What is Development Economics

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What is Development Economics
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What is Development Economics
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What is Development Economics

• During the past three centuries, three economists
  stand out as archetypes,
• symbols of three distinct approaches to economic
  philosophy, guiding development throughout the
  world.
• Adam Smith, a student of the Scottish
  Enlightenment, expounded a system of natural
  liberty, a liberal democratic order consisting
  of an unfettered market and limited government,
  and elucidated how a nation flourishes and
  advances the standard of living of its citizens.
• In the nineteenth century, the German philosopher
  Karl Marx attracted and inspired workers and
  intellectuals who felt disenfranchised by
  industrial capitalism and sought radical
  solutions to inequality, alienation, and
  exploitation of the underprivileged.
• Finally, in the twentieth century, the British
  economist John Maynard Keynes sought to stabilize
  a crisis-prone market system through activist
  fiscal and monetary government policies.

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What is Development Economics

• What is development?
• To understand Development, first we have to
  understand what development thinking . Hettene in
  his review of Development Theory and the Three
  Worlds (1995) suggested that Development involves
  three things.
• Development Theory, Development Strategies and
  Development Strategies.

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What is Development Economics

• Development Theory may be regarded as sets of
  ostensibly logical propositions, which aim to
  explain how development has occurred in the past,
  and/or how it should occur in the future.
• Development Theories can either be normative or
  positive. Normative that they can generalize
  about what should happen or be the case in an
  ideal world. Positive, in the sense of dealing
  with what has generally been the case in the
  past.
• According to Hettene, a study of Development is
  explicitly normative. Teachers, students,
  researchers and practitioners in the field want
  to change the world, not only analyse it.

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What is Development Economics

• Development Strategies can be defined as the
  practical path to Development which may be
  pursued by international agencies, states in both
  the developing and developed worlds, NOGs,
  Community based organisations or individuals, in
  an attempt to stimulate change with particular
  nations, regions and continents.
• Hettene provides a definition of development
  strategies as effort to change existing economic
  and social structures and institutions in order
  to find enduring solutions to the problems facing
  decision makers (state and other actors)

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What is Development Economics

• Development Ideologies Different development
  agendas reflect different goals and objectives.
  These goals reflect social, economic, political,
  cultural, ethical, moral and even religious
  influences.
• Development Ideology refers to set of political
  and economic, cultural and religious beliefs that
  finally shape up development strategies.

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Development

• Development economic first appeared as distinct
  area of research in 1940s 50s, concurrently
  with decolonisation of Asia, Middle East and
  Africa.
• The main object of the research was to uncover
  the causes of the underdevelopment.
• As a result of this pursuit, 3 major approaches
  appeared
• Capitalist theories of development.
• Neo-Marxist/Dependency theories
• Theories of Human Development
• .

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Development

• Neo classical free Market
• Neoliberal policies of the capitalism draws
  inspiration from the classical political economy
  of 18th and 19th century represented by Adam
  Smith (1723-1790), Thomas Robert Malthus
  (1766-1834), David Ricardo (1772-1832)
• Adam Smith (1723-1790)
• Adam smiths Laissez-faire was based on three
  principles
• Freedom Individuals have the right to produce
  and exchange production, labour, and capital as
  they see it.
• Competition individual have the right to compete
  in the production and exchange of goods and
  services.
• Justice the actions of individuals must be just
  and honest , according to the rules of the
  society.

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• He underlined the critical role of the market
  mechanism.
• The major thrust of his argument was that there
  may be producers who will try to sell inferior
  goods at high prices, but if the producers are
  competing they will all eventually be forced to
  deliver proper goods at reasonable prices.
• Further, he says when market is free then demand
  would increase and production would grow as a
  result of that.

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Development

• At the same time specialisation would also
  increase as a result of the competition.
• Specialisation, for number of reasons, would lead
  to higher productivity per working hour.
• The major condition for this was an increased
  accumulation of wealth which had to come form
  rich, especially industrialist and their profits
  for productive investment in new industries.
• As a result, the newly emerging industrial sector
  would serve as a base of aggregate growth.
• To Smith, accumulation and investment of profits
  were the most important determinant of economic
  growth and has played important role in the
  debated ever since.

