alternative to the Marxist system; but he would argue that the "focusing of attention on this problem is an urgent item on the agenda of the social"sciences. Further, i t s solution appears essential both for a f u l l understanding of the process of economic growth in the past and for the formulation of adequate public policy designed to sustain or accelerate economic growth in the many portions of the world where this is the majority w i l l of peoples and the enunciated aim of their governments."12 As far as the f i e l d of economics is concerned, the. essence of the.Marxian standpoint is as follows. 1 3 12 Walt Whitman Rostow, The Process of Economic Growth, New York", Norton, 1952, p. 9. 13 Vladimir I. Lenin, "The Three Sources"and Three" Constituent Parts;of Marxism," Capital, The Communist Manifesto and"Other Writings by Karl Marx, New York, Modern Library, 1932, pp. xxi-xxvi. Karl H." Marx, The German Ideology, 184o. Karl H. Marx, The Communist Mani- festo, 1848. Karl H. Marx, Critique of P o l i t i c a l Economy, - 149 - ; The fundamental proposition of Marxism i s the so-called economic or m a t e r i a l i s t i c interpretation of h i s t o r y . The general character of the various processes of l i f e i s fundamentally determined by the mode of produc- t i o n i n material l i f e . Marxism proceeds to the conclusion that the entire h i s t o r y of society i s merely a record of class struggles. Nineteenth-century i n d u s t r i a l i s m had greatly s i m p l i f i e d previous class alignments by s p l i t t i n g society into two great h o s t i l e groups: the bourgeoisie, as sole owners of the means of production, and the p r o l e t a r i a t , devoid of a l l productive forces except t h e i r own labour power and hence at the mercy of the small class of bourgeois employers. The dominant economic class, whenever faced by the r e f u s a l of an outmoded economic class to surrender i t s politicalldominance, has been compelled to erect a new p o l i t i c a l state of i t s own i n order to consolidate i t s economic power. Marxism regards control of the p o l i t i c a l state by the dominant economic class as the central fact i n a l l h istory. The class struggle i s originated and kept going by the existence of surplus value. The worker alone produces a l l wealth and i s r i g h t l y e n t i t l e d to the f u l l value ..of h i s creation. Marxism reduces a l l labour to simple average labour, regards land as merely a passive agent and c a p i t a l as the product of past labour. The exchange value - 150 - of everything i s determined by the labour time socia l l y - necessary to produce these products. The workers do not receive the f u l l value of t h e i r labour, but, with only t h e i r labour power to o f f e r , receive from employers no more than enough f o r meager subsistence and the propaga- t i o n of the race. Employers on the other hand, are said to be pocketing as p r o f i t s the surplus value, the difference between what they pay t h e i r workers and what these workers produce^. Marxism believes exploitation i n c a p i t a l i s t society taking the form of surplus value, which grows ipace as increasing e f f i c i e n c y of production shortens the labour time s o c i a l l y necessary to produce the workers' subsistence. Industry concentrates into larger and larger business units as wealth and income come increasingly into the hands of an ever-diminishing number of people. Pro- duction increases, but the consuming power of the working population r e l a t i v e l y decreases. Periodic depressions are f o r a time offset by various expansionist phases of c a p i t a l - ism, but, with the drying up of both foreign and domestic markets, society becomes increasingly rent by devastating crises and enters upon a period of i n d u s t r i a l decline leading inexorably to the collapse of capitalism. As the class struggle i n t e n s i f i e s , the r i c h grow fewer and r i c h e r , the poor more numerous and poorer. The increasing number and misery of the labouring class engenders a m i l i t a n t _ - 151 - class consciousness. The p r o l e t a r i a t hampers and attacks the c a p i t a l i s t i c system i n every possible way. When conditions have become unbearable, and where c o n s t i t u t i o n a l means of reform have been of no a v a i l , the workers unite i n a mass uprising at some propitious moment, overthrowing the r u l i n g class by the use of every method which capitalism has employed to preserve i t s e l f . Capitalism, containing w i t h i n i t s e l f the seeds of i t s own destruction, supplies the motive power which brings about i t s inevitable extinc- t i o n . With capitalism overthrown, the working class assumes complete control. The taSk of reconstruction i s carried on f o r an indeterminate period under the leadership of the proletarian dictatorship. When, f i n a l l y , the working class has come to include the entire population, t h i s i n t e r - mediate stage of socialism evolves into communism, the completely classless society, and c i v i l i z a t i o n has reached i t s f i n a l stage of development. Professor Rostow summarises the Marxist thought