Development Economics

DEVELOPMENT Economics -THEORIES & PERSPECTIVE



Professor Dr. Begum Rokshana Mili


Key Concepts of Economic Development, Under Development, Characteristics of developing Economy, Issues in Development Policy, Economic growth and its determinants, Classic theories of development,
Classical Theory of Development: The core focuses of classical theory

Key Concepts of Economic Development:  Conceptualizing Economic Growth (EG):
EG can be defined in two ways. First one is, economic growth means rising trend of net national

Criticized it as inadequate & unsatisfactory. Argument is that national income may be increasing & yet the standard of living of people may be falling.

Second way of defining EG is to do so in terms of per capita income. Arther Lewis says, EG means the growth of output per head of population. That is, EG runs is concerned in terms of per capita income or output is better.
Third point of defining EG is sustained increase. That is, increase in national income & increase in per capita income or output must be a sustained increase.

Economic Development: Traditional View

According to traditional view, some planned changes in the structure of national product, than changes in occupational pattern of labour force & also changes in the institutional & technological aspects.
C. P. Kindleberger writes, economic growth means more output economic development implies both more output & changes in the technical & institutional arrangements by which it is produced.

Traditional view defines economic development as growth & structural change. Structural change refers To changes in technological & institutional factors which cause shift of labour from agriculture to modern manufacturing & services sectors & also generate self sustained growth of output.
Societal factors are considered as secondary factors.

Economic Development: Modern View
Traditional view of economic development failed to solve the problems of poverty, unemployment & inequality. Trickle down effect in creation of more employment opportunities, rise in wages & improvement in income distribution & after all poverty situation was not arrested.  
This led to the view that economic development should not be judged on the basis of “growth in GNP alone.
Well-being of masses as the ultimate objective of development.

When the poor people are raised above the poverty line, then development will take place.

ED is not only concern of reduction in poverty, but also concerned with the improvement in quality of life which includes cleaner environment, better education, good health & nutrition.

Meaning of underdevelopment:

Economics of the world are classified into developed economics & underdeveloped economics.
The term underdevelopment is one which is poor but which has the future possibility & prospect of removing poverty & raising the levels of its people by utilizing the idle & under –utilized resources for production.

World bank classifies the economies of the world into three groups:
i) Low income economy,
ii)Middle-income Economy,
iii) High income economy.

The low income economy & Middle income Economy are generally described as developing economics.
Characteristics of developing Economy:
1) Excessive Dependence on agriculture
2) Lack of capital and low rate of capital formation
3) Foreign trade orientation
4) Rapid population growth and disguised unemployment
5) Under utilization of natural resources
6) Economic backwardness of the people
7) Dualistic structure
Issues in Development Policy:
1) Vicious circle of poverty: Does it exists
2) Physical capital vs. Human capital
3)Balanced vs. unbalanced growth
4) Basic heavy industries vs. wage goods industries
5) Choice of technique and technology
6) Foreign aid and economic growth
7) Population growth and economic development
8) Import substitution vs. export promotion
9) Planning vs. liberalization and free market
10)New economic policy of structural adjustment
11) De reservation of industries for the public sector
12) Liberalization
13) Privatization: public sector disinvestment
14) Welcoming foreign technology and private foreign investment
15) Trade liberalization

Economic growth and its determinants
1) Supply of natural resources
2) Capital formation which depends upon the rate of domestic savings and investment and inflow of foreign capital
3) Growth of population
4) Technological progress
5) Non economic factors such as social, political, cultural and religious factors
Classic theories of development:
Focus is given here to explore the recent historical and intellectual evolution in scholarly thinking about how and why development does or does not take place. Four major and often competing development theories are found in the evolution of theories of development;
i. the liner stage of growth model,
ii. theories and patterns of growth model,
iii. the international dependence revolution,
iv. the neoclassical, free-market counter revolution.

Recently, an eclectic approach has emerged that draws on all Of these classic theories.

The liner stage of growth model:
The theories developed in 1950s & early 1960s. These theories viewed the process of development as a series of successive stages of economic growth through which all countries pass. These theories focus on right quantity and mixture of saving, investment, and foreign aid were all that was necessary to enable developing nations to proceed along an economic growth path followed by the more developed countries.
Theories and patterns of growth model:
The liner stage approach was largely replaced in the 1970s. Here two competing economic schools of thoughts were found.
i)  First one is focused on theories of structural change.
ii) The second is the international dependence revolution.

It focuses on international dependence revolution. It is more radical and political in orientation. Underdevelopment in terms of international and domestic power relationships.