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Development
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Development

• David Ricardo he was the first one to elaborate
  on the Adam Smiths political economy, especially
  on Land-rent, distribution and the theory of
  comparative advantage.
• In addition to capital, Ricardo found two other
  sources of growth - technical innovation and
  international trade.
• Ricardo further argued that continued population
  growth and the corresponding increase in the
  demand for food would result in the conversion of
  all land for agricultural production.
• Hence, the utilization of land would cause the
  land value/rent to go up, mainly due to the
  farmers competition for the better and more
  profitable land.

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Theories of Economic Development

• According to David Ricardo, this process would
  result in a redistribution of national income to
  the benefit of landed aristocracy and to the
  detriment of industrialists.
• Simultaneously marginal cost of agriculture
  production would then rise with increase in the
  cultivation of marginal land.
• Food prices would then rise, leading to stronger
  pressure on wages which would in return, eat into
  the profits of industrialists from outside.
• Final result would be the squeezing of the
  industrial profits to zero whereby the whole
  foundation of growth would disappear.

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Theories of Economic Development

• According to Ricardo, only technical innovation
  and international trade could prevent this sad
  outcome.
• The theory of comparative advantage.
• According to which each country should
  concentrate its production in areas where it had
  comparative advantage in relation to other
  country keeping in view the productivity of its
  workers.

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Theories of Economic Development

• In accordance with this basic thesis, Ricardo
  suggested that non-industrialised countries such
  as Portugal should refrain form trying to build
  up industries and instead concentrate on
  production of, for instance, wine. Industrialised
  countries like England on the other hand should
  produce and exchange products such as textile and
  clothing for Portuguese products.
• Malthus
• According to his theories, population increase
  faster than resources. So countries should
  concentrate their efforts on population control
  in order to achieve the target of growth.
• In case no attempt is made on the part of the
  countries, then nature would intervene in the
  form of natural calamities in order to maintain
  balance between population and resources.

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Theories of Economic Development

• John Maynard Keynes in his book on the General
  Theory of Employment, Interest and Money did not
  focus on growth and conditions in the colonies
  but rather discussed relationship between state
  and market.
• To Keynes employment was key to growth.
  Therefore, he strongly focused in the dual role
  of state and market.
• According to him, market imperfection could be
  overcome by state intervention.
• Further to support state, he envisioned the
  institutional control of international trade and
  finance.

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Theories of Economic Development

• It was in this context that the IMF and World
  Bank were formed in 1944 with the objective to
  help the development process in Europe and bring
  financial stability by controlling exchange
  control and providing liquidity to the members
  states facing problem of balance of payment.
• By the time there was clear difference in stand
  of three main schools of thought
• Neoclassical economist saw the economic
  development in terms of the utility maximisation
  on the part of the consumer, profit maximisation
  on the part of the producer and the central role
  of the market as determining factor.

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Theories of Economic Development

• Developmental Economist saw the economic
  development in terms of the redistribution of the
  growth and more so in terms of the social
  development of the society.
• Modernisation theorist saw the economic
  development as a process of the transformation of
  the society from traditionalism to modernism.
• They are mainly concerned with how traditional
  values, attitudes, practices and traditional
  structures break down and replaced with more
  modern one.
• What condition promotes and impedes such
  transformation was the main focus of the
  modernisation theorist.

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Theories of Economic Development

• Capital Accumulation and Balanced Growth
• Rosenstein Rodan and Nurkse.
• He was polish born economics. According his
  theory of the development that only massive
  industrialisation way forward to growth and
  progress for back ward areas for Eastern Europe
  and rest of the world.

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Theories of Economic Development

• He further expanded his argument into the theory
  of Big Push, according to which the backward
  areas were characterised by low income and little
  buying power.
• Further they were characterised by high
  employment and under employment in agriculture.
• To break out of this mould, it is necessary to
  industrialize.
• However, private companies can not do this alone,
  partly due to the lack of the incentives to
  invest as long as market for their products
  remained small.

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Theories of Economic Development

• To him , for example, one of the major impediment
  to the growth is the cost being incurred on the
  training of workers.
• According to him barriers to growth could be
  overcome with the
• state intervention
• investment in education of the workforce
• planning and organising of large scale investment
  in industrial sector.
• Rosenstein Rodan compared big push with aeroplane
  which needs critical ground speed before becoming
  airborne.
• A similar condition applied to the growth
  process. Launching country into the
  self-sustaining growth requires critical mass of
  simultaneous investment and other initiatives.

