Economic theories and perspectives on development

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					       Economic theories and
    perspectives on development
                Marina Della Giusta

„The earth provides enough resources for everyone‟s
       need, but not for some people‟s greed‟
1. Economic theories of development

2. The two main policy schools: let‟s all grow!

3. Limits to growth: sustainable development.

4. So what? Role for the market and goals for
  public policy.
1. Economic theories of development
• What development economists agree on:
 Development economics: deals with the economic,
  social, political, and institutional mechanisms, both
  public and private, necessary to bring about
  improvements in wellbeing.
Structural change is an essential part of this process

BUT: does this mean a shift away from agriculture or
 increases in productivity throughout the economy?
 (see Timmer‟s papers on Blackboard)
Back and forth: theories of economic development
 See Hunt, D. (1989) Economic Theories of Development: An Analysis of Competing Paradigms H. Wheatsheaf. 338.9-HUN, ch3

 Context: 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
    planning of the economy (Soviet Union)
 Ideas underdevelopment as low-level equilibrium caused by low savings, high
    population growth, market failures due to scale economies and externalities
    (Rosenstein-Rodan, Nurkse), dual economy with backward sector
    (agriculture) and modern sector (industry) (Lewis), emphasis on
    intersectoral linkages and discussions about the benefits of balanced versus
    unbalanced economic growth (Lewis, Hirschman)
                             …mid1950s-late 1960s
 Context uneven international development (Myrdal) and import substitution
    policies to promote industrialisation
 Ideas Marxist theorists (Baran): importance of political and social factors in
    development and inefficiency and corruption of capitalist state.
    Structuralism (Cardoso, and Prebisch at the UN ECLA, Chenery):
    recognition of structural rigidities typical of DCs : supply rigidities in
    agriculture and industry, terms of trade weighted against DCs exports
    (Singer and Prebisch)
Context emergence of the Newly Industrialised Countries –Taiwan,
   Singapore, South Korea, Hong Kong, debt problem in LA and SSA
Ideas revival of neoclassical economics, free market policies and export
   orientation (Lal, Little, Scitovsky); emergence of basic needs agenda,
   emphasising neglect of the poor; dependency school: criticism of structure
   of international relations and trade (and transnational corporations) which
   systematically hampers efforts of ISI countries

                              …1980s and 1990s:
Context Debt crisis, IMF and WB first structural adjustment wave: recession
   and poverty increases. Revision of the NIC‟s experiences showing the
   scope for state intervention and the synergies between states and markets,
   BUT continuing pressure to liberalise.
Ideas Raise of institutions: New growth theory emphasising role of income
   inequality, education and natural resources, New structuralist theory
   studying determinants of growth, income distribution, inflation, and fiscal
   and balance of payments problems. Micro: New neoclassical approaches
   (industrial organisation, game theory and information economics) applied
   to development (agrarian relations, income distribution, causes of poverty).

 POST CRISIS: rediscovery of state intervention and regulation (back to
                             the 1940s???)
2. Development policies: West vs South (and East)
The Washington Consensus (World Bank and IMF policies): macroeconomic
    stability (control of inflation and reduction of fiscal deficit), liberalise trade and
    factor markets (privatisation and deregulation), globalisation of development policy
    analysis (one recipe) and a-historical performance assessment
Beliefs: markets work well and are superior to gvts. in resource allocation, all
    economies behave in the same way, all economies tend to equilibrium, predictable
    response to policy, speed of transition depends on the consistency of policy
    makers and the swift removal of barriers to market functioning
Issues not addressed: how long is the transition? how large the negative effects to be
    tolerated? how large the positive ones needed to compensate them?

First adjustment wave -Washington Consensus: adoption of different trade regimes
   (elimination of trade barriers adopted during the Import Substitution phase),
   privatisation of large domestic firms (particularly in the service sector),
   deregulation of labour and financial markets

Second adjustment wave “refurbished Washington Consensus” or “augmented
   Washington Consensus”: investment in education, training and infrastructure,
   access to finance for modernisation for small and medium enterprises (SMEs),
   education reform, safety net type of projects for those who bear the costs of reform ,
   need for „good governance‟ and anti-corruption measures, controls on flows of hot
The “Southern” Consensus (Latin American Structuralism and East Asian
   Developmentalism): reject idea that there is one recipe for growth with late
   industrialisation, heavy emphasis on historical analysis of processes of late
   industrialisation in the world periphery, emphasis on development of national
Beliefs: institutional failures of markets, governments, and international institutions
   structural differences and asymmetries exist, path-dependency (history matters)
   and lock-in (some processes may be irreversible) Asymmetric globalisation in
   wealth generation and in markets: think of mobility of capitals and products and
   barriers to labour mobility.

