Module 1

Introducing Economic Development: A Global Perspective

What is Economics?
 It is a social science that deals with the study of proper allocation and efficient
utilization of scarce productive resources to produce goods and services for the
maximum satisfaction of unlimited needs and wants.

What is Development?
 It is the process of improving the quality of all human lives and capabilities by raising
people's living, self-esteem and freedom.

-The Nature of Development Economics

 Greater scope than traditional neoclassical economics and political economy.
Rethinking Theory and Empirics.
-Why Study Development Economics? Some Critical Questions
- The Important Role of Values in Development Economies
-Growth and Development

1.2 Economics and Development Studies

 Economies as Social Systems: The Need to Go Beyond Simple Economics
 Social Systems
 Interdependent relationships between economic and noneconomic factors
 Success or failure of development policy
Importance of taking account of institutional and structural variables along with more
traditional economic variables.

1.3 What Do We Mean by Development?

 Traditional Economic
 Measures Gross National Income (GNIffi
 Income per capita
 Utility of that income?
 The New Economic View of Development
 Leads to improvement in wellbeing, more broadly understood.
 Amartya Sen's "Capability" Approach
 Functioning's as an achievement
 Capabilities as freedoms enjoyed in terms of functioning's.
 Development and happiness
 Wellbeing in terms of being well and having freedoms of choice.
 "Beings and Doings".

Three Core Values of Development

 Sustenance: The Ability to Meet Basic Needs
 Self-Esteem: To Be a Person
 Freedom from Servitude: To Be Able to Choose
 Correlation of the Above with levels of Income
  Growth and Distribution

Income and Capability

 A critical question is how far growth and levels of income are associated with
changing capabilities.
 Public vs. Private provision of resources towards developmental needs.
 Form and Extent of State Intervention.
 How to tackle problems of Corruption, Leakage, Accountability.
 Growth related factors more talked about but effectively undermined.

The Central Role of Women

 To make the biggest impact on development, societies must empower and invest in
women.

The Three Objectives of Development.

 Increase availability of life sustaining goods.
 Raise levels of living
 Expand range of economic and social choices.
Can all three above be achieved by better credit conditions, markets and technology?
Social Choice is the Issue with
 Health
 Education
 Real Income

1.4 The Millennium Development Goals

 Millennium Development goals (MDGs ffi
Eight goals adopted by the United Nations in 2000.
 Eradicate extreme poverty and hunger.
 Achieve universal primary education.
 Promote gender equality and empower women.
 Reduce child mortality.
 Combat HIV/AIDS, malaria, and other diseases.
 Improve maternal health.
 Ensure environmental sustainability.
 Develop a global partnership for development.

Common Characteristics of Developing Countries

 These features in common are on average and with great diversity, in comparison
with developed countries:
 Lower levels of living and productivity.
 Higher levels of inequality and absolute poverty.
 Lower levels of human capital.
 Higher population growth rates.
 Greater social fractionalization.
 Larger rural population rapid migration to cities.
 Lower levels of industrialization and manufactured exports.
 Adverse geography.
 Underdeveloped financial and other markets.
 Colonial Legacies poor institutions etc.

2.2 Basic Indicators of Development: Real Income, Health, and Education

 Gross National Income (GNl ffi)
 Gross Domestic Product (GDP
 PPP method instead of exchange rates as conversion factors
  Other possible Innovative Measure
 Degree of Income/Social Mobility

2.4 Characteristics of the Developing World: Diversity within Commonality

 Underdeveloped Financial and Other markets
 Imperfect markets
 Incomplete information
 Colonial Legacy and External Dependence
 Institutions
 Private property
 Personal taxation
 Taxes in cash rather than in kind

2.5 How Low-Income Countries Today Differ from Developed Countries in Their Earlier
Stages
 Eight differences
 Physical and human resource endowments
 Per capita incomes and levels of GDP in relation to the rest of the world
 Climate
 Population size, distribution, and growth
 Historic role of international migration
 International trade benefits
 Basic scientific/technological research and development capabilities
 Efficacy of domestic institutions

2.6 Are Living Standards of Developing and Devolved Nations Converging?

 Evidence of unconditional convergence is hard to find.
 But there is increasing evidence of "per capita income convergence." weighting
changes in per capita income by population size.

Nature and Role of Economic Institutions

 Institutions provide "rules of the game" of economic life.
 Provide underpinning of a market economy.
 Include property rights; contract enforcement.
 Can work for improving coordination.
 Restricting coercive, fraudulent and anti-competitive behavior.
 Providing access to opportunities for the broad population.
 Constraining the power of elites and managing conflict.
 Provision of social insurance.
Provision of predictable macroeconomic stability

Module 2 - Classic Theories of Economic Growth and Development

INTRODUCTIONI

EVERY NATION STRIVES FOR DEVELOPMENT, but economic progress is not the
only component DEVELOPMENT > material & financial Widespread realization
national context + international economic + social system

FOUR APPROACHESI
Post-World War III
1. Linear stages of growth
 2. Theories and patterns of structural change
3. International-dependence revolution
4. Neo-classical, free market counterrevolution

POST WORLD WAR III

Context:
 Struggle to rebuild
 Postwar economic boom
 Demand for consumer goods.
 Flowing foreign aid to countries like PH
 PH context: Bell Trade Act (no import duties for US products)

1. LINEAR STAGES THEORY

Development as growth
Post-war interest on poor nations
 Economists had no conceptual apparatus for largely agrarian countries w/o
modern economic structures.

