DEVELOPMENT

ECONOMICS
LECTURE NOTES
BY
MR. CHULU
Notes extracted from Todaro& Smith
CONCEPTS OF DEVELOPMENT
• Development
• The process of improving the quality of all human
lives and capabilities by raising people’s levels of
living, self-esteem, and freedom.

• DEVELOPMENTECONOMICS
• The study of how economies are transformed from
stagnation to growth and from low income to high-
income status, and overcome problems of absolute
poverty.
Economic Development
• Economic development can be defined as social and
technological progress. It typically refers to
improvements in a variety of indicators such as
literacy rates, life expectancy and poverty rates. The
understanding of development can differ among
countries and even among individuals, but it usually
goes far beyond the objective of increased average
income to include things like freedom, equity, health,
education, safe environment, and much more.
Development in all societies
must at least have the following
three objectives
• To increase the availability and widen the distribution
of basic life sustaining goods such as food, shelter,
health, and protection.
• To raise living standards, including and in addition to
higher incomes, the provisions of more jobs, better
education, and greater attention to cultural and
humanistic values; and
• To expand the range of economic and social choices
available to individuals by freeing them from
CONTI….
• As such, Economic development is also viewed as the
development of economic wealth of countries or
regions for the wellbeing of their inhabitants. It is the
process by which a nation improves the economic,
political, and social wellbeing of its people.
Approaches to economic
development
• Rostow's stages of growth
• Rostow's stage of growth is one of the major historical
models of economic growth. It was developed by W.W
Rostow. The model set out a number of conditions that
were likely to occur in investment, consumption and
social trends at each stage. Not all of the conditions are
certain to occur at each stage, and transition periods
may occur at varying lengths from country to country,
and even from region to region.
CONTI…
• The theory asserts that the transition from
underdevelopment to development can be described in
terms of a series of steps which all countries must go
through.
• The model argues that economic modernization occurs in
five basic stages of varying length: the traditional society,
preconditions for take off, take-off, drive to maturity, and age
of high mass consumption.
Traditional society
• Traditional society is one whose structure is developed
within limited means of production. The following happens
in this stage;
• 1. The economy is dominated by subsistence activity where
output is consumed by producers rather than traded.
• 2. Any trade is carried out by barter system where goods are
exchanged directly for other goods.
• 3. Agriculture is the most important industry and production
is labour intensive using only limited quantities of capital.
• 4. Resource allocation is determined very much by traditional
Preconditions for take-off
• The second stage of growth embraces societies in the
process of transition. This is the period wherein the
preconditions for take-off are developed. Rostow's
(1960:5) argument was that it takes time to transform
a traditional society in the ways necessary for it to
exploit the fruits of modern science, and to fend off
diminishing returns.
CONTI…
• During this stage the following happens
• 1. Education broadens and changes to suit the needs of
modern economic activity.
• 2. Investment increases, notably in transport,
communications, and in raw materials in which other nations
may have an economic interest. 3. The scope of commerce,
internal and external, widens. However, these activity
proceeds at a limited pace within an economy and a society
still mainly characterized by traditional low-productivity
methods
CONTI…
• During the preconditions for take-off, increased
specialization generates surpluses for trading.
• The emergence of a transport infrastructure support
increased trade. As incomes, savings and investment
grow, entrepreneurs emerge.
CONTI…
• External trade concentrated on primary products
increases during this stage. Although the period of
transition between the traditional society and the
take-off saw major changes in both the economy itself
and in the balance of social values, a decisive feature
was often political.
• Politically, the building of an effective centralized
national state on the basis of coalitions touched with
a new nationalism, in opposition to the traditional
landed regional interests was a decisive aspect of the
Take-off
• The take-off is the interval which takes place when the
old blocks and resistances for steady growth are
finally overcome. During the take-off, the rate of
effective investment and savings may rise from, say, 5
% of the national income to 10% or more. In areas
where heavy social overhead capital investment was
required to create the technical preconditions for
take-off, the investment rate in the preconditions
period could be higher than 5%
CONTI…
• In this period,
• Industrialization increases, with workers switching from the
agricultural sector to the manufacturing sector.
