Economic Theories of Development presentation.pptx

Economic Theories of Development as reported by yours truly

1. Economic Theories of Development Presented by: Edwin B. Aquino Juan Miguel Casupanan

2. Economic Theories of Development Development theories attempt to explain the conditions that are necessary for development to occur and weigh up the relative importance of particular conditions Types of growth and development theory: Linear growth theory; Structural change theory; Dependency theory; New-classical theory; and New growth theory.

3. Linear Growth Theory One of the first growth theories that was proposed by American economic historian Walt Rostow  in the early 1960s. economies must go through a number of developmental stages towards greater economic growth; and each stage could only be reached through the completion of the previous stage.

4. Rostow’s Stages of Economic Growth Traditional Society Pre-take-off Stage Take-off Stage Drive to maturity stage Stage of mass consumption LEVEL OF DEVELOPMENT TIME

5. Structural Change Theory Arthur Lewis Model of economy growth is one of the part of classical theories of growth of structural change theory Arthur Lewis presented this model on 1955; It is also known as the two sector model and the surplus labor model; and It focused on the need for countries to transform their structures, away from agriculture, with low productivity of labour , towards industrial activity, with a high productivity of labor.

6. Two sector model Rural agricultural sector and the urban industrial sector Agriculture generally under-employs workers and the marginal productivity of agricultural labor is virtually zero; Labor is then released for work in the more productive, urban industrial sector; Industrial firms start to make profits, which can be re-invested into even more industrialization, and capital starts to accumulate; and As soon as capital accumulates, further economic development can sustain itself.

7. Evaluation of Lewis model Profits may leak out of the developing economy and find their way to developed economies through a process called  capital flight; Capital accumulation may reduce the need for labor in the urban industrial sector; The model assumes competitive labor and product markets, which may not exist in reality; Urbanization may create problems, such as poverty, squalor and shanty towns, with unemployment replacing underemployment; and The financial benefits from industrialization might not trickle down to the majority of the population.

8. Clark-Fisher Development Theory As early as 1935, Allen Fisher had suggested that economic progress would lead to the emergence of a large service sector, which followed the development of a primary and secondary sector; In 1940, Colin Clark developed this theme to create the Clark-Fisher development theory, also called the Fisher-Clark model; and The Clark-Fisher hypothesis states that development will eventually lead to the majority of the labor force working in the service sector. The Clark-Fisher model shares some characteristics of early  linear stage  models and later  structural change  models.   In this model, structural change must occur for economic progress to occur in capitalist economies The Clark-Fisher hypothesis states that development will eventually lead to the majority of the labor force working in the service sector

9. Emergence of the service sector after industrialization HIGH INCOME ELASTICITY OF DEMAND LOW PRODUCTIVITY OF LABOR There is generally a high income elasticity of demand for services, especially leisure, tourism and financial services. As incomes rise, demand for services increases and more employment and national output are allocated to service production. Productivity in the service sector is lower than in the manufacturing sector because it is harder to apply new technology to many services. This means that, over time prices of services rise relative to primary and secondary goods

10. Dependency Theory Dependency theory became popular in the 1960’s as a response to research by  Raul Prebisch . Prebisch found that increases in the wealth of the richer nations appeared to be at the expense of the poorer ones  The dominant view of dependency theorists is that there is a dominant world capitalist system that relies on a division of labor between the rich ‘core’ countries and poor ‘peripheral’ countries Over time, the core countries will exploit their dominance over an increasingly marginalized periphery. Dependency theory has disappeared from the mainstream of economic theory since the collapse of Communism in the early 1990s. The considerable inefficiencies associated with state involvement in the economy and the growth of corruption, have been dramatically exposed in countries that have followed this view of development.

