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II.Changes in development theories and policies: toward economic growth with social equity

1. Growth maximization and trickle-down policies
2. Overcoming internal obstacles to development: top-down planning for sectoral development
3. Stimulating development from the bottom up" :economic growth with social equity policies
4. Conclusions


Theories of international development have undergone serious evaluation and fundamental change over the past two decades. These changes were in part a response to the shortcomings and failures of policies and programmes implemented during the 1940s and 1950s, and in part a reaction to changing economic and social conditions during the 1960s and 1970s. Dissatisfaction with the pace and direction of economic growth, and with the severe problems of social inequity, spreading poverty and dualism in the economies of developing countries, led development planners and policy-makers to reexamine strategies emphasizing capitalintensive, export oriented industrialization. Increasing concern about the inappropriate and ineffective use of natural resources in developing countries and the declining quality of the physical environment also led to the search for new approaches to development during the late 1970s and early 1980s.

These changes in the perceptions of, and approaches to, development can be traced by reviewing development theories and strategies during three recent periods of evolution: (1) the period from the early 1940s to the late 1950s, when international assistance organizations and governments in developing countries were pursuing policies aimed at maximizing economic growth, industrial output and export production through capital-intensive investment strategies and were relying on the free operation of market systems and "trickle-down" effects to generate sustained economic growth; (2) the period from the early 1960s to the early 1970s, when international development agencies and national governments were concerned with removing "obstacles" or "bottlenecks" to development primarily by concentrating investments in "key sectors" of the national economy and attempting to "modernize" developing societies by transferring methods and institutions from Western industrial countries; and (3) the period from the early 1970s to the present, during which international assistance organizations and developing country governments were seeking to achieve more "balanced" development in the international economy by reducing the growing disparities between rich and poor countries, to achieve greater equity in the distribution of the benefits of economic growth within developing nations, to reduce the high and growing levels of absolute poverty in the poorest developing countries. and to provide for the basic human needs of those living in absolute poverty while increasing their productivity and income.1

1. Growth maximization and trickle-down policies

When the Point Four Program, or Marshall Plan, was initiated in the 1940s, the intention of aid-giving nations was to rebuild the physical and industrial structure of countries that had attained relatively high levels of productive capacity before the Second World War. American aid was primarily aimed at rehabilitating physical infrastructure and industrial plant, at temporarily feeding large numbers of people displaced from their livelihoods by the war, and at re-establishing market mechanisms in European economies. Other international funding organizations, established in the wake of the Marshall Plan, had similar objectives. The World Bank's mission, for instance, was clearly reflected in the organization's formal title - the International Bank for Reconstruction and Development - and in the order in which elements of the title appear. Concern for promoting development in poor countries was subordinate to reconstructing productive capacity in more economically advanced nations that had been devastated in a long and intense global conflict. In the late 1940s and early 1950s the emphasis of aid-giving organizations was on macro-economic development, national planning and construction of capital-intensive industries, highways and power generating systems and on rebuilding the financial capacity of European countries to continue their own reconstruction. The plans called for large-scale and expensive projects requiring sophisticated engineering skills and high technology equipment. The governments receiving aid were generally experienced in industrial development. They had well-trained professionals and skilled workers, high levels of planning and managerial capability and a strong motivation to recover as quickly as possible.2

With their success in rehabilitating European economies, bilateral and international aid organizations turned their attention increasingly to poor nations of the world that had never attained high levels of industrial production. Their economic, social and political characteristics were quite different from those of European nations, as were the motivations of their leaders. Their poverty was far greater than in Europe and preconditions for economic growth that were taken for granted in European nations did not exist in most countries of the Third World. But international aid agencies largely pursued the same strategies in poor countries that they had used successfully in reconstructing the economies of Europe. During the 1950s, little attention was given to differences in the Third World's conditions and needs, until these appeared to create obstacles to achieving high levels of industrial output. A strong belief that the same processes of industrialization that brought economic growth to Europe would stimulate and modernize the developing nations) economies pervaded aid organizations. as did the confidence of development theorists that the benefits of growth would eventually reach the vast majority of people in poor countries through automatic market mechanisms and through spread and "trickle-down" effects.