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Theories of Economic Development

• Nurkse
• He further developed many of Rodans points.
• He asserted that the economically backward
  countries were caught in vicious circle of
  poverty.
• The reason for this situation is that the demand
  in backward society is low as a consequence of
  the very low income.
• When demand is low and market limited then there
  will not be much incentive to make private
  investment.
• Therefore, capital formation and accumulation
  remain at very low.

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Theories of Economic Development

• As a result, no productivity improvement occurs
  and income therefore remain low.
• On the supply side, the low incomes result in a
  small capacity to save which, in turn, is
  reflected in lack of capital and low
  productivity. The final outcome is reproduction
  of mass poverty.
• Nurkse added to this that whole problem with
  attaining the necessary savings and capital
  investment was compounded by rich peoples
  tendency to copy, in their own consumption, the
  consumption standards and patterns of
  industrially advanced countries. This propensity
  on the part of the rich finally leads to
  reduction in the saving rate.

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Theories of Economic Development

• To break out of this these poverty circles,
  according to Nurkse, the creation of strong
  incentives to invest along with increased
  mobilisation of investible funds.
• This requires significant expansion of the market
  through simultaneous massive and balanced capital
  investments in a number of industrial sectors.
• This further depends on the active involvement of
  state.

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Theories of Economic Development

• Demand side
• low level of
• capital
  formation
• Little incentive to
  low productivity level
• invest
• limited market

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Theories of Economic Development

• Supply side
• Low income
• Small capacity
  low
• to save
  Productivity
• Lack of
  capital

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Theories of Economic Development

• Unbalance growth and income distribution.
• Hirschman and Kuznets
• Unlike Rosenstein Rodan and Nurkse, Hirschman
  rejected the notion that growth process could be
  initiated with balanced capital investment in
  several sectors.
• He claimed that there was a need to maintain and
  accelerate imbalances and disequilibria in
  backward economies.
• According to them there were other barriers to
  growth than limited market and the lack of
  capital investment. The major impediment to
  growth is lack of entrepreneur class and
  management.

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Theories of Economic Development

• According to them if the country were ready to
  apply the doctrine of balanced growth then it
  would be underdeveloped.
• Instead of spending resources thinly over several
  sector and manage badly, developing countries
  should invest in selected sectors which had many
  forward and backward linkages.
• Again they suggest redistribution in favour of
  rich as they have tendency to save and invest and
  they could be major source of growth. After which
  there will be trickle down to the poor in such
  way that in the end everybody would be better
  off.
• Simon Kuznets had the same views that growth
  would initially produce inequality but later
  inequality would be flatten out.

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Theories of Economic Development

• Modernisation and stages of growth
• Lewis and Rostow.
• They considered development as modernisation
  process.
• Developing courtiers have abundant labour force
  but due to the low income their saving rate is
  low.
• They considered the existence of entrepreneur
  class necessary for the transition to
  modernisation.
• Lewis divided economy into the capitalist and
  subsistence sector.
• The capitalist sector employs wage earners, used
  reproducible capital and paid capitalists for the
  use of capital.

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Theories of Economic Development

• Subsistence sector was characterised by being
  based primarily on family labour.
• It was in the subsistence sector that the
  abundant labour reserves were fond not
  necessarily in the shape of many unemployed but
  rather in the shape of many underemployed.
• These underemployed could be transferred to the
  capitalist sector with out bringing about a
  decline in the subsistence sectors total
  production, and a wage which was determined by
  the average in the subsistence sector.
• The central problem in the in the theory of
  economic development was therefore to investigate
  under which circumstances it would be possible to
  increase the rate of saving and investment in a
  backward and stagnant economy.

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Theories of Economic Development

• Lewiss answer to this central problem was that
  the poor in the subsistence sector and workers in
  the capitalist sector could not produce increased
  savings, because they were simply too poor to
  save a significant proportion of their income.
• Same is for the rich in the subsistence sector,
  because they were mostly landowners, who used
  their rents and other income unproductively to
  existing assets rather than to create new ones.
• Therefore capitalists have to produce the
  necessary increase in the saving rate.

