theories of economic development

5/21/2018 Theories of Economic Development

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Department of Geography(Delhi School of Economics)University of Delhi

MA in Geography


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Paper 204Spatial Economic System

MA in Geography

Part I (Semester 2)


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Dr. Anjan Sen, AITPAssistant Professor

E-mail:[email protected]

Mobile:

+91-9899919701
mailto:[email protected]:[email protected]


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Unit 8:Theories of EconomicDevelopment


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Topic 40:Survey of Theories ofEconomic Development


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1860s1960s

Time

Period

Development

Approach

Development

Understanding

Key Thinkers &

Influences

1800s ClassicalPolitical

Economy

Catching Up,Industrialization,

(still not linked to

development)

Ricardo,Smith,

Marx

1850s Colonial

Economics

Resource Management,

Trusteeship

1930s &

1940s

Development

Economics

Economic Growth,

Industrialization

Keynes,

Hirschman

1950s &

1960s

Modernization

Theory

Linear Progress,

Economic Growth,

Social and Cultural

Modernization

Rostow,

Lewis,

Myrdal


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1960s1980s

Time

Period

Development

Approach

Development

Understanding

Key Thinkers &

Influences

1960s &1970s

DependencyTheory

National-centeredDevelopment,

Development of Under-

development

Frank,Prebisch,

Cardoso,

Rodney,

Wallerstein

1970s &

1980s

Basic Needs,

Grassroots,

Alternative

Development,

Women in

Development

(WID)

Human flourishing,

Basic needs to poorest,

Local Level Community

Development,

Role of Women in

Development

McNamara,

Boserup,

Streeten


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1980s

Time

Period

Development

Approach

Development

Understanding

Key Thinkers &

Influences

1980sonwards

Neo-Liberalism Market-led EconomicGrowth advocating

Deregulation,

Liberalization,

Privatization

Lal,Balassa,

Friedmann,

World Bank,

IMF

Human

Development,

Gender &

Development

(GAD),

Sustainable

Development

Human Capacities &

Entitlements, Participation

& Empowerment,

Role of Gender Relations

& Societal Expectations,

Role of Natural

Environment

Sen, Chambers,

UNDP, Cooke &

Kothari, Edwards &

Hulme, Moser,

Brundtland, Kabeer,

Elson, Momsen,

Shiva, Blaikie


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1990s2000s

Time

Period

Development

Approach

Development

Understanding

Key Thinkers &

Influences

1990s Post-developmentalism

Challenges idea ofdevelopment as a form

of continued Colonialism

& Eurocentrism

Escobar,Sachs,

Esteva

2000s Millennium

Development

Goals

Specific Goals to

Alleviate Poverty, Specific

Indicators to be achieved

by 2015

United Nations

Diverse Inter-

disciplinary Views,

Optimistic post-

development

Well-being, Sustainable

Development, Localism &

Decentralization

Kabeer, Momsen,

ORiordan,

Redclift,

McGregor, Gough


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Global Hegemony & Development

Theories (1/2)

Historical

Context

Hegemony Explanation Development

Thinking

19thCentury British Empire ColonialAnthropology,

Social Darwinism

Progress,Evolutionism

18901930s Colonialism Classical Political

Economy

Catching-up

Post-war Boom US Hegemony Growth Theory,Structural

Functionalism

Modernization


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Global Hegemony & Development

Theories (2/2)

Historical

Context

Hegemony Explanation Development

Thinking

De-colonization Third WorldNationalism,

NAM,

G77

Neo-marxism Dependency

1980s Globalization,

Finance &

Corporate Capital

Neo-liberalism,

Monetarism

Structural

Adjustment

1990s Rise of Asia,

Big Emerging

Economies,

BRICS

Capabilities,

Developmental

State

Human

Development


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Major Periods

Pre-Classical Economics or Mercantilism (16thlate

18th century)

Classical Economics (~1776-1870s)

Neo-classical Economics (1870s-1930s)

Keynesian Economics (1930s-1970s)

Marxian Economics (1950s-1990s) Development Economics (1940s-1990s)

Neo-Liberal Economics (1990s onwards)


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Topic 41:Pre-Classical Economics(Mercantilism)


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Pre-Classical or Mercantilism (1/2)

Feudal society, at the mercy of Industrial Revolution

(18thcentury onwards)

European origins, achieving national power through

economic growth:

Colonization to gain control over resources.

