ECONOMIC DEVELOPMENT

Second Semester: Midterm Lectures

Lesson 1: introduction to economic development Reasons for studying development economics:

Economics is a branch of Social Science Nature - It is concerned with economic,
that deals with allocation of resources, cultural and political requirements for
production, distribution, and effecting rapid structural and institutional
consumption of goods and services. transformations of entire societies in a
manner that will mostly efficiently bring the
It has two branches: Microeconomics and
fruits of economic progress to the broadest
Macroeconomics.
segments of their populations.
factors of production:
Aim - The purpose of this field is “to help
Land – the natural resources people understand developing economies in
Labor – the manpower resources, physical order to help improve the material lives of the
and mental abilities (Human capital) majority of the global population.” (Todaro
Capital – goods produced that are used as and Smith, 2015)
resources/man-made
Entrepreneurship – the act of organizing Scope - The study of Economic
the other three resources Development traces the current state of
developing nations, from what they have and
what they have not, and apply the theories of
Key Concepts in Economics: development applicable to each.
Opportunity cost
Marginal benefit This includes analysis of THE FOLLOWING:
Marginal cost poverty
Efficiency inequality
Incentive population growth
Exchange rural-urban migration
Market agricultural development
Theory international trading
stabilization policies
Economic Development financial system
• Development economics - The fiscal policy
study of how economies are
transformed from stagnation to Importance - To help developing countries
growth and from low-income to high- attain development:
income status, and overcome o economic and social equality
problems of absolute poverty. o elimination of poverty
o universal education
• Absolute poverty – unable to meet o rising levels of living
the minimum levels of income, food, o national independence
clothing, health care, shelter and o modernization of institutions
other essentials. o rule of law and due process
o access to opportunity
o political and economic participation
o grassroots democracy
o self-reliance
o personal fulfillment

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Second Semester: Midterm Lectures

Definition of development o International Monetary Fund (IMF),

Traditional Definition - It means achieving Food and Agricultural Organization
sustained rates of growth of income per (FAO), World Health Organization
capita to enable a nation to expand its output (WHO), UNICEF, and International
at a rate faster than the growth rate of its Labour Office.
population. o its causes and the means of its
alleviation
Income per capita = gnp/population o In order to quantify the line of poverty
= 1,000,000/2,000,000 = 0.5 the World Bank in its 1990 report
= 2,000,000/1,000,000 = 2 adopted a universal figure of $370
per person a year to meet the cost
of minimum adequate caloric intakes
Levels and rates of growth of “real” per capita and other basic necessities.
gross national income (GNI) o Those whose income fall beyond this
o used to measure the overall figure are poor and those who fall
economic well-being of a population beyond $275 are extremely poor.
how much of real goods and services
is available to the average citizen for Poverty as an equilibrium condition
o consumption and investment. 'poverty equilibrium'
(Todaro and Smith, 2015) o poverty itself maintains the forces
that lead to its perpetuation.
New Meaning of development o a condition of life so characterised by
malnutrition, illiteracy and disease as
During the 1970s, economic development
to be beneath any reasonable
came to be redefined in terms of the
definition of human decency.
reduction or elimination of poverty, inequality,
o Yet within a particular society at a
and unemployment within the context of a
particular time, poverty is often
growing economy.
defined relative to average living
standard.
“Redistribution from growth” became a
common slogan. (Todaro and Smith, 2015)
Definitions of poverty:
The process of improving the quality of all o “Poverty is a state or condition in
human lives and capabilities by raising which a person or community
people’s levels of living, self-esteem, and lacks the financial resources and
freedom. essentials for a minimum standard
of living.
Magnitude of world poverty o Poverty means that the income level
from employment is so low that
“The magnitude of absolute poverty results
basic human needs can't be met.
from
o Poverty-stricken people and families
o a combination of low per capita
might go without proper housing,
incomes and
clean water, healthy food, and
o highly unequal distributions of that
medical attention.
income.” (Todaro and Smith, 2015)
o Each nation may have its own
o Poverty has been an issue of interest
threshold that determines how many
to World Bank (WB),
of its people are living in poverty.”
(Chen, 2020)

