How can Developing Countries Develop Economically? (part 2)

This post is the second part of my previous article entitled “How can the Developing Countries Develop Economically?”. In this post, I would like to present the rest of thinkable hypotheses for economic development.

Less Military Expenditure Hypothesis
According to the data provided by the United Nations, world military expenditure is approximately US$800 billion/year. This large number of money is unnecessary considering that, for instance, currently, there is no major war in the world like we used to have in the past (e.g. two World Wars). Public expenditure in military sphere leads to a shortage of funds for pressing requirements in other fields. Imagine the usefulness of those papers and coins if we allocated them for civilian investment or the extension of the infrastructure. These investments, undoubtedly, would lead to higher growth rate.
Policy prescriptions suggested by this hypothesis is as simple as reduce the military budget. The problem is that peace can actually be obtained through military presence. Moreover, as the theory of Prisoner’s Dilemma (Please read my previous post entitled “Prisoner’s Dilemma Theory and Arms Race” (in Indonesian)) and realism imply, we are living in the state of nature, where we can not truly believe at someone, thus the only way to be secured is by keep increasing our power.

Let us continue reading this post!!

Industrial Policy Hypothesis
Industrial policy is broadly defined to include any measure, policy, program aimed at improving growth ad competitiveness of industries in one’s economy. Let us observe the Japanese style of industrial policy. After the era of American occupation, Ministry of Economy, Trade and Industry (METI) guided all the matters of industries and foreign experts believed that this was the reason why Japan could catch up with the West.
After signing an agreement to intervene foreign exchange market to lower a highly overvalued dollar in 1985, Japan entered a recession. New hypothesis, Public Sector as Growth Retardant, rose into prominence. Government and bureaucracy were too big, too costly, and too powerful in Japan. In addition, the government acted imprudently and unwisely. Since bureaucrats are not producers, the less is the better. Privatizing the public sector is the prescriptions offered by this new hypothesis. Should Indonesia privatize her public assets? Please read my previous article entitled “Memprivatisasi Garuda Indonesia” (in Indonesian).

P.S: If you want me to write Japan’s economic growth and her industrial policy, please let me know.

Foreign Direct Investment Hypothesis / Investment-Led Growth Hypothesis
Before explaining this hypothesis, I would like to list two economic schools which are concerned about this hypothesis. Talking about this hypothesis, the very first thing comes into my mind is whether Multinational Corporations (MNCs) are tool of growth or exploitation.
The first school is Liberal School / Orthodox School; it argues that MNCs should be invited to host countries as they provide employment, spillover effect to other sectors, technology transfers, and income increase.
The second school is Dependencia School; its idea is similar to that of Neo-Marxism. They argue that the world is divided into four categories: core, semi-periphery, periphery, and external. Countries fall into core category require countries in periphery category to be persistently poor in order to benefit from them through their agents, MNCs. In short, they believe underdevelopment is perpetuated by MNCs. They distrust monetary institution like IMF and World Bank and accuse them for giving wrong prescriptions for economic development.

Outside Assistance Hypothesis
There are two types of Outside Assistance, Bilateral Official Development Assistance (ODA) and multilateral aid through the United Nations system.
ODA is basically aid from the governments of the wealthy nations to promote economic development in developing countries. I, once, wrote an article about “Japan’s ODA: Perspectives and Controversies” in English, you can read it here for the explanation.
One of the major goals of the United Nations is, again, to promote economic development through Economic and Social Council (ECOSOC), IMF, or other specialized agencies.

There are still some unfamiliar hypotheses like Religions-Ethnics Hypothesis and Rapid Population Growth Hypothesis.
Remember, I asked you to make a causal relationship between economic development as dependent variable and hypotheses mentioned above as independent variable. Which variable is the most important and why?

I still welcome other thinkable hypotheses.