Based on trade (mercans istrade in Latin)

Trade monopolies (e.g. East India Co.) due to

colonization [trading in opium, spices, etc].

Trade based on shipping.

Bullion (i.e. gold and silver) exchange.


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Pre-Classical or Mercantilism (2/2)

Economic prosperity based on favourable balance of

trade:

Net exports [over imports].

ProtectionismElites influence on protection of

domestic economy through tariffs and other

preferential laws (e.g. Corn laws protecting British

landlords).


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Topic 42:Classical Economics


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Introduction (1/2)

Based on critique of Mercantilism.

General belief on economic development through

Free market (i.e. trade without barriers).

Natural order determines price, rent, & economicaffairs.

Competitive economy promotes public interest.

Freedom from government restriction.

Institutions supply money.

Capital accumulation (savings)outputwages.


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Introduction (2/2)

Division of laborrelated to market size.

Free trade.

Diminishing returns.

Iron law of wages.

Formulated amid scientific discoveries & technical

change. Major flawspopulation theory & lack of

technological change.


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Adam Smith

Adam Smiths Wealth of Nations (1776): the start

Self-interestas an economic drive. Limited

government interventionfree trade; and self-regulating markets [contrast with mercantile

protectionism].

Market prices limited by competition.

Invisible hand of self-regulating markets transformself-interest into public virtue.

Division of labour (i.e. specialization) enhances

production [distinctively industrial orientation].

However, division of labour is limited by the extent

of market.


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Malthus

Malthuss Essay on Population (1798):

Human progress limited by human passion

population outgrows food production.

While population increases in geometric

progression (2,4,8,16,32,64,), food increases in

arithmetic progression (2,4,6,8,10,12,).


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David Ricardo

David Ricardos Principles of Political Economy and

Taxation (1817):

Economic development through Comparative

AdvantageCountries gain when they trade

products in which they have greatest comparative

advantage.


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Topic 43:Neo-Classical Economics


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Neo-Classical Economics (1/2)

Beginning in 1871:

William Stanley Jevonss Theory of Political

Economy.

Carl Mengers Principles of Economics.

Leon Walrass Elements of Pure Economics.

Alfred Marshall's Principles of Economics (1890). Free competitive markets as means of efficient

allocation of resources.


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Neo-Classical Economics (2/2)

Assumption: Rational and self-interested individuals

maximize their utility.

Significance of marginal utility:

Marginal utility proportional to price (supply/

demand).

Long run equilibrium.

Minimal state intervention:

Laissez-faire.


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Topic 44:Keynesian Economics


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Keynesian Economics (1/3)

Critique of Classical economics.

Gained credence after the 1929 Depression.

Keynes The General Theory of Employment,

Interest, and Money (1936):

Markets not self-adjusting.

Long-run equilibrium untenable [In the long run,we are all dead].

Economic uncertainty.


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Savings leads to investment, which matters for

economic growth.

Capital formation is determined by savings and

investment:

o Domestic savings are channeled to productive

investments such as manufacturing, which

results in high productivity.

o Growth is market driven. As income levels rise,

savings rises, and frees capital for alternative

investment.


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Macro-levelbehaviour:

Aggregate demand (country level) as driver of

economic growth.

Active fiscal policy to control markets (planned

economies).

Economic growth can be accelerated by changing

the saving rate.

Government regulation of interest rates.


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Topic 45:Marxian Economics


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Beginnings

Historical dialecticexamines where society was, is

going, and its change process.

Movement from slave society and feudalism, to

capitalism, socialism and communismchange is

based on relationship between ruling and oppressed

classes.

Reserve army of unemployed.

Can socialism be introduced through parliamentary

democracy?


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Marxian View of Development

Originated in 1950s to counter capitalism:

Capitalist or market economy:

o Production depends upon wage labor.

o Labors efforts produces a surplus.

o The surplus is accumulated and appropriated by the

employer.

o This often results in class conflicts. Socialist or command/planned economy:

o Mode of Productionelements and activities

necessary to produce real and material life.

o Ownership of Productioncommunity.


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Critiques & Successof Marxism

Critiquesof Marxism:

Discussion of socialism not well developed.

Worker revolt is weakest link.

Overlooked possibility that workers & capitalists

interests dont conflict.

Successof Marxism: Yet Marxism remains rallying point for

discontented people.

Class antagonism threat to rulers of any

economic system.


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Failure of Marxism in West

Marxian explanation

Divide & rule.

Exploitation of LDC workers.