i n seven p r o p o s i t i o n s . ^ "(1) A society's p o l i t i c a l , s o c i a l and c u l t u r a l c h a r a c t e r i s t i c s are a function of the conduct of the economic process u n t i l the stage of communism i s reached, (2) History moves forward by a series of class struggles, (3) Feudal s o c i e t i e s were destroyed when they permitted the growth of a middle class 14 Walt Whitman Rostow, "Rostow on Growth; A Non- ~~ Communist Manifesto,";Lectures delivered at the University of Cambridge, Economist, August 22 , 1959, pp. 528-529. • - 152 - - - (4) C a p i t a l i s t i n d u s t r i a l " s o c i e t i e s " would create the conditions f o r . t h e i r own destruction, because they created a working force to which they allocated' only a minimum wage;"and because the venlarging of Indust- r i a l capacity would lead to a competitive struggle f o r marketsV —-." "" ' " ' ' ' ' (5) An increasingly assertive proletariat'would be goaded to seize the means"of production (6) This seizure of power would occur i n a- s e t t i n g of disruption caused by"imperialist wars . (7) After t h i s seizure of power, production' would be driven s t e a d i l y forward, without c r i s e s , and r e a l Income would expand u n t i l true communism became possible." There are cer t a i n s i m i l a r i t i e s between Professor Rostow*s dynamics (the t r a d i t i o n a l society, the t r a n s i t i o n a l society, the society i n take-off, the maturing society, and the mass consuming s o c i e t y ) , and the Marxist standpoint (feudalism, capitalism, socialism, and communism). By ac- cepting the facts that economic change has s o c i a l and p o l i t i c a l e f f e c t s , and that there i s the r e a l i t y of group and class interests which help to create the causes of wars, both theories s t a r t from t r a d i t i o n a l or feudal societies and inquire into the process of building compound interest into the s o c i a l structures. And both indicate the goal of true affluence i n the end, although the mass consuming society and communism are extremely d i f f e r e n t . As Professor Rostow said eight years ago, the problem of formulating an alternative to the Marxist system i s an urgent item on the agenda of the s o c i a l sciences. Judging from the previous study, Professor Rostow*s dynamics c e r t a i n l y has a cogent c h a r a c t e r i s t i c as a non-communist - 153 - manifesto. His basic c r i t i c i s m of Marxism i s related to the following two aspects. The Marxist hypothesis omits the r o l e of very long-run forces which have manifestations i n r e l i g i o n and the consciousness of n a t i o n a l i t y ; and i t gives an undemonstrated p r i o r i t y and fundamental causal p o s i t i o n to economic motivations and economic processes i n s o c i a l and p o l i t i c a l l i f e . " ^ - Human motivation i s the key point of attack on Marxism. Although the people i s a complex u n i t , seeking power, l e i s u r e , adventure, continuity of experience and sec u r i t y ; concerned with the family, the values of the culture; and capable of being moved by a sense of connec- t i o n with other human beings, Marxism finds nothing but the notion of p r o f i t maximization as human motivation. The h i s t o r i c a l background and Marx's personal experience made Marx think that people's behaviour was not an act of balanc- ing a l t e r n a t i v e and c o n f l i c t i n g objectives. However, i n the f a c t u a l world seen i n the l i g h t of economics, patterns of choice, not a r i g i d i n e v i t a b i l i t y , are of significance. As a matter of f a c t , Marxism assumes that the decisions of a society are a function of who owns property; so c a p i t a l i s t s o c i e t i e s would c l i n g f o r ever to the free market mechanism and private advantage. Thus, Marxism can give no expla- nation why.capitalist s o c i e t i e s accept progressive income 15 Walt Whitman Rostow, The Process of Economic Growth, New York, Norton, 1952, pp. 42-43. - 154 - tax and the welfare state, and why the working class joins i n democratic p o l i t i c a l a c t i v i t i e s . "The outcome of s o c i a l c o n f l i c t i s i n fact l i k e l y to be "governed by ultimate" considerations of communal continuity. K a r l Marx regarded the ultimate human solvent as cowardice and betrayal, not as' the"." minimum condition f or organized s o c i a l l i f e , "16 According to Marxism, economic advantage, i . e. p r o f i t maximization, i s the cause of wars. But c o l o n i a l wars were fought mainly because of national prestige and power, regional aggressions were aroused from the dilemma between asserting national power on the world stage and consolidating central governmental power over t r a d i t i o n a l forces i n the regions, or concentrating on modernization, and massive wars were attempted to win decisive hegemony i n the world arena. C a p i t a l i s t s o c i e t i e s enjoy making st r i d e s of economic growth without being dependent upon colonies. Colonialism i s v i r t u a l l y dead. World economic development has been tracing the route of the f i v e stages: the t r a d i t i o n a l society, the