11. New Classical Theory During the 1980s, mainstream economic theory rejected Keynesianism and returned to its Classical market roots, with its emphasis on market freedom and a limited role for the state Three different new-classical approaches emerged: THE FREE-MARKET APPROACH where markets alone are assumed to be sufficient to generate maximum welfare THE PUBLIC CHOICE APPROACH which is an extreme New-classical model which emphasises that all government is ‘bad’ and leads to corruption and the gradual confiscation of private property THE MARKET FRIENDLY APPROACH which suggests that, while markets work, they sometimes fail to emerge, and a government has an important role in compensating for three main market failures: missing markets, imperfect knowledge and externalities

12. Trade Liberalization There is a broad consensus between New-classical economists that  free trade  can help stimulate growth and development by encouraging inward investment and the application of economies of scale and economies of scope, increasing competition and breaking down domestic monopolies and creating a low inflation environment

13. New Growth Theory New Growth theory is closely associated with American economist, Paul Romer A central proposition of New Growth theory is that, unlike land and capital, knowledge is not subject to diminishing returns IMPORTANCE OF KNOWLEDGE A focus on the development of  knowledge  is seen as a key driver of economic development In order to develop, economies should move away from an exclusive reliance on physical resources to expanding their knowledge base, and support the institutions that help develop and share knowledge Governments should invest in knowledge because individuals and firms do not necessarily have private incentives to do so Therefore, Government should invest in human capital, and the development of education and skills. It should also support private-sector research and development and encourage inward investment

14. Role of the public sector New Growth theorists argue that government should allocate resources to compensate for this failure Public utilities and infrastructure Industrial sector relies on energy and water for its production and distribution

15. Development Constraints The pace of development can be slowed down, or even reversed, by various factors affecting the economy. Some of these constraints can be dealt with through economic and social policy, while others may be difficult to resolve The constraints on development include: Inefficiencies within the micro-economy; Imbalances in the structure of the economy; A rapidly growing or declining population; Lack of financial capital; Lack of human capital; Poor governance and corruption; Missing markets; Over-exploitation of environmental capital; and Barriers to trade.

16. Promoting Development Policies to promote development Inward looking Inward-looking strategies were typical of the general approach to development which dominated thinking after the Second World War. This approach is interventionist and protectionist, and guided policy-making in many African and Latin American countries, and in some countries still does.

17. Promoting Development Inward-Looking The general economic strategy was referred to as  import substitution , which meant encouraging the development of domestic industry ‘undercover’ of protective barriers, such as tariffs and quotas. The industries targeted were those that provided the largest quantity of imports. Therefore, in the case of Japan, import substitution meant developing strong motor vehicle and consumer electronics industries. Inward looking strategies also involved the heavy subsidization of domestic producers as well as limiting the activities of multinationals. Inward looking policies did generate some short-term benefits, such as the protection of infant and declining industries; job creation; increased income, and preserving traditional ways of life. However, the consensus is that the challenges of  globalization  require a more outward looking approach.

18. Outward looking An outward looking strategy, such as promoting tourism, is seen as a more  modern  approach to development, and one that relies less on government intervention. A number of important global events forced many developing countries to become outward looking, including a rising development gap between countries adopting inward and outward looking policies. In addition, the collapse of communism created an opportunity to adopt more outward looking policies. Those that have adopted them, including India and China, clearly benefitted from increasingly outward looking policies in terms of growth rates and reduced poverty.

19. The benefits of outward-looking policies The benefits of outward-looking policies are derived from the benefits of free trade. For example, free trade brings welfare gains from tariff removal and increased competition and efficiency. In addition, outward-looking countries may be better able to cope with globalization and with external shocks. However, the  financial crisis  and its after-effects have forced many national governments to rethink their policies and to minimize the risks of an outward-looking approach.

20. Falling farm incomes In the long run, the income of many primary producers has fallen because the global supply of food has risen. This is the result of a greater use of new technology and better crop yields, and because of new entrants into the global marketplace, such as the entry of Vietnam into the coffee market.