Strands of thought
 Marshall Plan: US financial and technical assistance to war-torn European
countries.

 All modern industrial nations were once underdeveloped agrarian societies.

1. LINEAR STAGES THEORYI

Rostow's Stages of Growth
 Developed countries already passed all stages. Underdeveloped in traditional
and preconditions stage should just follow rules of dev't to self-sustaining
economy.

The Harrod-Domar Growth Modell

 the rate of growth of GDP (YN ffi is determined jointly by the net national
savings ratio, s. and the national capital-output ratio, c.
 To grow, economies must save and invest.
 Other components: labor force growth & technological progress.
Sample: I
 Countries able to save 15% to 20% would develop faster
 PROBLEM: relatively low level of new capital formation in most poor
countries
 ANSWER: through either foreign aid or private foreign investment (justified
Marshall plan for developing world ffi.

PROBLEMS: I
 Mechanisms of development embodied in the theory DOES NOT ALWAYS
WORK
  WHY? More savings and investment are not sufficient.
 Worked for Europe because of necessary structural, institutional, and
attitudinal conditions.

II. STRUCTURAL CHANGE MODELSI

2-SECTOR SURPLUS MODEL/LEWIS THEORY OF DEVELOPMENT
-Structural transformation of a subsistence economy
 Presence of 2 sectors: overpopulated rural sector w/zero marginal labor
productivity and a high-productivity industrial sector
 Transfer of labor from traditional to modem, growth of product output.

LEWIS THEORY OF DEVELOPMENT

 Growth until surplus labor is absorbed by industrial sector f
 Lewis turning point: declining labor-to-land ratio (marginal product of rural
labor no longer 0ffi labor supply curve positively sloped as modern-sector
wage & employment grow

LEWIS THEORY OF DEVELOPMENT

CRITICISMS:
1. Assumes labor transfer & employment creation proportional to capital
accumulation. But what if profits invested in labor saving equipment?
2. Contemporary research show little surplus labor in rural areas (except in
some countries like China ffi.
3. Urban surplus labor
4. Wages increase amid unemployment.

PATTERNS OF DEVELOPMENT ANALYSIS

 Economic, industrial and institutional structure of an economy transformed to
permit new industries as engine of growth.

 Capital accumulation + changes in economic structure needed.

 Constraints (affect level of dev't ffi: Internal resources, population size,
government policies; External access to capital, technology, trade (countries
as part of internal system ffi.
 Empirical work of Harvard economist Hollis Chenery and his colleagues,
cross-sectional and time-series studies of countries at diff. levels of per capital
income, identified characteristic features of the development process:

PATTERNS OF DEVELOPMENT ANALYSIS

 Shift from Agri to industrial production.
 Steady accumulation of physical and human capital
  Change in consumer demand from basic necessities to diverse manufactured
goods.1
 Growth of cities and urban industries.
 Decline in family size ad overall population.
- Proponents of structural change model prefer "facts to speak for themselves" unlike
theories such as stages of growth.

CONCLUSIONS
 Major hypothesis: development is an identifiable process of growth and
change with features similar in all countries
 Problem: The model does not recognize differences, factors influencing
development process.
 Limitations of emphasizing patterns over theory. May draw wrong conclusions
about causality.
 Optimistic that "correct" mix of policies will generate beneficial patterns.

III. INTERNATIONALIDEPENDENCE REVOLUTION

 1970s International-dependence models gained support because
disenchantment. w/stages and structural-change models! of
 Resurgence in various forms in the 21st century
Developing countries caught in a dependence and dominance relationship with rich
countries because of institutional, political and economic rigidities difficulty for poor
nations to be self-reliant and independent

1. NEOCOLONIAL DEPENDENCE MODEL

 Indirect outgrowth of Marxist thinking
 Underdevelopment as result of historical evolution of highly

unequal international capitalist system of rich country-poor country relationships

 Regardless if intentional, nations are under unequal power relations between
the center and the periphery.
 Small elite ruling class (landlords, entraps, military rulers, merchants, public
officials, etc. ffi interests (knowingly or not ffi to perpetuate the international
capitalist system of inequality.
 The elite serve or are rewarded by international special interest power groups
tied by allegiance or funding to wealthy capitalist countries.
 Elites' viewpoints inhibit genuine reform efforts and may lead to even lower
levels of living and perpetuation of underdevelopment.

 External-induced against internal constraints!

 Revolutionary struggles or major restructuring of world Capitalist system
required to free dependent nations.
 Theotonio Dos Santos: Dependence as conditioning situation; Expand based
on expansion of dominant countries; Dominant countries w/ technological,
commercial,
 Pope John Paul II: One must denounce the existence of economic, financial,
and social mechanisms which, although they are manipulated by people,
often function almost automatically, thus accentuating the situation of wealth
for some and poverty for the rest. These mechanisms, which are
maneuvered directly or indirectly by the more developed countries, by their
 very functioning, favor the interests of the people manipulating them. But in
the end, they suffocate or condition the economies of the less developed
countries.