• Growth is concentrated in a few regions of the country and in one or
two manufacturing industries.
• The economic transitions are accompanied by the evolution of new
political and social institutions that support the industrialization.
• The growth is self-sustaining as investment leads to increasing
incomes and in turn generates more savings to finance further
investment.
Age of high mass consumption
• In this stage of economic development, the leading
sectors shift towards durable consumer goods and
services.
• During this stage, real income per head rises to a
point where a large number of persons gained a
command over consumption.
CONTI…
• The structure of the working force changed in ways
which increased not only the proportion of urban to
total population, but also the proportion of the
population working in offices or in skilled factory jobs.
• In addition to these economic changes, the society
ceased to accept the further extension of modern
technology as an overriding objective.
CONTI…
• It is in this post-maturity stage, for example, that,
through the political process, western societies are
said to have chosen to allocate increased resources
to : social welfare and security.
• This stage is also characterized by the directing of
resources to the production of consumer durables and
to the diffusion of services on a mass basis.
Conclusions and Implications
• An important implication of the model is that
development requires substantial investment in
capital equipment. To foster growth in developing
nations, the right conditions for such investment
would have to be created i.e. the economy needs to
have reached stage 2. The model assumes the
following:
CONTI…
• Savings and capital formation (accumulation) are
central to the process of growth hence development;
• The key to development is to mobilize savings to
generate the investment to set in train self generating
economic growth; and
• Development can stall at stage 3 for lack of savings in
relation to the national output
The Harrod-Damar growth
model
• Evsy Domar and Roy Harrod were the co-founders of a
neo-Keynesian approach to modelling economic
growth. The Harrod-Domar model focuses on two
critical aspects of the growth process:
• 1. Saving
• 2. Efficiency with which capital is used in investment.
CONTI…
• This model can provide accurate short term
predictions of growth and has been used extensively
in developing countries to determine the required
investment rate or financing gap to be covered in
order to achieve a target growth rate.
CONTI…
• The model suggests that every economy must save a
certain proportion of its national income to replace
worn out or impaired capital goods. In order to grow,
new investments representing net additions to the
capital stock are necessary. The rate of growth of the
gross national product is determined jointly by the
national savings ratio and the national capital output
ratio
The model takes into the
following assumptions
• The labour market grows against steady rate;
• Savings and investments are a fixed ratio of total
output; and
• Labour and capital are used in a fixed ratio
CONTI…
• The model assumes a direct economic relationship
between the size of the capital stock and total GDP.
The rate of economic growth is the direct product of
the investment-output ratio and the output-capital
ratio. If for example K3 of capital is always necessary
to produce a K1 stream of GDP, it follows that any net
additions to the capital in the form of new investment
will bring about corresponding increases in the flow of
national output, GDP
CONTI…
• The change in productive capacity will depend on the
level of investment and the potential average
productivity of new investment. The model makes the
following findings:
• Economic growth depends on the amount of labour
and investment;
• Developing countries have an abundant supply of
labour. It is lack of physical capital that holds back
economic growth and economic development;
CONTI…
• More physical capital generates economic growth;
and
• New investment, over and above that needed to
replace worn out equipment, leads to more capital
intensive goods, which in turn generate higher output
and income. Higher income allows for increased level
of savings
Conclusions and Implications
• Although the Harrod-Domar model was initially created to
help analyse the business cycle, it was later adapted to
explain economic growth.
• i. Its implications were that growth depends on the quantity
of labour and capital; more investment leads to capital
accumulation, which generates economic growth.
• ii. The model also had implications for less economically
developed countries; labour is in plentiful supply in these
countries but physical capital is not, thus slowing economic
progress
CONTI…
• iii.Least developed countries do not have sufficient
average incomes to enable high rates of saving, and
therefore accumulation of the capital stock through
investment is low
• iv. The model implies that economic growth depends
on policies to increase investment by increasing
saving, and using that investment more efficiently
through technological advances.
