THEORIES AND MODELS OF ECONOMIC DEVELOPMENT

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THEORIES AND MODELS OF ECONOMIC DEVELOPMENT
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OVERVIEW OF DEVELOPMENT THEORIES

• To understand how development occurs it is
  important to understand the theories of economic
  development.
• Development theory has come a long way since
  classicism originated in the eighteenth century.

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THEORIES AND MODELS

• Classical School
• Marxism
• Neoclassical
• structuralist disequilibrium
• radical Marxist theories

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CLASSICAL THEORY OF DEVELOPMENT

• Led by Adam Smith and David Ricardo, the
  classicals believed in Smiths invisible hand and
  self-interest, as well as in the development of
  monetary institutions, capital accumulation based
  on surplus production, and free trade.

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OVERVIEW OF DEVELOPMENT THEORIES

• They also believed in division of labor and law
  of diminishing returns and the ability of the
  economy to self-adjust in a laissez-faire system
  devoid of government intervention.

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THE CLASSICAL THEORETICAL THINKING

• The classical theory of economic growth
  originated in the eighteenth century. It was
  mainly characterized by Adam Smiths invisible
  hand which took into account
• Paper money
• The development of monetary institutions
• Capital accumulation based on surplus production
• Free foreign trade
• Division of labor

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Also Underlying the Classical Theoretical
thinking were

• Law of diminishing returns
• Iron law of wages The total wages increases in
  proportion to the labor force. Output increases
  with population but ceteris paribus, output per
  worker decreases with diminishing returns on
  fixed land.
• Law of diminishing returns by David Ricardo
• Says law which states that supply creates its own
  demand

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THE CIRCULAR FLOW OF THE CLASSICAL MODEL

• The circular flow of the classical model
  indicates that wages may deviate but eventually
  they return to their natural rate of subsistence.
  If, according the classical model, wages
  increase, food production will also increase
  leading to a population growth.

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THE CIRCULAR FLOW OF THE CLASSICAL MODEL
The increase in population will give rise to an
increase in the demand for food which, in turn
results in an increase in the supply of labor
which ultimately forces wages to fall. The
classicals argue that a decrease in wages will
result in an increase in deaths and a decrease in
the supply of labor which will then force wages
up again.
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CLASSICAL BELIEF IN DIMINISHING RETURNS

• For the classical belief in diminishing returns,
  Ricardo uses Robert Malthuses population doctrine
  to argue that as more labor is applied to land of
  less fertility, the total returns fall.
• He believed that to offset the diminishing
  returns, there should be an increase in
  accumulation of capital per person.

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CRITIQUE OF THE CLASSICAL SCHOOL OF THOUGHT

• The classicals underestimated the impact of
  technological change in offsetting diminishing
  returns.
• We note some major discoveries such as the steam
  engine.
• The Iron Law of Wages based on the malthusian
  doctrine did not foresee voluntary population
  controls.

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MARXISM

• It was because of the problems inherent in the
  classical paradigmunderestimation of the impact
  of technology, the iron law of wages and the
  neglect of historythat Karl Marx advanced his
  dialectical Materialism and the reserve army of
  the unemployed.

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MAIN TENETS OF MARXISM

• Marx believed in a dynamic system in which there
  is the flow
• Primitive society-to-Feudalism-to-Capitalism-to-So
  cialism-to-Communism
• The basis being the so-called dialectical
  materialism.
• This is characterized by the movement from thesis
  to antithesis to synthesis

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MAIN TENETS OF MARXISM

• This transition will result from changes in the
  basis of the ruling and the oppressed classes and
  their relationship with each other.
• He then envisaged conflict between forces of
  production, organization of production, relations
  of production, and societal way of thinking and
  ideology.

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MAIN TENETS OF MARXISM

• What Marx did was provide the dynamic movement in
  the materialist movement.
• Marx predicts capitalist cycles which will
  ultimately lead to the collapse of capitalism.
  According to him, these cycles will be
  characterized by
• A reserve army of the unemployed
• Falling rate of profits

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MAIN TENETS OF MARXISM

• Business crises
• Increasing concentration of industry into a few
  hands
• Increasing misery among the proletariat
• Increasing misery and alienation of the
  proletariat

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CRITIQUE OF MARXISM

• The economic collapse of the socialist and
  communist countries that adopted Marxism or
  versions of it have shown its limitations.

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OTHER SCHOOLS OF THOUGHT

• In general, theories of economic development have
  developed along the lines of the classical ideas,
  the Marxist idea, or a combination of both.