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 ECONOMIC DEVELOPMENT
Second Semester: Midterm Lectures

Structure and characteristics of developing nations Human Development Index

The Structure of Third World Economies It measures a country's average
– 7 critical components achievements in three areas of human
development: health, education, and
1. The size of the country (geographic area,
standard of living.
population, and income)
2. Its historical and colonial background
Socioeconomic development based on
3. Its endowments of physical and human
income per capita, education and health
resources
4. The relative importance of its public
and private sectors
Lesson 2: theories of economic development
5. The nature of its industrial structure Linear Stages Theory
6. Its degree of dependence on external Structural Change Models
economic and political forces International-Dependence
7. The distribution of power and the Revolution
institutional and political structure within Neoclassical Counterrevolution
the nation. O-Ring Theory of Economic
Development
Characteristics of the Developing World:
o Lower levels of living and productivity
A. Linear Stages Theory
o Lower levels of human capital • states that development undergoes
o Higher levels of inequality and stages of growth in achieving
absolute poverty development
o Higher population growth rates • advocated by the American economic
o Greater social fractionalization historian Walt W. Rostow.
(ETHNIC, CULTURAL, RELIGIOUS - According to him, there is a series of
o ASPECT) steps that is undergone by a country
o Larger rural populations but rapid in achieving growth form
rural-to-urban migration underdevelopment stage to
o Lower levels of industrialization development stage.
o Adverse geography - This is called “takeoff into self-
(RESOURCES/WEATHER & sustaining growth.
CLIMATE) • The important factor that will start this
o Underdeveloped financial and other takeoff is for a country to have a
markets sufficient fund to achieve the
o Lingering colonial impacts such as necessary growth to attain
poor institutions and often external development.
dependence. • This is done through the mobilization
of both foreign and domestic savings.
Indicators of development: • This is explained by the Harrod-
INCOME Domar growth model.
GDP/GNP/GNI
PPP –PURCHASING POWER
PARITY
HEALTH
EDUCATION

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 ECONOMIC DEVELOPMENT
Second Semester: Midterm Lectures

Harrod-domar growth model Two-sector surplus labor - Lewis Theory of

Economic Development.
• The basic model of Lewis was the
Structural Transformation as
described above. Later it was
Where: ∆Y/Y – growth rate of GDP modified by John Fei and Gustav
s - net national savings ratio (sG, also Ranis.
gross savings) • This is the two-sector model which
c – national capital output ratio became the general theory in
ø - rate of capital depreciation developing countries with surplus
labor.
• This equation explains that for
countries to achieve growth, they 1. Traditional, overpopulated, rural
need to save and invest. subsistence sector
• The more they save and invest, the • characterized by zero marginal
more they grow. labor productivity
• The growth of the labor force and the 2. High-productivity modern, urban
progress in technology are the other industrial sector
factors needed to attain growth. • The laborers in the first sector are
• Capital-output ratio. A ratio that transferred to the second sector
shows the units of capital required to to increase output.
produce a unit of output over a given • This is a combination of
period of time. developing both the traditional
• Net savings ratio. Savings expressed sector and the industrial sector.
as a proportion of disposable income • Structural-change theory. The
over some period of time. hypothesis that
• Y = C + S+ T underdevelopment is due to
• Yd = C + S – T = C + S underutilization of resources
arising from structural or
b. Structural change model institutional factors that have their
• This model describes the origins in both domestic and
transformation of the economic international dualism.
structures of the developing countries • Development therefore requires
from traditional subsistence more than just accelerated capital
agriculture to modern industrialized formation.
economy. • Investment = capital formation;
• it uses the modern econometrics, the expenses of the business firms
tools of neoclassical price and the • Structural transformation. The
theory of resource allocation in the process of transforming an
transformation process. economy in such a way that the
• The “two-sector surplus labor” and contribution to national income by
the “patterns of development” are the manufacturing sector
examples of this model. eventually surpasses the
contribution by the agricultural
sector.