21. One strategy for a country looking to develop is to try to develop one of its sectors. It would appear that there is a strong correlation between the level of development of an economy, and the proportion of its national output being generated by different sectors. Development theory  suggests that the greater the significance of agriculture, the less the level of development. Conversely, the more prominent the service sector, the greater the level of development. Developing particular sectors

22. Primary markets Many developing countries specialize in agricultural and other primary products. Indeed, the principle of comparative cost advantage suggests that specializing in commodities and products with the lowest opportunity cost will provide the best opportunity for economic development. However, over- specialisation , particularly in terms of primary production, can be highly risky. A country may remain underdeveloped if it specializes in producing a few primary products. There are several reasons for this.

23. Low value-added un-branded products Primary products, such as food and commodities, are bought and sold in markets which are virtually perfectly competitive. This means that products are un-branded and homogeneous, with a low value added, and therefore low-priced. As a result, the sale of such commodities generates a relatively small share of global income, so the rewards to factor inputs will also be limited. This does not create an economic environment in which entrepreneurs can flourish and take risks to accumulate short-term supernormal profits. Inconsistent yields Yields from land are likely to be inconsistent because of variations in growing conditions. Price instability Price instability, which is an inherent feature of primary markets, can make it extremely hard for producers to survive. It also deters investment in new technology, which requires a stable macroeconomic environment.

24. Susceptibility to global shocks If countries rely on producing a small range of agricultural products, they are more likely to be adversely affected by global shocks. Unfavourable elasticity Primary products have low income and price elasticity, which means that, as world incomes rise, proportionately less income is allocated to primary products, and more is allocated to manufactured goods, and services. In addition, commodity prices often fall in relation to manufactures but, because of the relatively low price elasticity, sales revenue falls when prices fall. In addition, export prices of commodities sold by developing countries tend to fall relative to import prices of manufactures from developed countries, hence the terms of trade of many developing economies fall. This means they have to export increasingly more commodities to pay for the same volume of imported manufactures, including both consumer and capital goods.

25. The Prebisch -Singer hypothesis The hypothesis states that, over time, the terms of trade for commodities and primary products deteriorate relative to manufactured goods. This hypothesis contributed to the general view that it was dangerous to rely on agriculture to secure growth and development. This means that just to keep up with developed economies and maintain the existing development gap, countries relying on producing and exporting primary products, whose terms of trade decline, must continually increase output. The hypothesis also provided the basis for an  inward-looking  approach. This suggests that countries are encouraged to switch to manufacturing and undertake  import substitution . This means encouraging countries to stop importing goods with increasing terms of trade and develop their own industrial base so that they can produce these goods for themselves.

26. Development Constraints During the latter half of 1980‘s, two concepts of development have succeeded in dominating the thoughts of policymakers and development economists. The two development concepts are supported by well organised international efforts and are accepted by most of the nations. They are: • Human Development • Sustainable Development Human Development

27. Amartya Sen‘s capability approach places human well-being in the core of discussion of development policies. Influenced by the thoughts of Amartya Sen, the Human Development Index (HDI) designed by Mahbub ul Haq and popularized by the UNDP in 1990, is an alternate to conventional measures of economic development and human well-being. Since then, human development has become an operational goal, through which planning, monitoring and evaluation frameworks are designed at various levels of policy making. Human Development

28. The HDI was an attempt to move the development debate beyond the domain of economic indicators (Morse, 2003). The determinants of individual and societal well-being go beyond the production and consumption of economic resources ( Boarini et al., 2006). The central theme of human development is on freedom for well-being, and therefore focuses on what people are free to be (their ̳ capabilities‘) and what they do (their functions ‘). Functionings and capabilities are the constituent elements of well-being ( Distaso , 2007). Human Development

