The theory of development policy

In the early phase of the theory of development policy in the Fifties it was capital that was stressed as the strategic factor in development. Foreign investment by the multinational enterprise (MNE) was therefore regarded mainly as a source of foreign funds which supplemented domestic savings efforts. Nurkse’s thesis that countries are poor because they are poor and needed large injections of foreign capital became widely accepted.2 According to this view, a poor country could not raise its low ratio of savings to national income very quickly or very easily. A low savings and investment rate led to a low rate of capital accumulation. This, in turn, implied that workers were endowed with relatively little capital: this kept their productivity low. Low productivity per worker perpetuated low income per head. The low investment ratio was both cause and effect of poverty. In order to break out of this vicious circle of poverty, massive injections of capital from abroad would be necessary. Foreign investment could contribute to pulling poor countries out of this low equilibrium trap.