The industrialization policies prescribed by economic development theorists during the 1950s and 1960s sought high levels of economic growth and rapid increases in gross national product (GNP). The only real debate concerned the means by which these goals would be achieved. Some argued that the most effective way of attaining high levels of economic growth was through heavy investment in capital-intensive industry as a "leading sector," whereas others contended that a "big push" was needed in all sectors at the same time to increase output and demand for industrial goods. Both theories were modelled on processes of economic growth that had occurred in Western Europe and North America during the second half of the nineteenth and first half of the twentieth centuries.3

The underlying rationale for these theories was that GNP could be increased most rapidly by raising the level of industrial output. Developing nations were urged to seek large amounts of foreign capital, promote specialization in low-wage or raw material industries, and apply capital intensive technology to the production process. Export production and import substitution industries were usually favoured. Since many developing countries had comparative advantages in natural resources and raw materials, these were often exploited by colonial governments, foreign investors or national governments. Exports of natural resources would generate the flow of foreign capital needed for investment in the industrial sector.

As industrial output grew it would generate more employment and higher incomes, which in turn would raise the level of demand for both agricultural and industrial goods, increase savings, allow for expanded capital formation and generate new investment. Public expenditures, bolstered by foreign aid, would be used to construct the physical infrastructure that would lower production costs and improve distribution. Nearly three fourths of the loans made by the World Bank and International Development Association (IDA) from 1946 to 1963 were made for physical infrastructure projects, especially for transport, electrical power, ports and harbours and industrial plant.4

One group of economists - "leading sector" theorists insisted that the most effective means of generating and sustaining high levels of economic growth was by investing heavily in a single sector. Industry was usually considered the "engine of growth" for developing economies, but some economists argued that other sectors might be more appropriate for initiating the growth process. Some. such as Arthur Lewis and Theodore Schultz, contended that agricultural investment would provide the capital needed for industrialization in rural nations, and still others insisted that investment in the housing and social services sectors would stimulate demand for industrial products and set off a new spiral of growth 5.

But many economists, such as Albert Hirschman, maintained that it mattered little which sector was chosen initially, because heavy investment in any sector would generate increased demand and induce investment in all other sectors. Growth in the leading sector would spread and thereby raise the overall level of economic output. Hirschman argued that heavy public investment in either directly productive or social overhead activities would lower costs and, through complementarities in the economy, increase demand for the investment of private capital. The ripple effect from this initial stimulation would generate growth throughout the economy. Thus, the objective of "leading sector" theorists was to create a set of continuous tensions: a sequence of investments that "leads away from equilibrium is precisely the ideal pattern of development," Hirschman insisted. Unbalanced growth would generate and enlist resources and abilities for development that had previously been "hidden. scattered or badly utilized." The mechanisms by which growth would spread were thought to be largely automatic once investment began. "If such a chain of unbalanced growth sequences could be set up." Hirschman predicted, "the economic policy makers could just watch the proceedings from the sidelines."6

Other economists, embracing the same ultimate goal of maximizing economic growth, argued for a different approach. They noted that in labour-surplus economies, investment in one industry or set of industries could not generate sufficient employment, income and demand to absorb output. Moreover, heavy investment in one industry precluded development of other sectors needed to provide inputs for industry. They argued that massive amounts of foreign aid should be used in combination with domestic resources to make a "big push" for development by investing simultaneously in all sectors. Balanced investment would create the internal complementarities that Hirschman and others assumed already existed in developing economies. It would allow each sector to supply the others without heavy reliance on imports; appropriate use could therefore be made of natural resources; employment would increase in all sectors of the economy at the same time; and greater demand would be created for outputs in each sector. Agriculture and commerce would benefit as well as manufacturing. Moreover, expansion of industry would proceed at pace with improvements in labour skills and entrepreneurial experience. Investment in physical infrastructure, public utilities, productive equipment and plant would be balanced, but sizeable enough in each sector to push the economy into a stage of rapid and sustained growth. Such a strategy was necessary, Nurkse insisted, because, in the long run, productive capacity, the level of production and ability to use capital to increase output were all limited by the size of the market, which was extremely small in most poor countries.7

