ECONOMIC DEVELOPMENT THEORIES
What is the definition of economic development?
Within a rising economy, economic development is defined as the reduction and elimination of poverty, inequality, and unemployment.
The Gini coefficient is a measure of how well a
This is a metric for determining the distribution of income. Perfect equality is represented by a Gini coefficient of 0.
Index of Human Development (HDI)
Life expectancy, educational attainment, and adjusted real income (PPP$ per person) are the three primary characteristics of human development that are measured.
What are the goals of theories and models?
Economic development theories and models attempt to explain and predict how economies develop (or do not develop) through time, how growth barriers can be discovered and overcome, and how governments can induce (start), sustain, and accelerate growth with suitable development policies.
Generalizations are what theories are.
While Less Developed Countries (LDCs) have certain commonalities, each country's unique economic, social, cultural, and historical experiences imply that the implications of a particular theory differ greatly from one country to the next. The Rostow model helps us think about the different stages of development that LDCs could go through, while the Harrod-Domar model shows why appropriate savings are so important in that process.
Concepts of Economic Development: Absolute Advantage
When a country or region can produce more of a product with the same inputs, this occurs.
Advantage in comparison
Standard free trade theory's foundation. David Ricardo was the first to present it in 1817. According to Ricardo, if countries specialize and trade the items in which they have a comparative advantage, everyone benefits. Comparative
When a country has a margin of superiority in the production of products or services, the opportunity cost of production is lower, it has an advantage. This is true even if one of the trading nations is more productive than the other in all traded goods (has an absolute advantage).
The Linear Stages Model of Rostow
This is a linear development hypothesis. It claims that to achieve? modernity,? Every country goes through the same developmental stages. Primary, secondary, and tertiary industries can be found in economies. A similar pattern of structural transformation emerges from the history of wealthy countries:
The Harrod-Domar Savings Model is based on the Harrod-Domar Savings Model.
According to the Harrod-Domar model, which was created in the 1930s, a population's savings provide the cash that is borrowed for investment purposes. To promote self-sustaining economic growth, larger rates of savings can be converted into higher rates of investment.
Lewis's Two-Sector Model
In a dual economy, the Lewis model is a structural change model that explains how labor transfers. Economic growth, according to Lewis, is driven by the industrial sector.
The Model of Slow Growth
Economic growth is determined by the number and quality of resources as well as technological advancements.
Theory of Dependence
The term "dependency" refers to excessive reliance on another country. Dependency theory combines political and economic theories to explain how international trade and domestic development make some LDCs increasingly economically dependent on wealthier countries.
Theory of Balanced Growth
According to the balanced growth (or big push) idea, as a large number of industries develop at the same time, each creates a market for the others.
Theory of Unbalanced Growth
Unbalanced growth theorists say that the government will not be able to mobilize sufficient resources to encourage widespread, coordinated investments across all industries. As a result, in a few critical industries, government planning or market involvement is essential. Prioritization is given to those with the most backward and forward ties to other industries.
Tobin Tax on Foreign Exchange Transactions is a tax on foreign exchange transactions that aims to limit speculation while also raising funds for development.
The Trickle-Down Effect
The wealthiest reap the immediate rewards of expansion, but the poor gradually profit as well. For example, wealthy families purchase local goods and hire servants, among other things.
The Washington Consensus (Washington Consensus)
To boost growth, free-market economists advocate a set of liberalization policies.
Models of Major Economic Development Rostow
This is a linear development hypothesis. Primary, secondary, and tertiary industries can be found in economies. A similar pattern of structural transformation emerges from the history of wealthy countries: Traditional Society (Stage 1): Characterized by subsistence economic activity, which means that rather than being exchanged, the output is consumed by the producers.
Transitional Stage 2 Stage: The pre-flight preparations. Surpluses for trading appear, aided by new transportation infrastructure. Savings and investments increase in value. Entrepreneursemerge.
Stage 3 - Take Off: Industrialization accelerates, resulting in a shift in labor from agriculture to manufacturing. The country's growth is concentrated in a few regions and one or two industries. To enable industrialization, new political and social structures emerge.
