The Road to Development

At the end of chapter 13 in Backhouse’s The Ordinary Business Life, the topic changes to that of development economics. What really drives development in underdeveloped countries? Is primarily based out of the development of the private sector, or is the public sector’s presence needed. On page 303 of Backhouse Arthur Lewis “distinguish[es] between a modern sector in which firms maximize profits and use mechanized production methods and a ‘traditional’ sector in which family relationship ensured that everyone was employed on the land, even if their presence did not raise output….Economic development involve[s] the growth of the modern sector. Labour move[s] out of a sector in which its productivity was zero into one where it was productive”. From studies in my development economics course, I have found this movement from a traditional sector to a modern one to be one of the most essential parts of undeveloped countries catching up. My only question to this remains, what is the best way of going about this transformation?

Many times developing countries lack the resources and education to simply start up private sector growth. If this is the case, then countries may be stuck in the realm of poverty and unemployment that Keynes touched on. However, what effects does the mobilization of the public sector have? Bringing in foreign investors to utilize what resources third world countries have often results in those outside of the country getting richer, while those within stay poor. Government spending may do the trick in a sense, however, there can be grave consequences. Mass borrowing on the part of the government is often necessary for this to happen, which may cause colossal inflation and the further loss of purchase power in the already poor countries. Government intervention may also disrupt the communication that prices and things related have. This disruption of communication amongst the markets may lead to the misallocation of capital and labor, and set up the chance for economic bubble bound to burst. The final problem with government interaction, which I have seen the grave effects of in my development economics course, is the amount of power that is placed in the hands of the government when they are the ones spearheading development. Often times, because they are the ones receiving the massive amount of funds they are able to use the money to increase their power by, allocating resources in a way that makes themselves richer and forces the citizens of the developing countries to obey their rule in order to receive enough to just survive. Even if the country is seeing some form of economic growth because none of it is being passed down to the people, they can remain poor.

Despite all that was said about the negative consequences that can come from the public sector’s initiation of development, I believe this to be the most viable option as long as those in charge have the people’s best interest in mind. While the initiation of development from this angle will initially leave the people of the country excluded and remaining poor, the effects of economic development along with increased opportunities in growing markets will trickle wealth down to the at the bottom. With the increase in production within a country, standards will rise as competition breeds innovation into the lands. Even if in the short term there is massive poverty and inequality, over time the bottom lines of developing countries will be pulled up with the growing economy and private sector will begin to see improvements. The only prerequisite to this is a competent government, which in many of these countries is not the case. This trickle down growth is better than the rut a developing country may find itself in waiting for the private sector to kick start itself. What is your take on the development of the third world? Which way do you think is the route to take for developing countries? Are there other viable options not touched on or given enough attention?