29. According to Alkire (2002), human development is about human flourishing in the fullest sense – in matters of public and private, economic and social and political and spiritual. The capability approach offers a broad normative framework to conceptualise and evaluate human well-being. Enhancement of living conditions and enlarging people‘s choices is the guiding principle here. In a wider sense, the term human development embraces all aspects of human progress, ranging from health to economic and political liberties. Thus, human development is about the expansion of people‘s choices and HDI itself is intended to indicate the level of attainment of some of those choices (Hicks, 1997). Human Development

30. The HDI as measured by UNDP approach attempts to encapsulate only three dimensions to human development: education, health and income. Though, a value- loaded index (Morse, 2006), HDI has been favoured on the grounds that it shows the inadequacies of other indicators such as GDP ( Noorbakhsh , 1998). Human Development

31. However, HDI is criticised for neglecting other dimensions of human well-being such as environment, human rights, human security, political participation, distributional concerns ( Alauddin , 2004; Hicks, 1997; Sagar and Najam, 1998; Grimm et al., 2008; Ballet et al., 2011; Martins, 2011). Critics also say that indicators considered in HDI are too few and too arbitrarily chosen and that its definition is still inadequate and do not allow the capability approach to work (Berenger and Verdier-Couchane , 2007). Human Development

32. The first ice-breaking event that brought ecologists and economists to a discussion happened in 1972 at the Stockholm Conference on the Human Environment. This event even led to the creation of UNEP and IIED. In the 1970s, some economists influenced by the idea of limits to growth‘ predicted that the world was using resources at a greater rate than they were being renewed, and hence economic growth would be restricted. These ideas led to the concept of sustainable development. The classic definition of sustainable development, ̳ meeting the needs of present without compromising the ability of future generations to meet their needs‘ was given by the Brundtland report (WCED, 1987). Sustainable Development

33. The report was successful in persuading the international arena that development was not possible in the long run without protecting the environment. Later, an action plan for sustainable development, called Agenda 21, was launched in 1992 at Rio‘s Earth Summit (World Summit on Environment and Development). It was in Agenda 21, it was recognised that ̳ long-term sustainability is essentially a development issue, and that achieving sustainability needs simultaneous attention to the social, economic and environmental aspects of development. In the interest of sustainable development it would be necessary to take measures to preserve, conserve and nurture the fragile and critical ecosystem (Singh, 2002). Almost all the world‘s societies acknowledge that they aim for a combination of economic development, environmental sustainability and social inclusion, but specific objectives differ globally, between and within societies (Sachs, 2012).

34. Sustainable development implies linking ̳ what is to be sustained‘ with what is to be developed‘ ( Kates et al., 2005). However the concept of sustainability‘ is still criticized as an inherently vague concept whose scientific definition and measurement lack wide acceptance (Phillis and Andriantiatsaholiniaina , 2001). This complexity in conceptualization poses difficulty in measuring sustainability and adopt practical sustainable policies.

35. There was a time where policy makers used to assume tradeoffs between developmental issues and environmental issues. In other words, environmental management was regarded in development and policy-making forums as an anti-development phrase. However, more recently, the opinion on developmental and environmental issues has been the other way and it is increasingly argued for complementarities between both the issues. Good environmental quality—particularly of air, water, and sanitation—is a necessary condition for improving the welfare of the poor (World Bank, 2008). Both concepts of human development and sustainable development are based on strong theoretical base and scientific investigations. In this context, the interconnections between human development and sustainable development become more relevant. It will be a quite an incomplete approach to development if both the development concepts are not integrated. SUSTAINABLE HUMAN DEVELOPMENT: AN INTEGRATED APPROACH TO DEVELOPMENT

36. It is an accepted notion that people‘s livelihood is affected by the environment, in which they lead their life. Hence, poverty reduction efforts need to support communities to sustainably manage land, water, and forests (World Bank, 2004). Agriculture provides a source of livelihood for large rural masses. Water, energy, and fuel are inseparable parts of human livelihood. Human health depends on the immediate environmental condition and could be at stake because of pollution hazards and natural disasters. Urban air pollution could increase the environmental burden of disease and impose an economic burden or welfare loss. Rural women suffer from indoor air pollution caused by non-clean cooking fuel. Poor people invariably depend on the forest resources and forest products, and deforestation may lead to loss of many livelihood sources for poor. Deforestation may also lead to desertification. From the perspective of poverty reduction, natural resources are not necessarily the assets that will provide the largest payoffs but they cannot be ignored in any investment strategy for poverty reduction (World Bank, 2008).