Drive to "Maturity" in Stage 4
Growth is now more diverse, thanks to technological advancements.
5 - Excessive consumption of mass The Model of Rostow's Implications To stimulate growth in developing countries, the proper conditions for such investment would have to be developed, i.e. the economy would have to have reached stage 2.
Savings and capital formation (accumulation) are important to the growth and development process, according to Rostow.
The key to development is to transform savings into investment, which will put in motion self-sustaining economic growth.
Lack of savings — 15-20% of GD necessary – can cause development to stop at stage 3. If the domestic Savings rate is 5%, then international aid/loan must total 10-15% to plug the ‘savings gap’. Resultant investment means a move to stage 4 Drive to Maturity and self-generating economic growth
The Model of Rostow's Limitations
The model proposed by Rostow is restricted. The determinants of a country's economic development stage are typically viewed in general terms, i.e. they are influenced by:- the quality and amount of resources - a country's technological capabilities - the institutional structures of a country Contract law, for example.
Rostow does a good job of explaining the development experience of Western countries. Rostow, on the other hand, does not explain the experiences of countries with different cultures and traditions, such as those in Sub-Saharan Africa that have seen little economic development.
The Harrod-Domar model is described in this article.
The Harrod-Domar model developed in the l930s suggests savings provide the funds, which are borrowed for investment purposes.
The rate of growth of the economy is determined by: - the amount of saving and the savings ratio - investment productivity, i.e. the capital-output ratio of an economy A capital-output ratio of 8 to 1 exists, for example, if £8 in capital equipment produces £1 in annual output. A three-to-one ratio means that for every £1 of products produced annually, only £3 of capital is required.
Additional Research
The Harrod-Domar model was created to evaluate business cycles in the 1930s. Later, it was used to 'explain' economic growth.
Economic growth is influenced by the amount of labor and capital available, i.e. =f New York (K, L) The labor force in developing countries is plentiful. As a result, economic growth and progress are hampered by a shortage of physical capital. Economic growth is fueled by increased physical capital. (As an example, see Production Possibility Boundaries) - More producer products (capital) result from net investment (i.e. investment above and beyond that required to replace worn-out capital (depreciation).
Higher output and income are generated as a result of this appreciation. Higher-income allows for greater savings.
The Harrod Domar Model's Consequences
Economic growth necessitates policies that promote saving and/or spur technological advancements, lowering the capital-output ratio.
Domar on Domar: Criticisms of the Model It was not my intention to derive" an empirically significant rate of growth," but rather to comment on business cycles. - Stimulating the appropriate level of domestic savings is tough. Borrowing from abroad to bridge a savings shortfall leads to debt repayment issues later. - Because capital equipment has diminishing marginal returns, each consecutive unit of investment is less productive, and the capital-to-output ratio grows. The amount of investment is only one component that influences development, such as the supply-side approach (opening up markets); and human resource development (education and training) Economic development is a necessary but insufficient requirement. The economy's sector structure is crucial (for example, agriculture vs. industry vs. services).
An Overview of the Lewis Model
In a dual economy, the Lewis model is a structural change model that explains how labor transfers. Economic growth, according to Lewis, is driven by the industrial sector. According to the Lewis Model, economic growth necessitates a structural shift in the economy, with excess labor migrating from the traditional agricultural sector, which has a low or zero marginal product, to the modern industrial sector, which has an increasing marginal product. As MP of rural employees = 0, transferring surplus labor from rural to urban areas has no effect on agricultural production.
Profits are reinvested in the business. Jobs for surplus rural labor are created as a result of growth. In metropolitan regions, more workers mean more output, which means more income and profits. Increased profits support increasing investment, while increased incomes raise demand for domestic products. As a result, rural-to-urban migration provides self-sustaining growth. The contemporary sector's ability to absorb surplus labor is determined by the rate at which it invests and accumulates capital. Surplus workers are not taken on by the formal sector when enterprises invest in new labor-saving capital equipment. Rural migrants who have recently arrived join the informal economy and reside in shanty settlements.