Media, education & religion supporting capitalist

ideology.

Powerful legal, police, military, & administrativemachinery.


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Marxian Framework

Factors of production

Existing rationality, science & technology.

Mode of organization of production.

Degree of development of people.

Relations of production

Appropriation of human labor product. Social contradictions under which production

takes place.

Principles of distribution.

Modes of thought and ideology.


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Topic 46:Development Economics


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Introduction

What development economists agree on?

Development economicsdeals with the

economic, social, political, and institutional

mechanisms, both public and private, necessary

to bring about improvements in well-being.

Structural changeis an essential part of this

process

But,does this mean a shift away from agriculture, or

increases in productivity throughout the economy?


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Context

Post World War IIdeveloping countries gained

independence & in-country concerns dominated:

Harrod-Domar Model (1946)

Trickle-down Theory (Myrdal-Hirschman, 1957-8)

Dependency Theory (Prebisch, 1959-60)

Stages of Growth (Rostow, 1960) Neo-Marxist Model (Baran, 1960)

Neo-Colonial Dependence Model (Santos, 1969)

Urban Bias (Lipton, 1977)

Basic Needs Approach (Streeten, 1979)


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Harrod-Domar Model

Harrod-Domar Model (1946):

Inspired by Keynesian economics.

GDP growth rate (g) depends directly on the

national saving ratio (s) and inversely on the

national capital/output ratio (k) (adjusted for

depreciation (d)) [g = (s/k)-d].

Need for capital formation (i.e. investment) for

economic growth.

National savings as a source for capital.

International aid as supplement (financing gap)

for savings for economic growth.


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Trickle-down Economics (1/2)

Gunnar Myrdal(1957) and Albert O. Hirschman

(1958):

No specific economist associated with this; yet,

many governments have implicitly or explicitly

subscribed to this.

Overall economic growth benefits the poor, since

benefits will ultimately trickle down the economicladder.

- continued -


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Trickle-down Economics (2/2)

Tax benefits to businesses will benefit the poor,

since businesses will then expand, and absorb

more labour (thus creating jobs).

Critique: Overall economic growth does not imply

that benefits are shared by all in the economy

(there could be dualistic economy). Redistribution

is not automatic. Despite it being criticized and rejected, it

manages to survive in many circles.


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Dependency Theory

Raul Prebisch (1959-60):

Contrary to classical and neo-classical position

that trade is necessarily beneficial.

Countries in the centre (Europe/ N America) gain

over weaker peripheral countries in trade.

While Centre trades in industrial goods,

peripheral countries trade in primary goods.

Import substitution policies to stimulate domestic

industries.


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Stages of Growth (1/8)

Walter W. Rostow (1960):

Stage 1Traditional society.

Stage 2Pre-conditions for Take-off.

Stage 3Take-off.

Stage 4Drive to maturity.

Stage 5Age of High-mass Consumption. Stage 6Beyond Consumption.


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Stage 1Traditional Society:

Pre-Newtonian or 18thcenturysubsistence

agriculture, barter economy, hierarchical

structure, low social mobility.

Lumps past economies, Developed Countries 19th

century, and Less Developed Countries today

together.

Neglects dualism of many low-income countries

today.


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Stage 2Pre-conditions for Take-off:

Agricultural modernization.

Transition to industrial economy.

Infrastructure growth and centralization.

Increased transport investmentenlarge market

& specialization.

Agricultural revolution to feed urban population.

Expansion of imports (especially capital), perhaps

financed by exporting natural resources.


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Stage 3Take-off:

Increase in industrialization, high investment, and

steady economic growth

Decisive expansion in 2-3 decades.

Radically transforms economy and society.

Barriers to steady growth overcome.

- Continued -


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Late 18th-century Britain, pre-civil war US, late-

19th-century Germany, post-Meiji (1868) Japan,

pre-1917 Russia, post-1947 India, and post-1949China.

I/NNP increases sharply, say 5 to 10%.

Leading manufacturing sector stimulates growth

through linkages. Political, social, & institutional framework to

exploit modern expansion: entrepreneurship,

retained earnings, banks & capital markets,

foreign investment.


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Stage 4Drive to Maturity:

Economic and technical progress; diversification.

Growth regular, expected and self-sustained.

Urban, skilled, less individualistic, more

bureaucratic labor force.

State provides more economic security.


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Stage 5Age of High Mass Consumption:

Social prosperity; mass consumption, and

dominance of service sector.