2. FALSE-PARADIGM MODEL
 less radical.
 Underdevelopment as result of faulty and inappropriate advice by well-
meaning. though uninformed or biased advisers from developed country
agencies and orgs
 Inappropriate policies merely serving vested interests of existing power
groups. (Domestic and internation Alffi
 Intellectuals, economists, civil servants trained in alien and "irrelevant"
Western concepts.

3. DUALISTIC-DEVELOPMENT THESIS
 Dualism-divergence between rich and poor nations rich and poor peoples on
various levels

4 KEY ARGUMENTS
 Different sets of conditions coexist rich and poor, modem and traditional
(Lewis model ffi, elites and masses, powerful industrialized nations and
impoverished peasant societies.
 Chronic coexistence (not temporary ffi of wealth and poetry will not be
rectified in time.
 Degrees of superiority or inferiority show no signs of diminishing and instead
increases.
 Superior element does little to pull up or "trickle down to the inferior element,
may even push it down.
 IDR models, amid ideological differences, all reject the emphasis on
traditional neoclassical economic theories.
 Question validity of the Lewis-type models rejects Chenery observation of
"well-defined empirical patterns" that should be followed by poor countries.
 Emphasis on international power imbalances and need for economic, political
and institutional reforms (internal & world tfi).
 Expropriation of private assets w/expectation that public asset ownership and
control will help address poverty & unemployment.

WEAKNESSES:
 Appealing explanation but no insight on how countries initiate and sustain
development.
 Actual economic experience of developing countries that pursued
revolutionary campaigns of industrial nationalization and state-run production
has been mostly negative
 Based on dependency theory, countries could pursue a policy of autarky or
inwardly directed development & trade w/ other developing countries.

IV. NEOCLASSICAL COUNTERREVOLUTION

Neoclassical counter revolution

  Challenges statist models in favor of free markets, public choice & market-
friendly approaches.
 Developed nations: favored supply-side macroeconomic policies, rational
expectations. theories and privatization of public corporations.
 Developing countries: freer markets and dismantling of public ownership,
statist planning and government regulation

Context
 Emerged in the 1980s during political ascendancy of conservative
governments of US. Canada, Britain and West Germany.
 Neoclassicists on the board of powerful international agencies World Bank
and International Monetary Fund as influence of International Labor
Organization, United Nations Development Program and United Nations
Conference on Trade and Development eroded!

Argument
 Underdevelopment resulted from poor resource allocation because of
incorrect pricing policies and state intervention (corruption, inefficiency, lack of
incentives, etc. ffi.
 State intervention slows economic growth.
 Neoliberals: economic efficiency and growth will be stimulated by free
markets, privatizing state enterprises, export expansion and eliminating
government regulation and price distortions.
 Allow "magic of the marketplace" and "invisible hand to guide resource
allocation. and stimulate economic dev't

3 component approaches
1. Free-market approach markets alone are efficient: competition is effective,
technology and information freely available and costless: gov't is
counterproductive.
2. Public choice approach new political economy approach; governments do
nothing right because of Selfish interests: misallocation of resources.
3. Market-friendly approach imperfections in economy land need gov't for
market-friendly interventions (social services and climate for private
enterprise; acceptance of market failures.

 Traditional Neoclassical Growth Theory Liberalization opening up of markets,

draw investment land increase rate of capital accumulation.
 Solow neoclassical growth model economies to converge to same income
level if same rates of savings, depreciation, labor force and productivity
growth.
 Source of output growth: labor quantity and quality. in capital and technology
improvement.
 Openness - encourages access to foreign production ideas, technological
progress.

CONCLUSIONS
 Finger-pointing between dependence theorists (many from developing
countries, seeing underdevelopment as externally induced phenomenon ffi
 and neoclassical revisionists (most from Western economies, blame gov't
intervention and bad economic policies ffi.
 Market price allocation may do a better job than state intervention but
developing economies have very different structures.
"Competitive free markets generally do not exist, information is limited, markets
fragmented, etc.

CONCLUSIONS
 Invisible hand often lifts those already well-off, failing to offer opportunities for
upward mobility of the majority.
 Lessons from supply-and-demand analysis to arrive at "correct" prices.
 "In an environment of widespread institutional rigidity and severe
socioeconomic inequality, both markets and governments will typically fail.

RECONCILING DIFFERENCESI
 Each approach has strengths and weaknesses,
 Controversies ideological, theoretical or empirical makes the study of
economic development challenging.
 Evolving patterns of insights and understandings.
 CONSENSUS? Significance from each approach:
 Linear stages: crucial role of savings and investment
 Two-sector model: transfer of resources from low to high productivity
activities, linkages between traditional & modern
 Dependence theory: importance of world economy and decisions of
developed
 world affecting developing economies.
 Neoclassical: efficient production, proper price systems.