t r a n s i t i o n a l society, the society i n take-off, the maturing society, and the mass consuming society, not only by the effect of p r o f i t motives. As soon as people understand that they need not die young or l i v e i n i l l i t e r a c y , there appear some.forces to make.this process of development ~ 16'" Walt Whitman Rostow, "Rostow on Growth; A Noh- Cbmmurilst Manifesto," Lectures delivered at the University of Cambridge, Economist, August 22 , 1959, p. 529. - 155 - i n e v i t a b l e . I t seems that societies have behaved i n the most Marxist way i n the drive to maturity, nevertheless people do the things needed to i n d u s t r i a l i z e a society not merely to make money, but to have power, adventure, challenge and prestige. Marxism cannot explain "the ardent s t r i v i n g of men long a f t e r they had made more money than they or t h e i r children could conceivably use."^7 An i n d u s t r i a l reserve army does not seem to have arisen, and the idea of stagnation of capitalism i s made u n r e a l i s t i c by r i s i n g r e a l wages. Competition does not lead to monopoly i f monopoly develops, i t i s more because of the economies of large scale research and development than because small firms could not survive the market environment. Owing to trade unions and various pressure groups a r i s i n g from the democratic process, wages approximate to net marginal value product. The Keynesian revolution has been making the amplitude of cycles of unemployment smaller and smaller through sensitive economic policy. Since people prefer a productive a c t i v i t y to l e i s u r e , they have a l o t of things to do productively. Therefore, d i - minishing returns are not l i k e l y to p r e v a i l . Where the class struggle i s softened, what i s l e f t . i s not a dominance of the.profit motive and progress, 17 Walt Whitman Rostow,""Rostow oh Growth; A Nori- Communist Manifesto," Lectures delivered at the University of Cambridge, Economist, August 22 , 1959, p. 529. - 156 - but a problem of balance between external assertion, con- solidation- of central power, and economic growth. Eventual- l y , Marxism assumes that our compound interest appears i n the perverse form of mounting p r o f i t s , capable of heing d i s t r i b u t e d in.high c a p i t a l i s t l i v i n g , unusable capacity and war; but Professor Rostow"s dynamics asserts that on the other hand, our compound interest would face the choices between the national pursuit of external power, the welfare state and the expansion of mass consumption. F i n a l l y , we have to notice the fact that Marxism has formidable force as a technique of power, because i t could help to establish a system of state organization based on p o l i t i c a l determinism. In a t r a n s i t i o n a l society, a w e l l - d i s c i p l i n e d minority can seize power, which means the control of the army, po l i c e , and means of communication. A centralized d i c t a t o r s h i p may supply e s s e n t i a l pre-condi- tions for take-off, through s e t t i n g up confusion and c o n f l i c t between t r a d i t i o n a l elements and modernizers. The Marxian standpoint i s faulty, and Professor Rostow"s dynamic view i s v a l i d , to interpret the world economic development. But the outcome i s uncertain. CHAPTER V. CONCLUSIONS Prognosis "The ideas of economists and p o l i t i c a l p h i l o - sophers, both when they are right and when they are wrong, are more powerful than i s commonly understood. Indeed, the world i s ruled by l i t t l e else. P r a c t i c a l men, who believe themselves to be quite exempt from any i n t e l l e c t u a l influences, are usually the slaves of some defunct economist. Madmen i n authority, who hear voices i n the a i r , are d i s t i l l i n g t h e i r frenzy from some academic s c r i b b l e r of a few years back. I am sure that the power of vested interests i s vas t l y exaggerated compared with the gradual encroach- ment of ideas. Soon or l a t e , i t i s ideas, not vested i n t e r e s t s , which are dangerous f o r good or e v i l . " J. Maynard Keynes - - V. Conclusion Prognosis There i s a growing conviction that world economic development holds the key not merely to save the world, but primarily to save our own souls. Very few problems are more engaging and more s i g n i f i c a n t than dynamics of world economic development. To study s o c i a l r e a l i t y , i t i s absolutely important to approach from the viewpoint of human id e a l s , because our thoughts are directed by a value' connotation. An enormous number of theories have been set f o r t h , but most of them lack cogency, due to the fact that they emphasize many things that are not true. To speak of development i s to assume that the society i s proceeding, or f a i l i n g to proceed, i n a certain d i r e c t i o n . Certain standards or c r i t e r i a of such development are not so simple that they are explained by an economic dynamic approach of a s o c i o l o g i c a l i n s t i t u t i o n a l approach. Capital accumulation, economic d i v e r s i f i c a t i o n , balance of payments, technological development, population, labour, employment, land