Transcript ideas and theories of economic development

DEVELOPMENT FACTORS &
DEVELOPMENT THEORIES
JUDY M. COMETA
PRODUCTS OF EXISTING
CONDITIONS;MAY CHANGE OR
IMPROVE EXISTING
CONDITIONS
Economic ideas
and theories
IDEAS AND THEORIES ARE
NOT THE SAME
WERE CONSIDERED IMPOSSIBLE
DREAMS AND WERE PUBLICLY
RIDICULED IN THE PAST
IDEAS OF ECONOMIC
DEVELOPMENT

ANCIENT ECONOMIC IDEAS
Based on the Holy Scriptures and codes of laws
PLATO
ARISTOTLE
XENOPHON
-In favor of capitalism
- Agriculture is important
-In favor of specialization of
production
-No gap between the rulers
and the ruled
-Stressed the value of
management of
agriculture
- Disagree with Plato
about communal
property
-In favor of joint-stock
companies,
specialization and
division of labor
- Just like other ancient
intellectuals, he
considered agriculture as
the basis of wealth

THE ECONOMIC DOCTRINES OF MERCANTILISM
HAS VITAL ROLE IN
ECONOMIC DEVELOPMENT
STATE
CREATE AND ACCUMULATE WEALTH;
WEALTH CAME FROM GOLD AND SILVER
Agriculture was no longer appreciated but
instead manufacturing was given top priority in
order to achieve the objective of mercantilism.
THOMAS MUN, AN ENGLISHMAN
- CONTRIBUTED THE IDEA OF BALANCE OF PAYMENTS, EXPORTS
AND IMPORTS OF GOODS AND SERVICES
- HIS WRITINGS DOMINATED THE WHOLE CONCEPT OF
MERCANTILISM

PHYSIOCRACY – RULE OF NATURE

During the 18th century, many significant
changes took place in Europe

Dependence on the Greek philosophy and the
church dogma began to diminish

People started to rationalize human behavior
and the existence of institutions.

According to the thinkers, an economy or
society that conforms to such laws would be
successful.

WEALTH CAME FROM THE LAND
SUBSCRIBED TO THE CONCEPT OF
NATURAL LAW AS BOTH BASIC AND
BENEVOLENT
1ST Modern School of Thinkers
ECONOMISTS/
PHYSIOCRATS
CLAIMED THAT ALL WEALTH
CAME FROM THE LAND
REAL WEALTH OF ANY
NATION ARE THE PRODUCTS
OF AGRICULTURE
THEORIES OF ECONOMIC
DEVELOPMENT
I. LAISSEZ FAIRE THEORY

Introduced by the Physiocrats

The government should not intervene in
economic affairs rather let the forces of the
market interact with one another.

Quesnay, the leader of Physiocrats stated that
market prices should be based on the cost of
labor.
II. THE CLASSICAL THEORIES
- founded by Adam Smith, a Scotman
- Smith believed that a free market
mechanism could provide more benefits to individuals
and society than an economy run by the government
A. Production is the real wealth
-Adam Smith stated that the only
source of wealth is production through labor and
resources.
B. Theory on population
- Tomas Malthus, a religious minister
stated that population is the root cause of the
problems of society.
C. The theory or law of Comparative Advantage
- developed by David Ricardo, one of the
famous classical economists
- Nations should export the goods which they
enjoy the greatest advantage, and should import the
goods which they have the greatest disadvantage.
Example:
Countries
Japan
Philippines
Rice
120 days
90 days
Calculator
10 days
15 days
III. THEORY OF KARL MAX
- Workers are the real producers of goods
and yet the benefits of production go to the capitalists
and not to the workers
WORKERS
(+)
SYNTHESIS
CAPITALISTS
(-)
- Karl Max stated that there is a class
conflict between the workers and the capitalists
- He developed his theory of scientific
evolution that in the beginning when it was still a
primitive society, there was social equilibrium
Linear theory of development
by: Rostow

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Economies can be divided into primary
secondary and tertiary sectors.
Implications of Rostow's theory
1. Savings and capital formation (accumulation) are
central to the process of growth hence development
2. The key to development is to mobilise savings to
generate the investment to set in train self generating
economic growth.
3. Development can stall at stage 3 for lack of savings
– 15-20% of GDP required.
Harrod-Domar model
developed in the l930s suggests savings provide
the funds which are borrowed for investment
purposes.
Implications of the Harrod Domar Model
Economic growth requires policies that
encourage saving and/or generate technological
advances, which lower capital-output ratio.
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The Lewis model
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The Lewis model is structural change model that
explains how labour transfers in a dual economy.
For Lewis growth of the industrial sector drives
economic growth.
The Lewis Model argues economic growth
requires structural change in the economy
whereby surplus labour in traditional agricultural
sector with low or zero marginal product,
migrate to the modern industrial sector where
high rising marginal product.
Dependency theory

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
refers to over reliance on another nation.
Dependency theory uses political and economic
theory to explain how the process of
international trade and domestic development
makes some LDC's ever more economically
dependent on developed countries ("DC's").
refers to relationships and links between
developed and developing economies and
regions.
Cont. Dependency theory

In this model under development is externally
induced (ie DC not LDC’s fault) and only a
break up of the world capitalist system and a
redistribution of assets (eg elimination of world
debt) will ‘free’ LDC's
Balanced Growth Theory
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involves the simultaneous expansion of a large
number of industries in all sectors and regions
of the economy.
Called as the big push theory argues that as a
large
number
of
industries
develop
simultaneously, each generates a market for one
another.
Balanced growth theory is an extension of Say’s
Law the demand for one product is generated
by the production of others
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It is argued that free markets are unable to
deliver balanced growth because
entrepreneurs:
Do not expect a market for additional output.
Employers cannot ‘internalise their positive
externalities.
Do not anticipate the positive externalities
generated by the investment of other firms
engaged in expansion.
Are unable to raise finance for projects
PROMOTION OF HUMAN VALUES
- Jean Sismondi, a noted Italian writer stated that
wealth should not be measured in terms of material
things but in terms of human welfare
- Sismondi asserted that the state should interfere
to prevent the unfair distribution of wealth spawned by
unrestrained capitalism
- The main contention of Sismondi is focused on the
welfare of the poor.
FACTORS OF ECONOMIC DEVELOPMENT

According to Friedrich List, the progress of a
nation is great not in proportion to the
accumulation of wealth but in proportion to the
development of the productive forces.

List proposed that a nation should protect its
industries by means of tariffs.
FOR GOVERNMENT
This requires state planning and intervention to:
-Train labour
- Plan and organize the large-scale investment
programme
- Mobilise the necessary finance
- Nationalise strategic industries and undertake
infrastructure investments eg build roads
- Protect infant industries through tariff (tax on
imports) and quota (limit on quantity of
imports) policies