Structuralism, Import Substitution and State-Led Development

A second phase extended from the early 1950s to the late 1960s. The major contributions - from structuralists in the South, such as the group of economists working at the United Nations (UN) Economic Commission for Latin America with Raul Prebisch - and in the North, such as Chenery, maintained the earlier themes but moved further away from neoclassical economics (and from its generally optimistic and problem-solving mind-set) in at least two different ways.

First, there was a general recognition that many kinds of structural rigidities existed in LDCs which made these countries very different from what were then perceived as relatively smoothly functioning advanced economies. For instance, supply rigidities in particular sectors, such as the agricultural sector owing to conditions of land tenure and the balance of payments due to a rigid import-gross domestic product (GDP) ratio - an idea formalized in the two-gap model (Chenery and Strout 1966) incorporating both saving and foreign exchange problems - were emphasized, and inflation was seen to be the result of supply rigidities and distributional conflicts in the economy (Noyola 1956; Sunkel 1960).

Second, there was a general belief that trade could not be relied on as an engine of growth, and that attempts to increase exports were likely to be met with inelastic world demand and hence worsening terms of trade (see Singer 1950; Prebisch 1959). The interaction between rich and poor countries through trade and factor movements, in particular, was argued to give rise to uneven international development. Myrdal (1957), who discussed both spread (which made rich country growth pull up poor countries) and backwash (which created divergence) effects, argued that, without deliberate redistributive mechanisms (in the absence of a world government), the latter would dominate.

The recognition of market failures, as in the first phase, together with that of rigidities and “export pessimism” led to the view that development and growth could not be left to the market.

This is not to say that there was unanimity on these views. An important dissenting voice was that of Bauer (see Bauer and Yamey 1957), who emphasized the corrupting influence of the politicization of economic life as a result of state intervention. Moreover, Marxist writers such as Baran (1952) took a broader view of development by emphasiz­ing political and social factors which, among other problems, led to the transfer of the economic surplus from LDCs to developed countries, rather than narrowly focusing on economic factors related to capital accumulation and industrialization, and also drew attention to the inefficiency of, and corruption in, the capitalist state.