d i s t r i b u t i o n , colonialism, dualism or pluralism, p o l i t i c a l a f f a i r s and ideology are very important problems per se; however, d i f f e r e n t opinions which are founded on those di f f e r e n t bas6s must become a broad synthetic system by improving each other. Professor Walt Whitman Rostow - - 159 - has been establishing a dynamic theory with broad under- standing of e x i s t i n g theories and o v e r a l l research of p r a c t i c a l f a c t s . As an economist, Professor Rostow makes a reasoned catalogue of the world as i t i s , because he believes that we must not picture to ourselves an unreal world as i t might, or ought to be, and make schemes f o r i t . His dynamic theory of economic growth on a global basis i s based upon f a c t u a l history seen i n the l i g h t of economics. Following an inevitable process of development, a l l economies i n the world have been tracing f i v e stages of growth. Almost two centuries have passed since the United Kingdom f i r s t attempted a take-off. Meanwhile, France, Belgium, the United States, Germany, Sweden, Denmark, Japan, Canada, A u s t r a l i a and the Union of Soviet S o c i a l i s t Republics have reached the stage of maturing society. Mexico, Argentina and Turkey seem to have finished the process of take-off, and China, India and Yugoslavia are taking-off now. Burma, Nigeria, the Belgian Congo, Southern Rhodesia, Colombia, B o l i v i a and Ecuador are t r y i n g to take-off, and Puerto Rico, Panama, Venezuela, Peru, B r a z i l , Chile, Iran and the Philippines keep up with the forerunners. I t i s obvious that even Indo-China, Thailand, Indonesia, Ceylon, Pakistan, - 160 - Afghanistan, Iraq, Egypt, Ethiopia, Kenya and Ireland w i l l sonner or l a t e r get out of- the pre-take-off stage. In the modern world there w i l l very soon be no e n t i r e l y t r a d i t i o n a l s o c i e t i e s l e f t . The future never resembles the past. Human knowledge i s too weak to t e l l what p a r t i c u l a r changes to expect. Nobody knows what the future holds. S t i l l we must be guided by some hypothesis, because as moving beings, we are forced to,act. Eventually, the assumption that the future w i l l resemble the past i s the chief determinant on how we act i n practice. When we know that the arena of s o c i a l c o n f l i c t w i l l become t r u l y global i n s i x decades, and that the outcome of s o c i a l c o n f l i c t i s i n fact l i k e l y to be governed by ultimate considerations of communal continuity, three massive current problems should be considered: how to m o l l i f y the dangerous characteristics of the Union of Soviet S o c i a l i s t Republics; how to cope with a number of the underdeveloped countries; and how to clear up the meaninglessness of Marxism. The great empire which stretches out from Europe to Asia has now reached i t s dangerous stage, facing inevitable choices. The fate of those l i v i n g i n the stage of high mass consumption as w e l l as those suffering greatly from the inequality of the world economic structure, w i l l be largely determined by the nature of the pre-take-off conditions and take- - 161 - off i n the younger nations. The minumum condition f o r organized s o c i a l l i f e i s the ultimate human solvent that the best decisions are the r e s u l t of disagreement, not of a single motivation. Observing the past economic history of the world, we might know that the ideas of economists are very i n f l u e n c i a l whether they are right or wrong. Thus, we must make known the following f a c t s . As f a r as the underdeveloped countries are concerned, the path of development i s an u p h i l l one. However, given the w i l l i n g - ness to bear the costs of development, and given the prerequisites of s o c i o l o g i c a l and p o l i t i c a l development, the prospects for development are hopeful. After the rate of development i s accelerated, the obstacles to further development may be more e a s i l y reduced. Professor Rostow's theory shows that once momentum i s gained, the process tends to be cumulative and each advance creates the conditions f o r further advance. As f o r the developed countries, the current i n s t i t u t i o n a l i z a t i o n of many requirements f o r development makes continued growth possible. There can hardly be seen any sign that changes i n the prev a i l i n g economic and s o c i a l structure are under- mining the present i n s t i t u t i o n a l i z a t i o n of development requirements. I t i s true, as J. Maynard Keynes once indicated, - 1 6 2 - that when we wish to put our point of view c l e a r l y , we must sometimes pretend to a l i t t l e more conviction than we f e e l . Professor Rostow's theory i s , at a munimum valuation, f u l l of interest and application to the present world; and contains many foresights for the future. I consider i t may be rated much higher, as superior to a l l other approaches, -replacing and in v a l i d a t i n g them. Neither Marxism, nor the other non-Marxist views, s a t i s f y our contemporary value connotations; they are both too narrow. 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