But the question of how massive poverty - a major factor limiting the size of markets in developing nations - would be alleviated was rarely asked by development theorists or directly addressed in aid strategies. The problem of reducing the large gaps in income and wealth between rich and poor nations would be solved, Rosenstein-Rodan argued in the 1940s, by achieving "a more equal distribution of income between different areas of the world, by raising incomes in depressed areas at a higher rate than in the rich areas."8 This would occur internationally through the same automatic mechanisms that Hirschman relied on within national economies. Public investments would set in motion complementary activities that would spread growth throughout the economic system. As industrial production increased, new jobs would be created, demand for new products would rise and through forward and backward linkages, new opportunities for investments would be created. They, in turn, would create new employment opportunities and raise overall levels of income. Some of the income would be spent on food, shelter, education and health care; some would be taxed to provide public services; some would be saved and reinvested. New employment opportunities would not only draw larger numbers of people into the productive system, but the resulting demand for labour, goods and services would spread from major urban centres where large-scale industries were to be concentrated to smaller towns and rural areas.

The rising level of income would create more demand for agricultural goods and the application of new technology would make agriculture more productive and less labourintensive. Surplus agricultural labour would be absorbed in the expanding industrial sector. As agricultural production increased, profits would be reinvested in more efficient technology, better seed varieties, irrigation and other inputs that would generate even higher yields with less labour and land. Rostow, and others, believed that the exploitation of land and natural resources would stimulate the growth of a self-sustaining industrial sector because the export of natural resources would generate the capital needed to finance industrial expansion and service foreign debt. Once the economy reached the "take-off" stage, more of the poor would begin to benefit and the growth cycle would generate higher levels of output, create incentives for diversification and allow more technologically advanced industries to succeed lower wage and natural resource export industries.9

Many economists believed, along with Kuznets who formalized the theory, that in the initial stages of growth the largest share of income would go to higher income groups. But as growth continued, the poor's relative share of income would increase.10 When growth became rapid enough to change the dualistic structure of the economy, benefits would be distributed more equitably and poverty would gradually be eliminated. Many economists argued that the premature reallocation of investments to increase the distribution of income and to provide welfare for the poor would slow the pace of economic growth and thus delay the time at which the poor's share of income would begin to rise on the " Kuznets curve. "

Reassessment of Classical Economic Development Theory

By the early 1960s it became increasingly apparent that in most developing nations a strategy of rapid growth through capital intensive industrialization was not working satisfactorily. Growth occurred in some Third World nations during the 1950s and early 1960s, but at rates well below those sought in national development plans. Studies found that foreign aid had little direct impact on increasing the levels of GNP in less developed countries. Griffin and Enos discovered, for instance, that the correlation between foreign aid and increases in GNP during the 1950s was weak or insignificant for African and Asian countries. Aid and growth were negatively correlated for Latin American countries: "the greater the inflow of capital from abroad, the lower the rate of growth of the receiving nation."12 Most countries had difficulty obtaining large amounts of foreign capital needed to finance ambitious industrialization plans and had little success in mobilizing sufficient savings internally to achieve high rates of capital formation.

Some theorists began questioning the assumptions underlying capital-intensive industrialization models. Dudley Seers, among others, pointed out that the prevailing conditions that made rapid and sustained industrialization possible in Western societies constituted a "special case," and that economic development policies applied successfully under those conditions could not be transferred or replicated in developing nations.13 He noted that in Europe and North America factors of production had been abundant during their periods of industrialization; labour was educated, skilled, mobile and could easily be organized for productive purposes. Land was also abundant, arable and widely held in private ownership. Capital was readily available, most sectors of the economy were heavily capitalized, entrepreneurship was well established, and governments provided inducements for entrepreneurial expansion. The structure of the economy was diversified and dominated by a competitive manufacturing sector that had evolved from numerous cottage and artisanal enterprises. Agriculture was largely commercialized in Western societies by the time of the industrial revolution, and an extensive marketing network had evolved that provided farmers with accessible and competitive outlets for their products. Public revenue collection and allocation procedures were firmly established and savings could be mobilized by an efficient banking system. The level of national investment was already high. Exports were diversified in products for which there was also an internal market. Income distribution was relatively equitable and a comparatively small percentage of the population remained impoverished. Population growth was below two per cent a year and a large percentage of the people lived in urban areas.14