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ECONOMIC DEVELOPMENT
Second Semester: Midterm Lectures

• More generally, a major alteration three major streams of thought:

in the industrial composition of o the neocolonial dependence model
any economy. o the false-paradigm model
• Lewis two-sector model. A theory o the dualistic-development thesis
of development in which surplus
labor from the traditional
1. Neocolonial dependence model
agricultural sector is transferred
o believes that the developing
to the modern industrial sector,
countries are underdeveloped and
the growth of which absorbs the
continues to be
surplus labor, promotes
o due to the historical evolution of a
industrialization, and stimulates
highly unequal international capitalist
sustained development.
system of rich country–poor country
relationships
Patterns of Development o This is a neo-Marxist view of
• This focuses on the process of underdevelopment
replacing traditional sector to o Explains the reasons why the centers
industrial sector. remain to be underdeveloped
• Capital, labor, and a set of o Presence of center, comprador
interrelated changes in the economy and periphery
are the drivers of this transition. o There are some elite groups in the
• The changes in the economic periphery, known as comprador
structure “includes the transformation group, who are considered as
of production and changes in the extensions of the centers that
composition of consumer demand, o continuously exploit the periphery.
international trade, and resource use o Center - In dependence theory, the
as well as changes in socioeconomic economically developed world.
factors such as urbanization and the o Periphery - In dependence theory,
growth and distribution of a country’s the developing countries.
population. o Comprador group - In dependence
• Empirical structural-change analysts theory, local elites who act as fronts
emphasize both domestic and for foreign investors.
international constraints on o Some of these elites are the
development. landlords, entrepreneurs, military,
and public officials.
c. International-Dependence revolution o They take part in the continuous
misery of the periphery by inhibiting
• This model sees the developing
genuine reforms to improve the lot of
nations as being threatened by
the population.
external environment such as
- Political
DEFINITIONS:
- economic rigidities
- institutional Dependence Dependence - The reliance of developing
- dominance of the rich countries countries on developed-country economic
policies to stimulate their own economic
growth.

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 ECONOMIC DEVELOPMENT
Second Semester: Midterm Lectures

the developing countries adopt • No matter how these developed

developed -country education systems, countries teach or train developing
technology, economic and political systems, nations, the latter still remain
attitudes, consumption patterns, dress, and underdeveloped.
so on. • The models that should be taught to
developing countries should be
Dominance - In international affairs, a founded on their historical
situation in which the developed countries institutions.
have much greater power than the less
developed countries in decisions affecting Definition:
important international economic issues,
False-paradigm model - The proposition
such as the prices of agricultural
that developing countries have failed to
commodities and raw materials in world
develop because their development
markets.
strategies (usually given to them by Western
economists) have been based on an
Neocolonial dependence model - A model
incorrect model of development, one that, for
whose main proposition is that
example, overstresses capital accumulation
underdevelopment exists in developing
or market liberalization without giving due
countries because of continuing exploitative
consideration to the needed social and
economic, political, and cultural policies of
institutional change.
former colonial rulers toward less developed
countries.
3. Dualistic-Development thesis
Underdevelopment – An economic situation The dualistic nature of the world that we live
characterized by persistent low levels of in is the existence of the rich and the poor:
living in conjunction with absolute poverty, rich and poor nations, rich and poor people.
low income per capita, low rates of economic
growth, low consumption levels, poor health
There are four arguments posed by this model:
services, high death rates, high birth rates,
dependence on foreign economies, and A. Different sets of conditions, of which some
limited freedom to choose among activities are “superior” and others “inferior,” can
that satisfy human wants. coexist in a given space.
o Examples of this element of dualism
2. False Paradigm model include Lewis’s notion of the
coexistence of modern and traditional
• Underdevelopment is due to faulty
methods of production in urbanand
and misleading and inappropriate
rural sectors;
advice given by the experts coming
o the coexistence of wealthy, highly
from developed countries. What is
educated elites with masses of
applicable for developed countries
illiterate poor people; and
oftentimes cannot be applied to
o the dependence notion of the
developing countries.
coexistence of powerful and wealthy
• Due to differences in resources,
industrialized nations with weak,
culture, governance and other
impoverished peasant societies in
institutions of developing nations
the international economy.
• The models should be founded on
their historical institutions.