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Theories of Economic Development

• Rostow like Lewis, differentiated between the
  traditional sector and modern capitalist sector.
• Further, he agreed with Lewis that a crucial
  precondition for lifting an economy out of low
  income stagnation into sustained growth is the
  significant increase in the share of saving and
  investment in national income.
• But Rostow was more interested in describing the
  whole process through which society develops in
  different stages.

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Five stages of Growth -- Rostow
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What is Development Economics

• Traditional Society characterized by primitive
  technology, hierarchical social structures,
  production and trade based on custom and barter,
  as in pre- seventh century Britain.
• Precondition for take off With improved
  technology and transport and increased trade and
  investment, economically based elite and more
  centralized national state. Economic progress is
  assisted by education, entrepreneurship and
  institutions capable of mobilizing capital.
  Always traditional society exits side by side
  with modern economic activities as in Seventh and
  eighteenth century Britain.

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What is Development Economics

• Take off It is characterized by rapid economic
  growth, more sophisticated technology and
  considerable investment, particulary in
  manufacturing industry. Share of net investment
  and saving in national income rise from 5 percent
  to 10 per cent or more, resulting in a process of
  industrialization. Agriculture becomes
  increasingly commercialized and more productive
  with increasing demand from growing urban
  centres.
• A period of self-sustaining growth, with
  increasing investment of 10 and 20 per cent of
  national income. Technology becomes more
  sophisticated. There is greater diversification
  in the industrial and agricultural sectors .
• Age of High mass consumption The final stage
  characterized by the increasing importance of
  consumer goods and services and the rise of
  welfare state.

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What is Development Economics

• From dualism to basic needs
• Earlier theories presented by Lewis, Hirschman,
  Myrdal, and Rostow failed to eliminate poverty
  and the so called trickle down effects of
  growth generally failed to benefit the poor.
• Dudley Seers ---- Poverty, inequality and
  unemployment.
• Basic need approach --- Food, Health Education.

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What is Development Economics

• Basic approach gained momentum when ILO
  conference in 1976 on World Employment adopted a
  declaration of Principles and Programme of Action
  for Basic Needs Strategy of Development.
• Poverty alleviation was the key objective in the
  period up to 2000.
• It failed to achieve its goal due to top-down
  approach.

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What is Development Economics

• Neoliberalism.
• Neoliberalism, in theory, is essentially about
  making trade between nations easier. It is about
  freer movement of goods, resources and
  enterprises in a bid to always find cheaper
  resources, to maximize profits and efficiency.
• To help accomplish this, neoliberalism requires
  the removal of various controls deemed as
  barriers to free trade, such as
• Tariffs
• Regulations
• Certain standards, laws, legislation and
  regulatory measures
• Restrictions on capital flows and investment

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What is Development Economics

• Central tents of Neoliberalism are
• The rule of the market freedom for capital,
  goods and services, where the market is
  self-regulating allowing the trickle down
  notion of wealth distribution. It also includes
  the deunionizing of labor forces and removals of
  any impediments to capital mobility, such as
  regulations. The freedom is from the state, or
  government.

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What is Development Economics

• Reducing public expenditure for social services,
  such as health and education, by the government
• Deregulation, to allow market forces to act as a
  self-regulating mechanism
• Privatization of public enterprise (things from
  water to even the internet)
• Changing perceptions of public and community good
  to individualism and individual responsibility.

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What is Development Economics

• Effects
• Some 3 billion people or half of humanity
  live on under 2 dollars a day
• 86 percent of the worlds resources are consumed
  by the worlds wealthiest 20 
•  
• Background ---oil crises of 1973 and 1979
  triggered slowdown creating recession and
  precipitated Global Financial Crisis in the
  South 19881-82.
• Brazil, Maxico and Poland failed to pay back
  their loans to Northern creditors.

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What is Development Economics

• North realized if necessary measures were not
  taken, entire International financial system will
  be undermined and will collapse.
• IMF assumed lead role
• Introduction of SAPs
• Removal of SAPs with PRSP
  
  .
• Enhanced Structural Adjustment Facility (ESAF)
  with Poverty Reduction and Growth Facility (PRGF)

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Theories of Economic Development
Conclusion