Given that urbanization promotes economic growth, government neglect of agriculture can result. However, the majority of people live in rural areas where incomes are relatively low. Instead of hiring newly arrived workers, more revenues could be invested in labor-saving capital. Rural-urban migration has been significantly greater than the formal industrial sector's ability to generate work in many LDCs. Rural poverty has been replaced by urban poor.
An Overview of Dependency Theory
The term "dependency" refers to excessive reliance on another country. Dependency theory combines political and economic theory to explain how international trade and internal development make certain LDCs increasingly economically reliant on wealthy countries ("DCS"). Relationships and links between developed and emerging economies and areas are discussed in dependency theory. Underdevelopment, according to dependency theory, is caused by unequal power relationships between rich developed capitalist countries and poor developing countries.
The capitalist system allows powerful rich countries to dominate dependent, vulnerable LDCs. The externally induced (i.e. DC not LDC's fault) mechanism under the Dependency model is under development. Growth is only possible in a closed economy that strives for self-sufficiency through planning. Dominant DCs have a technological and industrial advantage that allows them to dominate.
Ensure that the ‘rules of the game' (as defined by the World Bank and IMF) operate in their favor. This partly explains the hostility shown towards the WTO in Seattle in 1999. In this model under development is externally induced (i.e. DC not LDC’s fault)and only a break up of the world capitalist system and a redistribution of assets(e.g. elimination of world debt) will ‘free’ LDC's
Balanced Growth Theory
Balanced growth involves the simultaneous expansion of a large number of industries in all sectors and regions of the economy. Balanced growth (or the big push) theory argues that as a large number of industries develop simultaneously, each generates a market for one another. If a large number of different manufacturing industries are created simultaneously then markets are created for additional output. For example, firms producing final goods can find domestic industries that can supply them with their inputs. The benefits of growth are spread over all sectors and, ideally, regions. Balanced growth theory is an extension of Say’s Law the demand for one product is generated by the production of others It is argued that free markets are unable to deliver balanced growth because of entrepreneurs:
Do not expect a market for additional output – why risk resources when sales are uncertain? Require skilled workers but are not willing to hire and train unskilled staff who may then leave to work for rival firms – employers cannot ‘internalize 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 If the government can co-ordinate simultaneous investment in many industries one firm provides a market for another. This requires state planning and intervention to:- Train labor- Plan and organize the large-scale investment program.- Mobilize the necessary finance
- Nationalize strategic industries and undertake infrastructure investments e. g. build roads- Protect infant industries through tariff (tax on imports) and quota (limit on the number of imports) policies The strategy of balanced growth is beyond the resources of most poor countries; Balanced growth within a closed economy rather than specialization and trade contradicts comparative advantage Government planning results in government failure i.e. government intervention in the market fails to bring about an efficient allocation of resources e.g. planning process creates a bureaucracy. LDC development policies focusing on import substitution, agricultural self-sufficiency, and state control of production yield poor growth.
Unbalanced Growth Theory
Unbalanced growth theorists argue that sufficient resources cannot be mobilized by the government to promote widespread, coordinated investments in all industries. They share analysis with balanced growth theorists that free markets, alone, cannot generate development but differ in that government planning or market intervention is required just in strategic industries. Those with the greatest number of backward and forward links are prioritized. A country lacks resources to finance balanced growth. Resources are therefore concentrated on strategic industries with:- Significant forward linkages i.e. firms creating essential inputs for other key firms in the economy- Significant backward linkages i.e. key firms buy industrial inputs from a large number of domestic firms- Import substitution. Developing domestic industries replaces imports and so improves the balance of payments. Government identifies strategically important areas with significant backward and forward linkages to Nationalize (planned economy) or- Subsidies (market economy). E.g. State-owned development banks finance priority investment projects chosen for their contribution to growth and development goals
There is no universally accepted "development model." Each hypothesis sheds light on one or two aspects of the complex growth process. For instance, the Rostow