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.
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.
What is Development Economics • Development Theorymay 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 Theoriescan 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.
What is Development Economics • Development Strategiescan 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)
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.
Development • Development economic first appeared as distinct area of research in 1940’s & 50’s, 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 • .
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 smith’s 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.
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.
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.
Development • David Ricardo: he was the first one to elaborate on the Adam Smith’s 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Theories of Economic Development Nurkse • He further developed many of Rodan’s 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.
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 people’s 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.
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.
Theories of Economic Development Demand side low level of capital formation Little incentive to low productivity level invest limited market
Theories of Economic Development Supply side Low income Small capacity low to save Productivity Lack of capital
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.
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.
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.
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 sector’s 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.
Theories of Economic Development • Lewis’s 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.
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.
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.
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.
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.
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.
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
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.
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.
What is Development Economics • Effects • Some 3 billion people — or half of humanity — live on under 2 dollars a day • 86 percent of the world’s resources are consumed by the world’s 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.
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)
Theories of Economic Development Conclusion