Keynesian Development Economics


Post WW2 development economics focused on structural change towards modern advanced industries through government intervention.


  • Structural change is key to economic development.
  • Keynesian macroeconomic foundation.
  • Dirigiste dogma.
  • Rosenstein-Rodan (1943) suggested modern methods only > traditional at scale o/w not worth paying higher wages. Scale itself depended upon on size of market therefore if countries didn't develop at scale they could be trapped in poverty.
  • Worsening terms-of-trade from exporting primary commodities to manufacturing economies
  • Failure to develop capital industries is exogenously determined by structural rigidities (monopolies), labour's perverse response to price signals and or the immobility of factors.


Government intervention to facilitate structural change through import substitution by: 

  • Exchange controls
  • Quantitative restrictions on imports


According to Yifu Lin Comparative Advantage Defying (CAD) development and the protection of nonviable industries typically lead to:

  1. Increase in the price of imports and import-substituting goods relative to the world price and distortions in incentives and economically inefficient consumption.
  2. Fragmentation of markets and therefore too many small-scale goods.
  3. Decreased competition from foreign firms and support for the monopoly power of domestic firms - which were run by politically well connected owners
  4. Opportunities for rents and corruption which raised input and transaction costs.



  • Justin Yifu Lin argues that other schools of economic development have failed because 2/3 of low income countries in 1960 failed to reach middle income in 2009 and those in middle income have stayed the same or regressed.
  • Keynesian theories decline with stagflation, Latin American debt crisis and collapse of the socialist planning systems in the 1980s