But in developing nations the conditions were far different. In most poor countries, governments lacked analytical and administrative capacity to formulate and implement the comprehensive, complex national development plans that were prescribed by international assistance organizations to achieve in a short time what had been attained incrementally over a long period, and without comprehensive planning, in the West. The ability of governments to coordinate their activities among a variety of ministries and agencies to implement a "big push" or a leading sector strategy was weak. Few governments could manage public investments effectively, let alone guide or control those of the private sector. Low levels of education within developing societies limited the number of skilled workers, and the poor countries lacked experienced managers. Low levels of agricultural production and massive poverty in rural areas limited the expansion of domestic demand. W. Arthur Lewis noted that in countries with large surpluses of labour the import of foreign capital would not raise real wages unless the capital was invested in industries that produced goods for domestic consumption.15 But with natural resource exports yielding prices far below the costs of imported industrial plant and machinery, and with foreign private corporations investing in low-wage production sectors, there was little hope either of increasing the income of the majority of the poor or of producing goods at a price they could afford. The severe income disparities in developing countries created by industrialization strategies undermined the very market systems that economic development theorists claimed would be the engine of growth in developing nations. Myint pointed out that . . . disequalizing factors work not only on the supply side but also on the demand side, and unequal distribution of incomes and of activities combine with each other to inhibit economic development. One of the most important reasons why the backward countries have been prevented from enjoying the stimulating effect of manufacturing industries is not the wickedness of foreign capitalists and their exclusive concern with raw materials supplies but merely the limitation of the domestic market for manufactured articles. 16

Even natural resource export industries in developing countries were at the mercy of international markets in which they were uncompetitive or at a severe disadvantage. Myint pointed out as early as the mid1950s that on closer examination, it turns out that the only type of investment which private investors are willing to undertake in the underdeveloped countries, is the exploitation of raw materials, e.g., petroleum, and it is precisely in this field that the governments of the underdeveloped countries are frequently unwilling to admit private foreign capital because they fear that this 'nineteenth century type of investment' will merely develop the natural resources and not the people and will result in 'foreign economic domination' aggravating the economic 'backwardness' of their people.17

Moreover, poor countries had to pay substantially higher prices for their imports of equipment, technical knowhow, intermediate and finished goods than they received for their natural resources and raw material exports, leading to serious deficits in their balance of payments. High population growth rates offset advances in output and income, leaving much of the population no better off economically at the end of the 1950s than they had been a decade earlier.18

Market mechanisms that were supposed to act as channels for the spread of growth impulses and the filtering down of benefits in developing economies either did not exist or worked imperfectly. Instead of growth spreading throughout developing economies, resources were often drained from rural hinterlands, through what Myrdal called "backwash effects," to support industries located in metropolitan centres.19 Political instability, low levels of administrative capacity, pervasive corruption among politicians and bureaucratic elites, and an unwillingness of political leaders to share power, or to enforce laws that would maintain order with justice, led to the creation of "soft states" in which governments were unable to organize society for developmental purposes 20 Productive assets such as land were generally owned or controlled by a small, privileged elite who opposed reforms that might lead to a greater distribution of income and wealth. Their profits were often invested in the largest urban centres or entirely outside of the country.

Under these conditions entrepreneurship could not easily be promoted, and the low levels of income received by the vast majority of people continued to inhibit the expansion of internal demand. It was extremely difficult for governments in developing countries with large subsistence populations to mobilize savings or generate revenue through direct taxes. Thus, the level of public investment depended on revenue raised through indirect taxes, export earnings, foreign aid and external borrowing. As a result, investment remained a small percentage of gross domestic product. 21

The spread or trickle-down effects of growth were constrained by weak market and trade linkages between major industrial centres and rural areas. Many developing nations had "primate city" spatial structures: the bulk of modern economic activities, social services, infrastructure and facilities had been concentrated in the capital city or a single large metropolitan area which dominated the spatial system and economy of the nation 22 Few secondary cities could emerge and large disparities in income and wealth arose between the primary city and the rest of the nation. Disparities between the largest city and the rural hinterlands pulled large numbers of younger, more ambitious and better educated rural people into the metropolitan centre. They were followed by less educated and unskilled relatives and friends who, often, could not find jobs in the city or had access only to the lowest paying ones. Slums and squatter settlements of the poor grew quickly in the largest cities.23

