FOR about two decades after the end of the Second World War in 1945, most luminaries of development economics such as Mandlebaum, Arthur Lewis, Myrdal, Nurkse, Rosenstein Rodan and others in their analysis of economic backwardness and stagnation in the poor lands of the world started from a presumption that in these countries there was a large surplus of rural labour with low marginal productivity and industrialization was the key to absorb this surplus in more productive activities.

The process of industrialization in their view was constrained by lack of domestic demand, and on the supply side by the shortage of capital. Besides, the process was rife with externalities, indivisibilities and scale of economies.

These in turn meant that spontaneous industrialization through private initiatives responding to market signals would not come about so that the state had to play a major role in the process and this role would involve regulation of the market economy through control of prices, production, credit, domestic and foreign trade. Complementarities between industries on the supply as well as demand sides meant that, in an economy largely closed to foreign trade, ‘balanced’ investment in a number of activities has to be planned and because of indivisibilities, the quantum of investment will be large.

The prospects of foreign trade were seen to be limited for two reasons: First, traditional exports could only be increased by decreasing cost, because their price relative to those of imports i.e. the terms of trade, were believed to be declining secularly.

Second, non-traditional exports of simple manufactures were restrained on the demand side by the trade barriers created by the industrialized countries and on the supply side by the lack of industrial capacity and infrastructural bottle-necks.

Only industrialization based on import substituting domestic production could ease the constraint of domestic demand and foreign exchange.

It was also widely accepted that the state would have to play a dominant role in the economy and this would be achieved through comprehensive planning. As many poor countries became free from colonial rule in the post-world war II era, drawing up a five year plan became the norm in the newly independent states. Donors of foreign aid as well as the World Bank insisted on such plans.

In formulating elaborate five -year plans, it was an article of faith that the state not only had a dominant role to play in the economy but indeed was capable of playing it. In keeping with the temper of the times, real life markets and prices were not assigned a significant role in these plans.

The nobel laureate Prof Tinbergen in his “Design of Development”, set out certain basic characteristics that an economy must possess for it to achieve sustained development. Among these was a government engaged in ‘activity’ of the sort usually considered essential to an orderly state such as the maintenance of order and physical security of persons and property. In addition, there must be a minimum of instruments of economic policy in the hands of the government and these must be properly used.

Presumably because he conceived of most governments in the image of the Dutch government, he must have assumed that the state would be effective in its interventions in the economy, and above all those in control of the apparatus would behave like Platonic guardians rather than as predators, and use it only to further the interest of the governed.

In many developing countries including Pakistan, the unity of purpose, idealism, and the quality and character of leadership shown during their struggle for independence were optimistically projected to the post independence era of planning for economic development. Unfortunately, the idealistic founding fathers were too old to serve long after independence in some countries.

Besides, undue faith in the idealism and vision of the leadership, the proponents of the dominant development paradigm failed to realize that the exercise of the instruments of intervention in the economy often in a discretionary and non-transparent manner, would erode any idealism that was there to begin with.

Lord Acton once said, power corrupts and absolute power corrupts absolutely. Besides corrupting the leadership, the system of interventions created incentives for their avoidance or evasion if they conflicted with private interests. Worst of all, resources came to be diverted away from productive activities and towards financing those in 1eadership or bureaucracy who could dispense privileges and rents created by the interventions. Unfortunately, after five decades of development experience, the earlier dominant paradigm has not been validated.

The pessimism about foreign trade on which the strategy of import substituting industrialization was based turned out to be wrong. World trade during the last five decades has grown at an impressive rate. Those developing countries that shifted away from inward oriented import substitution to outward oriented export expansion succeed in easing their foreign exchange constraint, while the inward oriented ones ironically became more import dependent inspite of their efforts at import substitution.

The dominant paradigm assigned a major role for the state by assuming the state to have certain characteristics that it turned out not to have.

In the name of planning, a regulatory framework and mechanism for allocating resources was created to control private decisions. In exercising such control, quantitative restrictions rather than price based measures through the market were most often used.

A chaotic incentive structure and the unleashing of rapacious rent seeking and resource diversion were the outcomes. few countries that deviated from the inward orientation of the dominant paradigm in their development strategy since the early 1960s such as Korea, Taiwan and Singapore and their later followers such as Thailand and Malaysia have performed better in all aspects of development than the many who did not.

There have been several attempts at reforming policies and changing development strategies in many countries since the early 1980s. Briefly the lessons that emerge from the rich and varied experience of development performance in the Third World are:

(i)the incentive system matters and competition, domestic and international, is the most reliable way of ensuring that the appropriate incentives for efficient resource allocation are present;

(ii) an outward oriented external trade regime that is neutral between earning foreign exchange through exports and saving foreign exchange through import substitution and lets the forces of dynamic comparative advantage operate is essential for promoting growth in total factor productivity;

(iii) the state has to assume responsibility for creating physical and human infrastructure for development;

(iv) state intervention in the economy, where necessary should be market friendly rather than against the market;

(iv) a system of checks and balances is needed to prevent the abuse of economic and political power; (vi) a safety net is needed to protect the welfare of those who are weakly connected to the economic system because of their specific circumstances; and

(vii) the industrialized as well as the developing countries have a vital stake in ensuring that the global trading system is free from protectionist barriers of all kinds.