Some Economic Aspects and Problems of Under-Developed Countries

By Prof. P. T. BAUER

Summary

These two lectures, delivered in Bombay on September 8 and 9, 1958 by P. T. Bauer (Smuts Reader in Commonwealth Studies at Cambridge) and printed by the Forum of Free Enterprise, mount a systematic dismantling of the development-economics orthodoxy of the late 1950s. Bauer’s central target is the “vicious circle of poverty and stagnation” thesis advanced by Ragnar Nurkse, Gunnar Myrdal, Paul Samuelson and the wider United Nations literature, which inferred from low incomes that poor countries could not save, could not invest, and therefore could not grow without large-scale compulsory saving, state-led industrialisation and inter-governmental transfers. Bauer answers that the thesis is “manifestly invalid”: the developed world was once under-developed, and large stretches of Asia, Africa and Latin America — Malaya, the Gold Coast, Nigeria, much of India and Pakistan, West Africa more generally — show rapid economic advance over the last half-century driven by Africans and Asians on their own lands, by penniless Chinese immigrants, by Indians in East Africa, and by the spread of the exchange economy through cash crops.

The second half of the rendered pages turns to the policy corollaries that follow from rejecting the orthodoxy. Bauer attacks the “international demonstration effect” used to justify expenditure taxes and import restrictions, arguing that new wants and new goods actually stimulate saving, investment and the move out of subsistence rather than retarding capital formation. He defends the productivity of agriculture, fixed capital formation in tree crops such as rubber, cocoa and coffee, and the long time-horizons demonstrably taken by African and Asian smallholders — against the “allegedly inherent economic short-sightedness of the indigenous population.” He closes the rendered pages by puncturing the cult of manufacturing industry, insisting that “manufacturing industry is simply one type of economic activity” with no inherent claim on resources, and that statistical correlations between industrialisation and high incomes confuse cause with effect. The booklet’s polemical centre is that fundamentally defective ideas — vicious-circle reasoning, the demonstration-effect alarm, and the industrialisation fetish — “are unlikely to serve as a suitable basis for sane and effective economic policy,” and that Indian planning has absorbed them deeply through the Planning Commission and the writings of cabinet ministers.

Key points

• Bauer rejects the ‘vicious circle of poverty’ thesis (Nurkse, Myrdal, Samuelson, U.N. literature) as logically confused and empirically refuted, since today’s developed countries began as under-developed and many regions of Asia, Africa and Latin America have advanced rapidly without preconditions of large external capital.

• He marshals concrete cases — Malaya, the Gold Coast (Ghana), Nigeria, West Africa generally, Indian and Chinese immigrant communities — to show that capital formation, exports and infrastructure have grown massively from very low bases over fifty to a hundred years.

• Conventional per-capita national-income figures are dismissed as misleading instruments for measuring development in economies where population growth, falling mortality, the suppression of tribal warfare and the move from subsistence to exchange production are the dominant facts.

• The ‘international demonstration effect’ argument used to justify expenditure taxes and import restrictions is inverted: knowledge of new goods and consumption patterns is a major stimulant to saving, investment and the spread of the money economy, not an obstacle to it.

• Investment in agriculture and in tree crops (rubber, cocoa, tea, coffee) is a substantial form of fixed capital formation that orthodox accounts systematically ignore; its existence refutes the allegation that Africans and Asians cannot take a long view of economic affairs.

• Bauer attacks the case for state-sponsored, accelerated industrialisation: high industrialisation in the West reflects shared causes with high income, not causation; surplus-population, terms-of-trade-deterioration and external-economy arguments are individually weak.

• The booklet’s framing claim is polemical: ideas dominating United Nations literature, ECAFE, the Planning Commission of India and the writings of Indian cabinet ministers are ‘demonstrably wrong’ and incapable of grounding sound policy.

• A. D. Shroff’s introduction (dated Bombay, 17 December 1958) frames the booklet as the Forum of Free Enterprise’s contribution to Indian public debate, presenting Bauer’s approach as ‘fresh and invigorating’ against the prevailing planning consensus.

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