Policies: growth and structural change to be achieved through “strategic integration” of
   national economy into the world economy (attention to time and sequencing of
   opening up); combine macroeconomic policy with “productive development
   policy”, mixing sectorally-neutral and selective policies (technology policy,
   financial policy, human resource development, physical infrastructure development,
   industrial organisation and competition policy); government-business co-operation
   (common vision of development targets), pragmatic developmental state (support
   for private sector temporary and conditional on targets); management of
   distributional dimensions of the growth process to ensure legitimacy (wide asset
   ownership and expansion of productive employment: agrarian reform, rural
   development policies, re-investment of profits, profit-related payment systems,
   support for SMEs); regional integration and co-operation policies
          3. Sustainable development
"Anyone who believes exponential growth can go on forever
  Kenneth Boulding (1910-1993)

  3.1 Biophysical limits to growth
Finitude: fixed size of the ecosystem that hosts an expanding
  economic system

Entropy: the ordered structures of the economic subsystem are
  maintained at the expense of creating a more than offsetting
  amount of disorder in the rest of the system. Ecosystem as
  source of low-entropy inputs and sink for high entropy waste.
  Entropic costs = depletion of resources and pollution (see
  contraction and convergence reading)

Ecological interdependence: ecological connections between
  economic sub-system and its hosting ecosystem are disrupted
  with growth of economy
   3.2 Ethical and social limits to growth
Cost to unpaid workers: anything that does not enter the calculations of GDP
  does not matter, therefore it can be used up without need for reinvestment

Costs to future generations: how do discount rates work? Welfare of future

Cost to other life forms: extinction and the welfare of other animals and
   planet (Calculate your own „ecological footprint‟:

“The capitalist mode of production is not the famous capital-wage-labour
   relation, but rather needs different categories of colonies, women, other
   peoples and nature, to uphold the model of ever-expanding growth” (Mies,
   Maria (1986) Patriarchy and Accumulation on a World Scale London and
   New York: Zed Books)
                              What then?
United Nations Definition of Development The basic purpose of development is to
   of participation in community activities. The objective of development is to
   lives." Mahbub ul Haq

UN definition of sustainable development: development which meets the needs of the
  present without sacrificing the ability of the future to meet its needs.

Growth: quantitative increase by assimilation or accretion of materials

Development: qualitative improvement, realization of potential

Sustainable development: development without growth, limit the scale of
   throughput = the flow beginning with raw material inputs, followed by their
   conversion into commodities and finally into waste outputs. Herman Daly
   „Beyond growth: the economics of sustainable development‟ (see also
What role for the market? Market efficient
  mechanism for allocation of resources not for
  scale or distribution!
What should public policy be about? Evidence
  shows in fact that income is but one factor in
  determining well being, and that once basic
  needs are satisfied it is not associated with
  increases in well being, and other factors
  matter much more instead.
What is the current relationship between
  income levels and wellbeing?
   Income and happiness in the United States

Cross-sectional evidence across countries – among industrialised countries
   with incomes over $20,000 per head there is no relation between average
   income and average happiness. Helliwell (2003) explains 80% of the
   variance across 50 countries with only 6 variables: income, RELATIVE
   income (which in many surveys matters more than actual!), having a job,
   being healthy, having functioning relationships, and trust.
                Some Happy Policies
The policy implications (Layard, EJ 2005): massive
  redistribution, increased health expenditure, reduced working
  hours, incentives to reduce rather than enhance labour
  mobility, rethinking and drastically curbing advertising and
  performance-related pay as they create anxiety and

Consumption taxes: (Robert Frank) we should tax consumption
  and not income (as that taxes savings) and have unbound
  upper rates.
Watch this:

Check out readings on Blackboard, get in touch if you want to
  know more…

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