Thus, not only did the capital-intensive industrialization strategies of the 1950s fail to produce rapid and widespread growth in developing countries but, in many, it created "dual economies" and reinforced a cycle of poverty that became more difficult to break. The unfettered operation of the international market did not lead to the effects that development theorists expected. "In practice, the free play of economic forces in backward countries has resulted, not in a division of labour according to individual abilities, but in a division of labour according to stratified groups," Myint pointed out. The exploitation of natural resources reinforced the underdevelopment of human resources to create a vicious cycle of poverty. "The accurate selection of different types and qualities of natural resources by the automatic market mechanism contrasts dramatically with its lack of selectivity concerning human resources which has resulted in the'fossilization'of the backward peoples in their conventional roles of undifferentiated cheap labour and unspecialized peasant producers."24

The foreign aid strategies of the 1950s strengthened the forces perpetuating poverty in developing nations, and by the end of the decade came under attack by both liberal and conservative economists. Milton Friedman, for instance, while supporting the concept of foreign aid, questioned the three major assumptions underlying capitalintensive industrialization policies. He challenged the propositions that availability of capital was the key to economic development, that underdeveloped countries were unable to mobilize capital internally, and that centralized, comprehensive macro-economic planning was a prerequisite to development. "All three propositions are at best misleading half-truths," Friedman argued.25 He noted that developing nations had been mobilizing capital and other resources for high priority investments for centuries. But, he insisted, other conditions were more important for promoting economic development and that these had to be created before capital could be used effectively. Moreover, Friedman argued that the prescriptions for macroeconomic development planning were unlikely to be useful or appropriate in developing nations. "Such a centralized program is likely to be a hindrance, not a help," he maintained.

Economic development is a process of changing old ways of doing things, of venturing into the unknown. It requires a maximum of flexibility, of possibility for experimentation. No one can predict in advance what will turn out to be the most effective use of a nation's productive resources. Yet the essence of a program of economic development is that it introduces rigidity and inflexibility.26

Others insisted that bilateral foreign assistance which was tied to procurement in the donor countries prevented governments from using the funds for high priority needs and for non-industrial purposes. The conditions under which aid was given often precluded its use for investments in other than show-piece projects and high technology production. Ultimately these capital transfers discouraged indigenous savings and internal capital formation in developing nations. The benefits of aid often went to the small elite who held political power and who were unwilling to undertake social and economic reforms or initiate programmes that would break the bottlenecks to economic expansion and diversification. Griffin and Enos, reflecting on similar conclusions arrived at by World Bank officials at the end of the 1950s, claimed that "foreign aid tends to strengthen the status quo; it enables those in power to evade and avoid fundamental reforms; it does little more than patch plaster on the deteriorating social edifice."27

2. Overcoming internal obstacles to development: top-down planning for sectoral development

Because of these limitations of macro-economic development policies, international assistance agencies began to target their technical and financial assistance more carefully during the 1960s on specific problems and conditions in developing countries that were thought to be obstacles or bottlenecks to industrial expansion and economic growth. The underlying assumption of these strategies, which had been evolving over a number of years, was that social changes had to precede economic expansion because existing social conditions in developing nations were obstacles to growth. Greater attention had to be given to programmes for asset redistribution, institutionbuilding, population and family planning, labour-intensive and small-scale industrialization, agricultural expansion, more appropriate use and conservation of natural resources, and human resource development. Insistence on long-range, comprehensive, national plans gave way to sectoral programming and increased attention to project preparation and design. During the 1960s development theories focused on the search for the key sectors into which national resources and international assistance would be channelled. Some economists, such as Theodore Schultz saw agricultural development as the new "engine of growth" in poor countries. Johnston and Mellor insisted that agricultural sector development would have a number of beneficial effects. It would increase food supplies needed to meet the nutritional requirements of the population in poor countries and maintain lower food prices as demand increased. Expansion of agricultural exports would provide higher incomes to farmers and pesants and increase foreign exchange earnings. Higher agricultural productivity would free surplus labour for industrial employment and generate capital that could be invested in manufacturing and industrial sectors to absorb surplus labour. Increased income from rural people would create greater demand for both agricultural and industrial products. 28

But the aid strategies of the 1960s were based on more than a leading sector investment theory. It was widely recognized that linkages had to be created among sectors and that aid had to be channelled into a variety of supporting activities as well as into sectoral production. Thus, aid agencies provided technical and financial assistance for research into new high-yielding seed varieties, irrigation system construction, improvement of agricultural training and extension programmes, the creation of marketing systems, the organization of cooperatives and farmers' associations, and the initiation of agricultural credit schemes. 29

It also became clear during the 1960s that social, economic, and political problems were inextricably related. The existence of some conditions had to precede the creation of others. Among the most important preconditions was the redistribution of productive assets. Some development theorists argued that breaking up the monopoly of land ownership was the most effective way of redistributing assets to the poor and of making income distribution more equitable.30 Redistribution of lands owned by plantations and family estates to cultivators and peasants would reduce rents and increase income in rural areas while putting more land into cultivation. International aid programmes not only funded land reform in developing countries but sent technical experts to help carry it out.