Institutional and structural economic rigidities and the resulting proliferation of dual economics and dual societies.

The neoclassical, free-market counter revolution:

Throughout 1980s and early 1990s, a fourth approach prevailed. It is called counter revolution in economic thought and emphasized the beneficial role of free market, open economics and the privatization of inefficient public enterprise.

Classical Theory of Development: The core focuses of classical theory

Laissez –Fair policy: An automatic free market perfectly competitive economy. Free from any government interference.

Capital Accumulation: It’s key to progress. Laid emphasis on larger savings. According to the theorists, only capitalists and landlords are capable of saving, Working class is not capable of saving. Because wages got by them is equal to the subsistence level.

Profits, the incentives to investment: Classicists advocated that profits induce investment. The larger the profits, the greater the capital accumulation and investment.

Tendency of profits to decline: Profits do not increase continuously. They tend to decline when competition increases for larger capital accumulation among capitalists. Smith stated, reason is increase in wages due to competition among capitalists. Ricardo said, when wages and rent rise with the increase in price of corn, profits decline.

Stationary State: It is the end state of processing capital accumulation. Profits start declining, the process continues till profits become zero. Population and capital accumulation stop increasing and the wage rate reaches the subsistence level. Smith assumed that as because of scarcity of natural resources, finally stops growth and leads the economy to the stationary state.

For example, Malthus observation in terms of  population growth and food supply.

Uncontrollable of population growth-------outrun the growth of capital-------means of subsistence----law of diminishing returns--- ultimate checks to economic development.

Mill’s explanation:
Absence of technical improvement in agriculture---growth rate of population being higher than the rate of capital accumulation---- the rate of profit start declining----- economy reaches the stationary state.

Mill welcome the stationary state. Because, it would lead to improvement in income distribution and large remuneration for labour. It is only possible by controlling the increase




Mainstreams of economic theory according to historical periods:
Five streams or phases:
i) Pre-classical,
ii) Classical
iii) Marginalist,
iv) Keynesian,
v) Post- Keynesian theories.

i) Pre-classical: There are compatible relations between recent & previous ideas rather than critical even when some disagreements are found between schools of thought. French poststructuralist Michel Foucault called the historical recovery of the basis of ideas “archaeology”.
Thus, in case of economic theory, many concepts of classical economic theories were continuations, in new forms, of earlier preoccupations.

Medieval Christianity: Medieval thinkers found God active in all worldly process. They combined religion with economy. Catholic \ Medieval thinkers emphasized duty to God rather than the rights of the individual. This duty entail moral limitations on the economic actor.

Medieval doctrine of ‘just price’: According to Medieval doctrine of ‘just price’ every commodity had a true, absolute value. Absolute value or true value was determined by common estimation of the cost of production, which meant the amount of labor contained in a product.

Price set by the market for a commodity should be just & equitable. Greek philosopher Aristotle, Medieval thinkers like Albertus Magnus, Thomas Aquinas opined that prices were matters of justice and the law had a duty to fix them punish individuals who exceeded the just price.

Reformation of just price: The belief of communal economic justice, where God’s will was reflected had begun to erode with urbanization, monetization, secularization and the Protestant Reformation. Central belief at that time was ‘humans create their own destiny.’
Attitude toward work: Classical antiquity regarding work had associated wage labor with slavery, while Augustinian Christianity defined work as

punishment for Adam’s disobedience of God. In the late Middle Age, labor begun to emerge as the virtuous source of wealth.

Protestants ethics extended more radical version of this new ideas of work and labor. Protestants wanted to glorify God not through prayer only, but by actively working hard.
The exponents of protestants’ ethics are Martin Luther (1483-1546), John Calvin (1509-1564).
Allied thoughts of Protestants are called as Calvinism, puritan theology.
Martin’s explanations in this regard is that, God might grant gifts to humans, but people had to lend by working -  people had to give God a musk behind which he could act.
Calvin’s explanation’s about notion of predestination is that the idea to entry to heaven had already been decided for each person, paradoxically meant that individuals were responsible for their own behavior.
Calvinism is considered as an ethical code for the conduct of daily life and as a set of institutions necessary for compelling obedience among the faithful. In Calvinism, the hope for salvation (going to heaven) was reinforced by an ethic of self discipline.
However, Classic economics derives from the new, Protestants attitudes toward labor, wealth, and productive life.
Classical economics and mercantilism:  There was a conflictual relation between classical economics and mercantilism. Mercantilism means (duration fifteenth-early nineteenth) total system of ideas, politics, institutions, and economic practices. It broke with medieval precedent. It was an amoral system in terms of means and ends, in which political welfare of the state replaced the spiritual welfare of the individual. Mercantilist economists thought that states should foster development through internal improvements by the promotions of national industries and through regulations.
Protestant mercantile and manufacturing circles in Britain: Nature is partly opposed to the mercantilist system. It (Protestant mercantile and manufacturing circles in Britain) was concentrated much more definite ideas about a free market economy within.
Free market economy was based on a number of principles:
Potential harmony between individual self-interest and the public interest without state intervention;
The equilibrating tendencies of the forces of supply and demand in free markets;
The achievement of higher productivity through specialization and the division of labor;
The ability of the market to yield natural or even just price.