37. Chapter 40 of Agenda 21, the action plan adopted in 1992 at the United Nations Conference on Environment and Development in Rio de Janeiro, calls on countries, as well as international, governmental, and non-governmental organizations, to develop indicators of sustainable development that can provide a solid basis for decision- making at all levels (UNCED, 1992). Agenda 21 also calls for the harmonization of efforts to develop such indicators.

38. The world today faces two major challenges: Firstly, to improve the state of human development so that all people are lifted from poverty; and secondly, to find a way to protect our natural environment to ensure that future generations will continue to benefit from the health of our planet‘s ecosystem ( Galizzi and Herklotz , 2008). Ecosystem services consist of flows of materials, energy, and information from natural capital stocks which combine with manufactured and human capital services to produce human welfare (Costanza et al., 1997). Given that environmental degradation is the reality of the present world, for a large section of poor people across the world, environmental degradation eclipses the hopes of meeting even the most basic human needs (UNDP, 2005). Factors that lead to mismanagement of the environment will further hamper the goal of attaining higher human development status. Ensuring environmental sustainability requires managing ecosystems so that they can provide services that sustain human livelihoods ( Lusigi , 2008).

39. There are two approaches to measuring sustainability: By developing accounts: Since GDP is computed following the protocol of the System of National Accounts (SNA), it ignores the state of the ecosystem or environmental loss. This approach attempts to include/adjust the environmental value in the national account statistics. Examples of this include the System of Integrated Environmental and Economic Accounting (SIEEA), the Genuine Progress Indicator, the World Bank‘s estimate of national wealth, and Genuine saving. By Assessments: Assessment uses selected indicators over a wide array of issues and are combined to form an index.

40. Dewan (2008) deals with the concept of ̳ sustainable human development‘ (SHD). SHD is human development that can be sustained forever. Since natural, social and cultural capital are important determinants of the level of human development. He says SHD conditions must ensure the non exhaustion of environment. Attaining higher human development by leaving too many ―environmental footprints‖ cannot be considered sustainable human development in today‘s world. Dasgupta (2001) gives the evidence that, majority of the poorest countries today lie in the tropics and in contrast to it, most of the rich countries are in temperate zone. Further he says that many infectious diseases are endemic to the tropics and subtropical zones. Even the tropical and sub tropical regions are expected to experience greatest changes in climate. This phenomenon assumes significance because these regions happen to be where the majority of the world‘s poor people live (World Bank, 2004).

41. MEA (2005) says that human well-being is not evenly distributed with respect to the world‘s ecosystems. Infant mortality rates are highest within drylands and that most of the world‘s population and GDP is located within cultivated systems. However, the study emphasized that these generalizations implies anything about causality. If infant mortality is high within a particular ecosystem, this does not mean that the ecosystem explains the high infant mortality. Rather, it indicates that the ecosystem is home to populations experiencing comparatively low levels of well-being and that these populations are therefore, other things being equal, potentially vulnerable to declines in ecosystem services. Neumayer (2001) analysed the linkages between human development and sustainability for 155 countries by accounting depreciation, investment and net depreciation of a country‘s manufactured and natural capital stock. The study concludes that human development of 42 countries is potentially unsustainable. Most of these countries have a low HDI, which means that even this low achievement is not sustainable into the future. The authors make a case forboth a policy reform within these countries and for external assistance to help maintain at least current low level of human development.