Alternative: welfare state, military power.

US 1920s, Western Europe 1950s.

Autos, suburbs, innumerable durable consumer

goods and gadgets.


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Critiques of Rostows Model:

Difficult to test and Lack of empirical evidence.

No historical evidence of abruptness.

Stages define, not explain; and are not unique.

Dualism (not just pre-science and technology).

How does an economy move to next stage?

Does self-sustained growth imply effortlessness?Are obstacles to growth removed?

Is this Western (or US) model in disguise?


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Modernization Theory

This theory suggests that economic dimension alone

is insufficient, and incorporates theories on

institutional and social change: Incorporates non-economic elements such as

social practices, beliefs, values and customs.

Diffusion and speed of change is critical as it

removes various cultural and social barriers. Backward internal structures, rather than external

factors cause underdevelopment.


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Neo-Marxist Model (1/4)

Paul A. Baran (1960)Outgrowth of Marxist

thinking, applicable in Asia, Africa and Latin

America: Western economic and political domination

unfavorable.

Western monopolistic business transferred to

LDCs. Bourgeoisie in LDCs too weak to accumulate

capital and provide institutional change.

Bourgeoisie ally with moderate leaders of workers

and peasants.


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Form New Deal coalitiondemocratic, anti-

feudal, anti-imperialist, supportive of indigenous

capitalists. Indigenous middle and capitalist classes unwilling

or unable to reduce poverty and provide

economic development for masses.

Bourgeoisie frightened and forced into alliancewith landed interests and foreign capitalists.

Government supported by foreign economic and

military assistance.


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Progressive coalition breaks down.

Overriding interest in preventing socialism.

Needed: progressive income tax; landlords invest

productively, public investment where private

capital does not venture or where monopolies or

where infrastructure required.

Impossiblepopulist forces further polarization,radicalism and revolt.

Impasse broken by expropriation and ethos of

collective effort.


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Critique:

Potential conflict of interest between local and

foreign capital. Nationalism and decline of colonial economic ties.

Couldnt revolution just transfer from one elite toanother, e.g. USSR?

USSR is Barans model collectivism not marketsocialism.

Is transition of squalor, workers poverty & otherhuman costs inevitable?

Class interests under socialism.


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Neo-colonial Dependence Model (1/2)

Dos Santos (1969)Outgrowth of Marxist thinking,

in Latin America:

Underdevelopment due to historical evolution ofan international capitalist system:

o Unequal production relations.

o r ich country-poor coun try re lat ions.

o Sets up center versus per iphery contrast.

oAttempts to become self-reliant and

progressive are suppressed by this

relationship.

- Continued -


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Neo-colonial Dependence Model (2/2)

Elites in the developing world (e.g. landlords,

money-lenders, priests, merchants, etc) enjoy

high incomes, social status and political power.

o They promote conformity and inequality, and

are rewarded.

o They facilitate international power groups like

multi-national companies (MNC), financialassistance agencies (WB and IMF), and other

agents.


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Urban Bias

Michael Lipton (1977):

Bias in putting more investment in urban areas.

Urban populations are more organized and

politically powerful compared to rural people.

Trade protectionist policies and low food prices

adversely affect rural areas, as farmers do not

benefit.

Urban bias induces rural-urban migration [better

job opportunities, but increased crowding and

informal sector employment].


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Basic Needs Approach

Paul Streeten (1979):

Critique of macro-level economic growth theories.

Reduce mass deprivation; give everyone an

opportunity to live a full life.

Development is a function of meeting human

beings basic needs.

Most country policies translated basic needs as

food, shelter, and clothing.


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Topic 47:Neo-Liberal Economics

(Neo-Liberalism)


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Introduction (1/3)

Context:

1980s economically conservative governments,

Reagan-Thatcher era,

Fall of Berlin Wall,

Demise of socialist economies,

Globalization, Information & Communication Technology (ICT),

View dominant in World Bank and IMF.


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Introduction (2/3)

Designed to counteract impact of Keynesianism:

New emphasis on supply side factors in

developmentprivate initiatives and market ledgrowth.

Moves away from demand stimulation (interest

rate manipulation), import substitution, state

intervention and centralized planning. Gradual industrialization with trickle down of

benefits to all social classes.


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Introduction (3/3)

Neo-liberalsslow growth due to poor resource

allocation at non-market prices and excessive LDC

state intervention. Promote free markets, privatize public firms, free

trade, liberalizing exchange, encourage foreign

direct investment (FDI), reward savings, reduce

government spending & monetary expansion,remove price distortions & regulations.