ii) Classical Economics: This era covers a period of thought stretching from Adam Smith’s The Wealth of Nations (1776) to John Stuart Mill’s Principles of Political Economy (1884).
At this phase, economics was part of a broader system of political economy. Its focus was not only on growth of wealth but about the social results of development, particularly on “lowest orders of society.”  Classical Economics derived from the notions developed by Physiocrates Thought (members of a school of eighteenth century French Enlightenment Thought) lying midway between the medieval and the modern.
Core Focus of Physiocrates Thought:
a) Laws of human behavior deriving from the will of God could be discovered by theorists and followed by everyone.
b) God had endowed nature with the capacity to produce wealth, and that God’s will was realized through the medium of agricultural labor.
c) Agriculturally derived surplus circulated through the entire society, but was drained off by the people engaged in nonproductive economic activities, such as commerce and manufacturing.
French Physiocrate Thought vs. British Theories
French Physiocrate Thought might be compared with British theories developed at the same time. The focus of French theory is gifted by natural ( God-given) & origin of value. On the other hand, British Thought showed a greater separation of labor and value from both nature and God.
Smith’s economics philosophy: Adam Smith tried to remove the Medieval confusions inherent in the Physiocrate view synthesize a modern economic science. His idea is not based on the philosophy of human nature. In his theory ‘Theory of Moral Sentiments, Smith tried to reconcile the conflict between the pursuit of material and the maintenance of public morality by discovering the scientific law. He opposed the Greco-Christian doctrine, that a commitment to spiritual life excluded the pursuit of material advantages.
According to Hume, all value judgments were merely “a species of sensation,” that morality was relative to the sentiments of each person, that is it can be accounted by the principle of self-love. In other words, Humes regarded it as commercial humanism.

Smith expressed his believed with deeply influenced by Hume is that, there were laws both of external nature and of inner human morality that were divine. God is in the world, although not in the form represented by Christian superstition. Smith opined that the individual highest quest is for virtue, by which he meant exceptional powers of character and mind, the love of that which is dignified, honorable, and noble.

Then he raised question how should the virtuous individual take the duties owed to others? Smith thought in this regard is that self – impartially should be the deciding factor.
He found people sympathetic, even empathetic toward each other. The individual perceived his or her self through the eyes of the other, through the evaluations of others, a perspective which once internalized, humbled the individuals arrogance, bringing self- love down to level others could live with. So, the just and wise person would try to model     inward sentiments according to the external judgments of an impartial spectator, an abstract good citizen.

However, this assent to the representative, this submission to the substitute for the Deity, was never complete. So, that even good people were frequently corrupted by selfish passions.
Thus, Smith came to a belief in a Stoic harmony between higher and lower motives, between virtue and love. In his lecture jurisprudence (the principles of what laws ought to be) Smith argued that a new, impartial science of morals could be developed that would restrained self-love within socially beneficial limits derived from the impartial spectator’s judgment—for example, property rights were justified in the eyes of the impartial spectator when based on the individual’s labor.
Transformation of Smith’s moral philosophy into theory of economy:
The above mentioned moral philosophy transformed into economic theory which is revealed in the book Wealth of Nations published in 1776. Smith argued that all humans shared certain characteristics, whether innate or resulting from the faculties of reason and speech, which he described as a certain propensity to “truck, barter and exchange one thing for another”.  It was futile to expect the cooperation and assistance of others from their benevolence alone. Instead, the individual should prevail on the other’s self love , appealing to the other’s own advantage to get the other to do what he or she required; “Give me that which I want, and you shall have this which you want”- for, as he added, it is not from the benevolence of the butcher, brewer, or baker that we expect our dinner, but from regard for their self –love. Smith wanted to use human selfishness as an economic drive. But he thought that self – love should be both self- regulated and externally limited by virtue-as guide to economic behavior. Rather than, pure selfishness, he said, justice should be the basis of society. Smithian economics emerges from this tangle of conflicting beliefs.