The low levels of administrative capacity in governments of developing nations also prompted international aid agencies to provide technical assistance in public administration. Public administration specialists sought to reorganize bureaucracies in developing nations, establish civil service systems based on merit and skill, improve personnel administration, establish public enterprises and reform the budgeting and investment allocation procedures in Third World countries. Emphasis was placed on institution-building as a means of modernizing governments and of expanding their capacities to implement government policies more effectively.34

High rates of population growth were also seen as fundamental bottlenecks to economic and social progress in developing nations during the 1960s. Thus, large amounts of aid went to private and voluntary organizations promoting population control and family planning in developing nations. Aid was also channelled into human resource development. Assistance organizations worked with national governments to establish formal, informal and vocational education systems. Harbison, among others, argued that human resource development "is concerned with the two-fold objective of building skills and providing productive employment for unutilized and underutilized manpower."32 Aid programs would be used to increase the supply of professionals and scientists in developing countries, prepare young people to take up technical positions for which pare-professional training was needed and relieve the severe shortages of managerial and administrative personnel in the public and private sectors. Of high priority was expanding the numbers of trained teachers, the shortage of which Harbison called the "master bottleneck" that constrained the entire process of human development. Educational systems would also have to be reorganized to train people for occupational roles as craftsmen, clerical workers, and entrepreneurs.33 Large amounts of aid were also provided to send talented government officials and managers to the United States, Britain and some European countries for post-graduate and professional degrees and for short-term professional and technical training. School systems within poor countries were reorganized to reflect American, British or French standards and educational objectives.

The International Labour Office (ILO), concluding that unemployment had become "chronic and intractable" in most developing nations during the late 1950s and early 1960s, focused its attention on promoting labourintensive, employment-generating industrialization, agroindustries, small-scale manufacturing and informal sector enterprises that would absorb labour surpluses in the Third World.34

The shift from untargeted to semi-targeted aid was reflected not only in the sectoral policies adopted by international assistance organizations during the 1960s, but also in their planning and implementation procedures. International assistance agencies largely abandoned requirements for comprehensive, long-term macroeconomic development plans and turned instead to sectoral planning and investment programming. They began to give greater emphasis to project preparation and design.35 The shifts came as the result of the growing acceptance of two basic assumptions in international assistance agencies that were made explicit by World Bank official Albert Waterston in the early 1960s. The first was that assistance would have little impact unless it was more precisely tailored to the needs of developing countries and aimed more effectively at overcoming specific problems or obstacles to development through well conceived and efficiently organized development projects. National development plans had failed to disaggregate goals and objectives into manageable programmes of investment and provide guidance on the priority and selection of projects. "There is generally a scarcity of well-prepared projects ready to go and it is hard to find coherent programs for basic economic and social sectors," Waterston observed. "The lack of projects reduces the number of productive investment opportunities."36 At the same time, officials of international aid agencies assumed that governments in developing countries did not have the administrative capacity to use foreign aid effectively. Waterston maintained that "technical ministries, departments and aid agencies in most countries do not have the staffs qualified to (a) identify, evaluate and prepare good projects, (b) fix project priorities in accordance with well devised time tables, and (c) operate completed projects efficiently."37 But officials in international agencies also believed that individual projects and programmes would not lead to coherent and wellfocused development strategies and that aid had to be channelled into specific sectors in a highly coordinated fashion. Thus, the World Bank's annual report for 1967 pointed out that "an approach being increasingly employed in the developing countries is to undertake an analysis of a particular sector of an economy with a view to preparing a coordinated investment program for that sector and to selecting priority projects within it."38

Aid strategies were to be formulated and implemented during the 1960s through two seemingly contradictory approaches. On one hand the World Bank and the U.S. Agency for International Development (USAID) experimented with programme and sectoral lending arrangements that granted developing nations much more flexibility in using aid in priority sectors. These funding agreements did not tie aid to specific projects. On the other hand all international assistance organizations adopted more complex and rigid requirements and procedures for identifying, preparing, appraising and implementing projects.