Free marketsKorea, Taiwan, Singapore, Hong

Kong, Malaysia, Thailand and Indonesia.


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Washington Consensus (1/3)

Economically influential bits of Washington (US

government and international financial institutions).

Reduce government role (New Public Managementto emulate business practices); contractual

relationships and outsourcing.

IMF & World Bank lending policies:

o Stabilization policiespursue macro-economic stability bycontrolling inflation and reducing fiscal deficits.

o Structural adjustmentopen economies to the world

through trade and currency liberalization; liberalize domestic

economy through privatization and deregulation.


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Emphasis on:

Price de-control

Fiscal discipline

Reduce public spending

Tax reform

Financial liberalization Competitive exchange

rates

Trade liberalization

Domestic savings

Foreign direct

investment

Privatization

Deregulation

Property rights

Universal consensus

Big bang or shock

therapy


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Criticisms:

Neo-liberalism concerned with operation of

markets, not with how markets develop or withpolicies to induce development.

StiglitzWashington Consensus benefits few at

expense of many, rich relative to poor.

Income distribution and capital controls.


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New Institutional Economics

New Institutional Economics (1990s):

Policies, laws, rules, and regulations & their

enforcement (i.e. institutions) hold incentives forproductive activities.

Effective legal system for securing property rights.

Institutions could reduce or increase transaction

costs.

Organizational effectiveness according to their

comparative advantage (public/ private/ non-

profits).


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Topic 48:Summary of Emerging Policy

Perspectives


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Stages

The Policy perspective is historically spread over five

stages:

1945 to mid 1950s

Mid 1950s to Late 1960s

Late 1960s to 1980s

1980s and 1990s

Post 1990s


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1945 to Mid 1950sContext

Political independence of several developing

countries.

Worldwide policies to boost aggregate demand(Keynesian).

Setting up of the Bretton Woods institutions (World

Bank, IMF, WTO).

State intervention and planned/command economy(Soviet Union).


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1945 to Mid 1950sIdeas

Under-development or low-level equilibrium caused

by low savings.

High population growth.

Rosenstein-Rodan and NurkseMarket failures

due to scale economies and externalities.

LewisDual economy with traditional / backward

sector (rural-agriculture) and modern sector (urban-industry).

Lewis and HirschmanEmphasis on inter-sector

linkages and discussions about the benefits of

balanced versus unbalanced economic growth.


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Mid 1950s to Late 1960sContext

MyrdalUneven international development and

import substitution policies to promote

industrialisation.


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Mid 1950s to Late 1960sIdeas

BaranMarxist theorists gave importance to

political and social factors in development,

inefficiency and corruption of capitalist state. Cardoso, Prebisch, and Chenery Structuralism

recognition of structural rigidities typical of

Developing Countries.

Singerand Prebischsupply rigidities inagriculture and industry, terms of trade weighted

against developing countries.


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Late 1960s to 1980sContext

Emergence of the Newly Industrialised Countries

(NICs)Taiwan, Singapore, South Korea, Hong

Kong. Debt problem in Latin America and Sub-Saharan

Africa.


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Late 1960s to 1980sIdeas

Revival of neo-classical economics.

Lal, Little, Scitovskyfree market policies and

export orientation.

Emergence of basic needs agenda.

Emphasising neglect of the poor.

Dependency Schoolcriticism of structure of

international relations and trade (and TNCs), which

systematically hampers efforts of Import Substitution

& Industrialization (ISI) in countries.


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1980s and 1990sContext

Debt crisis.

IMF and WB first structural adjustment wave

recession and poverty increases.

Revision of the NICs experiences show the scope

for state intervention and the synergies between

states and markets.

But continuing pressure to liberalise.


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1980s and 1990sIdeas

New growth theory emphasize role of income

inequality, education and natural resources,

New structuralist theory studying problems ofdeterminants of growth, income distribution, inflation,

and fiscal and balance of payments.

New neo-classical approaches (industrial

organisation, game theory and informationeconomics) applied to development (agrarian

relations, income distribution, causes of poverty).


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Post 1990s

Rediscovery of state intervention and regulation

(back to the 1940s???).

theories of economic development

Documents

spatial economic systemma

role of naturalenvironmentsen

social darwinismprogress

gender developmentgad

sbasic needs

participation empowerment

edwards hulme

cooke kothari