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OTHER SCHOOLS OF THOUGHT

• We can thus identify the neoclassical,
  structuralist disequilibrium, and radical Marxist
  theories, each trying to explain development from
  a separate intellectual and cultural setting
  each considering certain variables and
  relationships more important than others.
• They all make predictions which lead to distinct
  set of policy conclusions.

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OTHER SCHOOLS OF THOUGHT

• Recent historical and intellectual evolution in
  scholarly thinking about how and why development
  does or does not occur comprises of five major
  models linear stages, structuralist,
  international dependence, neoclassical, and
  endogenous growth.

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OTHER SCHOOLS OF THOUGHT

• It is important to briefly discuss these models,
  their central ideas, what they believe causes
  underdevelopment, their recommended course of
  action, and criticisms.

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LINEAR STAGES SCHOOL OF THOUGHT

• The two models that exemplify the linear stages
  school of thought are Rostows and
  Harrod-Domars.
• Their central idea is that countries pass through
  stages and get to take-off by following certain
  rules.

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• They believe that internal constraints, mainly
  lack of savings and capital stockthe necessary
  conditionsare the main causes of
  underdevelopment.

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LINEAR STAGES SCHOOL OF THOUGHT

• They therefore advocate for increase in both
  domestic and foreign savings to increase
  investment.
• The linear stages models are criticized for
  ignoring important variables and for focusing on
  the necessary condition.

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THE STRUCTURALISTS

• The structuralistsArthur Lewis and Holis
  Cheneryfocus on the mechanism by which
  underdeveloped economies transform their domestic
  economies.

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THE STRUCTURALISTS

• Lewis believes in mostly internal constraints he
  uses a two-sector surplus labor model to show
  that the dualistic nature of developing
  economiesmodern and traditionalcreate
  differential marginal product of labor.

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THE STRUCTURALISTS

• Chenery emphasizes, in his patterns of growth
  model, both domestic and international
  constraints and recognizes that increased savings
  and investment are necessary but not sufficient
  conditions for economic growth.

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THE STRUCTURALISTS

• Chenery identifies several characteristic
  features of the development process to which LDCs
  must pay attention relating to the structure of
  the economy as well as the fact that LDCs are
  part of a highly integrated international system
  that can promote as well as hinder their
  development.

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THE STRUCTURALISTS

• The structuralists have been criticized because
  of the inapplicability and irrelevance of their
  models to developing countries.

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THE DEPENDENCE THINKING

• The international dependence thinking focuses
  mainly on external constraints to development.
• The protagonist, most of whom are downright
  pessimistic, argue that LDCs are beset by
  institutional, political, and economic rigidities
  both domestic and international, and caught up in
  dependence and dominance relationships to rich
  countries.

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THE DEPENDENCE THINKING

• They argue that numbers, especially statistical
  averages calculated by structuralists are of
  limited economic value.
• In their belief, unequal power relationships
  between the center (more advanced countries) and
  the periphery (LDCs) renders attempts by poor
  nations to be self-reliant and independent.

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THE DEPENDENCE THINKING

• Finally, they argue that inappropriate advice
  provided by well-meaning but often uninformed,
  biased, and ethnocentric international expert
  advisers from developed country assistance
  agencies and multilateral donors do more harm
  than good.
• The dependence school are criticized for
  overemphasizing the external factors.

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THE NEOCLASSICAL SCHOOL

• The neoclassical renaissance of the 1980s
  epitomized by Reaganomics and Tatcherism,
  refocused emphasis on the free market approach to
  development.

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THE NEOCLASSICAL SCHOOL

• The neoclassicals believed that underdevelopment
  results from poor resource allocation due to
  incorrect pricing policies and too much state
  interventionism, hence the strong emphasis on
  structural adjustment involving reducing the size
  of government and privatization.

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THE NEOCLASSICAL SCHOOL

• The less than satisfactory results of adjustment
  in Africa points to the failure of this line of
  thinking or at least to the flaws in its
  conception and implementation with regard to
  Africa.

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ENDOGENOUS MODELS

• More recently, however, some economists are
  calling for a balance between the state and the
  free market in a more endogenized growth model.
• The endogenous model typify this school of
  thought.

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ENDOGENOUS MODELS

• It recognizes the role of the free market
  enterprise and the private sector as the engine
  of growth, but suggests an active role of public
  policy in promoting economic development.
• Even the World Bank is now advocating for
  pragmatic policies and pragmatic orthodoxy which
  allows for government intervention, regulation
  and arbitration.