In the early 1960s, the USAID began making sectoral and programme loans to a limited number of countries, mostly in Latin America, to finance imports for coordinated investment programmes. Programme loans were based on self-help agreements between USAID and the recipient government, in which the borrower pledged to make detailed sectoral analyses, establish specific and precise goals for development of the sector and outline proposals for policies, programmes and projects to be supported with foreign aid.39 The Latin America Bureau in USAID made the most extensive use of sectoral loans because officials were dissatisfied with the macroeconomic approaches to development assistance employed during the 1950s and with the rigidities of the project format. Latin America Bureau officials insisted that standard prescriptions for development and inflexible procedures for aid administration would have little effect on promoting social and economic change in developing nations.40 Between 1967 and 1972, USAID authorized 21 sector loans totalling more than $438 million, which were used primarily for agricultural development, land reform, employment generation, education and municipal and urban development. Income redistribution was an explicit objective of many of the sectoral plans.41

At the same time, international assistance organizations were adopting more complex and systematic procedures for planning and implementing development projects. Attempting to overcome deficiencies in planning and administrative capacity in less developed nations, aid agencies took a more active and direct role in project identification, preparation, design and analysis. They formulated a complex set of procedures for testing preinvestment feasibility. To varying degrees the World Bank, USAID and the UN specialized agencies insisted on quantitative justifications of project proposals, including extensive market and needs analyses, technical feasibility studies, economic cost-benefit calculations or precise estimates of internal rate of return, and studies of administrative and managerial capacity. Preparation and selection guidelines were designed to ensure that proposals were compatible with the lending institutions' policies and priorities.42

Re-evaluation of Aid impacts and Procedures

Although development policies and aid strategies were successful in disaggregating and focusing aid on critical problems, the overall results were disappointing. Some progress was made in lowering the rate of population growth in most countries; a few countries such as Taiwan, Malaysia, Brazil and South Korea were achieving high rates of industrial output and agricultural production; and health conditions improved for higher and middle income groups throughout the developing world. Yet land reform failed in more nations than it succeeded, population growth still outpaced agricultural and industrial production in most poor countries, and high levels of illiteracy, poverty, child death, and malnutrition were common in Third World nations.

Evaluations of the UN's First Development Decade found that progress had been slow and halting during the 1960s and that the poor in most developing nations were no better off at the end of the decade than they had been at the beginning. Few nations had attained the levels of economic growth projected in their national development plans.43 A study undertaken for the World Bank found in 1967 that, despite overall increases in economic growth in developing nations during the 1960s, nearly 70 per cent of the population (outside of the Peoples' Republic of China) lived in countries where per capita income grew at less than two per cent a year and where population growth rates generally exceeded increases in national output.44

By the end of the 1960s, international evaluation commissions became increasingly critical of the ability of assistance organizations to deliver aid effectively and to break the bottlenecks and overcome the obstacles to development. The Pearson Commission reviewed the entire aid system for the World Bank and found that if technical and financial assistance was to become more effective it would have to be dissociated from political and military objectives of the aid-givers, untied from procurement requirements, and channelled more flexibly through multi-lateral organizations. The Commission saw the increasingly rigid and formal bureaucratic procedures surrounding international assistance as a hindrance to its effective use in developing nations. It noted that developing nations often lacked adequate policies for using aid, "leading to duplication of requests and confusion among government ministries interested in furthering their own interests."45

An examination of the United Nations' system of technical assistance by the Jackson Committee came to similar conclusions. Among the Committee's most severe criticisms was that foreign aid was not tailored to the needs of developing countries. Western practices and institutions, or seemingly successful solutions to problems in one developing nation, were often transferred to Third World countries without modification. "Instead of measuring and cutting the cloth on the spot in accordance with individual circumstances and wants," the Committee claimed, "a ready-made garment is produced and forced to fit afterwards".46

But one of the largest stumbling blocks to the use of aid in promoting national development, the Pearson Commission pointed out, was the failure of governments in most developing nations to take action that would distribute income and productive assets more equitably. "They have only recently begun to recognize that measures to make income distribution more equitable not only serve a social objective," the Commission argued, "but also are necessary for a sustained development effort."47


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