It is useful to recount briefly the motivating factors behind the push to industrialize, if only to place the
subsequent policies in their historical context. The economic arguments pointed to the secular deterioration
in the terms of trade for poor countries’ raw material and agricultural exports, differing income elasticities
of demand for agricultural and industry (Engel’s curves), and more generally, how high productivity growth,
considered the basis of rising per capita income, was only attainable through industrialization.
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It also reflected the political pressures and interests behind economic autonomy following political independence in
some countries, export pessimism from both the collapse of commodity prices and world trade in the 1930s,
and the post-war protectionism in Europe and elsewhere. There was also a relatively hospitable international
climate, in which US international agencies and multilateral institutions supported such initiatives. In this
context, returning to a dependence on raw material exports was considered both economically unviable and
politically problematic.
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In their arguments promoting government intervention, many early development economists
focused on a “missing factor’ – capital, technology, entrepreneurship –which was unlikely to emerge from
market forces alone. Therefore, different methods were required to elicit these missing ingredients for
growth. Imperfect capital markets, for example, were unlikely either to generate sufficient savings or allocate
them efficiently without some form of market intervention. Technological and pecuniary externalities lead
to underinvestment. In addition, investors’ expectations were often based on past experience, requiring some
kind of ‘inducement’ mechanism to elicit investment in new industrial activities (Hirschman, 1958, 1977).
With respect to capital, some focused on low domestic savings rates and the need to harness foreign
capital in the form of aid or direct investment (Lewis, 1955). Gerschenkron (1962) argued that the greater
relative backwardness of modern less-developed countries, in contrast to previous industrializers, required a leap into the most modern, capital-intensive sectors. In the face of this challenge, and equipped with a weak
private sector and scarce capital, only the state had the capacity to mobilize and allocate resources. Others
saw the problem from a Keynesian perspective as one of motivating investors, rather than as one of scarce
savings. Due to the prevalence of pecuniary externalities, Nurkse (1953), Rosenstein-Rodan (1943), and Scitovsky (1954) argued that governments need to coordinate investment decisions and promote a ‘Big Push’.
Despite these differences, there was broad consensus around the basic assumption that development
required non-marginal change that market forces alone could not generate.
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The goal was to reallocate resources to industry from agriculture or raw materials. The strategy involved changing the incentive structure
to redirect them.
There were two other implicit, but ultimately, questionable, assumptions that experience would later
make apparent. The first had to do with the nature of technological change. The development process was
typically portrayed as one of factor accumulation and technology, like labour and capital, was viewed as just
another missing factor. Embodied in capital, it could be imported and, assuming fixed-technology production functions, applied in the same methods as in the country of origin. The second had to do with the state
and technocratic omniscience. State planners, armed with input-output tables from industrialized countries,
and given the assumptions about technology, could simply allocate resources accordingly and leapfrog into
the modern industrial era.