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 ECONOMIC DEVELOPMENT
Second Semester: Midterm Lectures

B. This coexistence is chronic and not merely two weaknesses of dependence theories:
transitional. It is not due to a temporary 1. they do not give insight as to how
phenomenon, in which case, time could developing countries initiate and sustain
eliminate the discrepancy between superior development
and inferior elements. 2. the negative experience of developing
o In other words, the international nations in pursuing industrialization
coexistence of wealth and poverty is campaigns.
not simply a historical phenomenon
that will be rectified in time.
• Some countries may adopt self-
o Although both the stages-of-growth
reliance, or known as autarky. It is the
theory and the structural-change
same as being a closed economy;
models implicitly make such an
but most countries today have
assumption, to proponents of the
opened their economies already.
dualistic development thesis, growing
They realized that opening their
international inequalities seem to
economies brings more economic
refute it.
advantages than being self-reliant.
One best example is China, which
C. Not only do the degrees of superiority or
have grown stronger. The next best
inferiority fail to show any signs of
solution is the balancing of both the
diminishing, but they even have an inherent
government and the market in the
tendency to increase.
improvement of their economies.
o For example, the productivity gap
between workers in developed
D. Neoclassical counterrevolution
countries and their counterparts in
most developing countries seems to • In developed nations, this
widen. counterrevolution favored supply-
side macroeconomic policies,
D. The interrelations between the superior rational expectations theories, and
and inferior elements are such that the the privatization of public
existence of the superior elements does little corporations.
or nothing to pull up the inferior element, let
alone “trickle down” to it. In fact, it may • In developing countries, it called for
actually serve to push it down—to “develop freer markets and the dismantling of
its underdevelopment.” public ownership, statist planning,
and government regulation of
Definition: economic activities
Dualism - The coexistence of two situations
or phenomena (one desirable and the other central argument of the neoclassical
not) that are mutually exclusive to different counterrevolution
groups of society—for example, extreme
poverty and affluence, modern and underdevelopment results from poor
traditional economic sectors, growth and resource allocation due to incorrect pricing
policies and too much state intervention by
stagnation, and higher education among a
overly active developing-nation
few amid large-scale illiteracy.
governments.

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 ECONOMIC DEVELOPMENT
Second Semester: Midterm Lectures

Reason for underdevelopment: • people with similar skill levels work

rather because of the heavy hand of the state together. “ (Kremer, 1993)
and the corruption, inefficiency, and lack of • The name comes from the 1986
economic incentives that permeate the Challenger shuttle disaster
economies of developing nations. • a catastrophe caused by the failure of
a single O-ring.
promoting free markets and laissez-faire • Kremer thinks that the O-ring
economics within the context of permissive development theory explains why
governments that allow the “magic of the rich countries produce more
marketplace” and the “invisible hand” of complicated products, have larger
market prices to guide resource allocation firms and much higher worker
and stimulate economic development. productivity than poor countries.
(Nafziger, 2005)
3 component approaches of the Neoclassical
Counterrevolution five major assumptions of o-ring
1. Free-market analysis. Theoretical • firms are risk-neutral
analysis of the properties of an economic • labor markets are competitive
system operating with free markets, often • workers supply labor inelastically
under the assumption that an unregulated • workers are imperfect substitutes for
market performs better than one with one another
government regulation. • there is a sufficient complementarity
of tasks
2. theory (new political economy
approach). The theory that self-interest
implications one can derive from this model
guides all individual behavior and that
governments are inefficient and corrupt • Workers performing the same task
because people use government to pursue earn higher wages in a high-skill firm
their own agendas. than in a low-skill firm;
• Wages will be more than
3. Market-friendly approach. The notion proportionately higher in developed
historically promulgated by the World Bank countries than would be assumed by
that successful development policy requires measurements of skill levels;
governments to create an environment in • Workers will consider human capital
which markets can operate efficiently and to investments in light of similar
intervene only selectively in the economy in investments by those around them;
areas where the market is inefficient. • This model magnifies the effect of
local bottlenecks which also reduce
e. O-Ring Theory of Economic Development the expected returns to skill;
by Michael Kremer in 1993 • O-ring effects across firms can create
national low-production traps.
• proposes that tasks of production
must be executed proficiently
together in order for any of them to be
of high value.
• The key feature of this model is
positive assortative matching

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