Structural change models
• The patterns of structural change models are concerned with
mechanisms by which underdeveloped countries transform
their economic structures from a heavy emphasis on
traditional subsistence agriculture to a more modern,
urbanized, and more industrially diverse manufacturing and
service economy. It employs the tools of price and resource
allocation theory and modern econometrics to describe how
this transformation takes place
The Lewis theory of
development
• The Lewis theory of development, also known as the
two sector model, was developed in the 1950s by
Arthur Lewis. It was based on the assumption that
many least developed countries had dual economies
with both a traditional agricultural sector and a
modern industrial sector.
CONTI…
• The traditional agricultural sector was assumed to be
of a subsistence nature characterized by low
productivity, low incomes, low savings and
considerable underemployment. The industrial sector
was assumed to be technologically advanced with
high levels of investment operating in an urban
environment.
CONTI…
• Lewis suggested that the modern industrial sector
would attract workers from the rural areas. Industrial
firms, whether private or publicly owned, could offer
wages that would guarantee a higher quality of life
than remaining in the rural areas could provide. In the
Lewis model, the underdeveloped economy consists
of two sectors:
CONTI…
• A traditional, overpopulated rural subsistence sector
characterized by a zero marginal labour productivity.
This situation is characterized by surplus labour which
can be withdrawn from the agricultural sector without
any loss in output;
• • A high productivity modern urban industrial sector
into which labour from the subsistence sector is
gradually transferred.
Critiques of Lewis' model for
making the following
assumptions:
• It assumes that labour is transferred and employment
is created as capital accumulates in the modern
sector. The faster the rates of capital accumulation,
the higher the growth rate of the modern sector and
the faster the rate of new job creation. But what if
capitalist profits are reinvested in more sophisticated
labour absorbing capital equipment rather than just
duplicating the existing capital as is implicitly assumed
by Lewis mode?
CONTI…
• It assumes surplus labour in agriculture and full employment in urban
areas. Most contemporary research indicates that there is little general
surplus labour in rural locations.
• It assumes a competitive modern sector labour market that guarantees
the continued existence of constant real urban wages up to the point
where the supply of rural surplus labour is exhausted. Institutional
factors such as union bargaining power tend to negate the competitive
forces in labour markets.
• It assumes diminishing returns in the modern industrial sector, yet there
is much evidence that increased returns prevail in this sector, posing
problems for development policy making
Theories and patterns of
structural change model
• The model focuses on the sequential process through which the
economic, industrial, and institutional structure of an underdeveloped
economy is transformed over time to permit new industries to replace
traditional agriculture as the engine of economic growth.
• However, in contrast to the Lewis model, increased savings and
investment are perceived as necessary but not sufficient conditions
for economic growth. In addition to the accumulation of capital, both
physical and human, a set of interrelated changes in the economic
structure of a country are required for the transition from a
traditional economic system to a modern one.
CONTI…
• These structural changes involve virtually all economic
functions. These includes the transformation of
production and changes in the composition of
consumer demand, international trade, and resource
use as well as changes in socio economic factors such
as urbanization and the growth in distribution of a
country's population
The International Dependency
Revolution
• International dependence theories gained
prominence in the 1970s as a reaction to the failure of
earlier theories to lead to widespread successes in
international development. Unlike earlier theories,
international dependence theories have their origins
in developing countries and view obstacles to
development as being primarily external in nature,
rather than internal (Meier & Seers, 1984:45).
CONTI…
• The dependency theory is premised on the following
(Tausch & Prager, 1993:52):
• Poor nations provide market access to wealthy
nations (e.g., by allowing their people to buy
manufactured goods and obsolete or used goods from
wealthy nations), permitting the wealthy nations to
enjoy a higher standard of living;
CONTI…
• Wealthy nations actively perpetuate a state of
dependence by various means. This influence may be
complex, involving economics, media control, politics,
banking and finance, education, culture and all aspects of
human resource development (including recruitment and
training of workers); and
• Wealthy nations actively counter attempts by
dependent nations to resist their influences by means of
economic sanctions and/or the use of military force.
CONTI…
• According to Meier (1995:108), dependency theories
contend that the developing city exploits the
underdeveloped periphery in various ways. These
include biasing its structure of production toward the
supplying of raw materials, by the external drain of
capital, and by frustrating autonomous national
development.