Economic Development Theories

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EconomicDevelopmentTheories
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Ing.Bohuslava Boucková Department of Economics
CEMS II/277 Phone [phone] e-mail
bouckova_at_pef.czu.cz
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A short explanation to my (for you rather
unusual) name

• Many Czech Christian names include the part
  slava or slav (for men), which means
• GLORY (or celebrating in glory)
• And Boh (or Buh in modern Czech)
• is GOD
• Therefore, my Christian name means Glory to God

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• Therefore, my Christian name means Glory to God

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And my surname

• BOUCKOVÁ
• is a female form of the name
• Boucek,
• which is my husbands surname
• and it means a little beech tree

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Structure of the lecture

• Some information
• Main concepts
• Sectors of national economy
• different concepts
• Economic equations
• Business cycles
• Economic development theories
• Growth indicator controversy
• A little economic fairy-tale

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Before we start

• During your stay in Prague, we will tackle
  together 9 different topics
• Theory of economic development
• Agriculture in economic development
• Command driven and market economy Czech
  experience
• Transformation, restitution, privatisation in
  agriculture
• Economic integration in Europe and
• Czech accession to the EU
• Food consumption and nutrition policy
• Agricultural policy comparison
• Position of women in Czech economy and society
• Churches and religions in the CR

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As you already know,
You are obliged to submit an economic essay
before the final exam of the course. The topic
might be also connected to any of these 9 topics
of lectures (or rather 8, as the situation of
churches is not an economic topic). If you chose
to do so, you can either chose from the more
specific topics I will offer to you next time or
we can agree on a more detailed topic of your own
connected to the main topics In any case, the
demands for an essay submitted to me are as
follows
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Demands

• Scope of the essay (minimum)
• 2,000 words
• (without front page, content and resources)
• Obligatory structure
• Front page (title, name of author, year)
• Content
• Introduction, definition of the problem
• Discussion
• SWOT analysis
• Conclusion
• Resources

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SWOT analysis

• I hope that all of you know the meaning of SWOT
  analysis, but just in case

Internal
Strengths
Weaknesses
Negative
Positive
Opportunities
Threats
External
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Course evaluation

• Total points possible 80
• In that
• Oral examination
  30
• Essay
  50
• In that
• Scope, form
  10
• Topic relevance, resources 10
• SWOT analysis
  10
• Conclusion
  10
• Level complex
  10

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Resulting marks(according to points)

• 0 20..D
• 21 - 40..C
• 41 - 60.B
• 61 - 80.A

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Essay topics

• In the following slides, you will see the offered
  topics from which you can chose, which will be
  supplied also as a printed list at the end of the
  lecture.
• The principle is that each topic will be chosen
  by only 1 student.
• If you want to propose another topic, please
  discuss it with me first.

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Essay topics

• Theory of economic development
• Comparison of the CR and US with regard to
  economic development level
• Economic level indicators (GDP, workforce in
  different sectors, shares of sectors in foreign
  trade) development in the CR
• Economic flows among sectors of the national
  economy in the CR (or US)
• History and methods of computation of the
  aggregate economic indicators (GDP, GNP)
• Alternative indicators to GDP and their
  utilization in economic practice

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Essay topics

• Agriculture in economic development
• Position of agriculture in developing and
  developed countries selected example
• Position of Czech agriculture in national
  economy main indicators and their development
• Position of agriculture in the economy of the CR
  and USA comparison
•  Command driven and market economy Czech
  experience
• Strong and weak points of economic transformation
• Coupon (voucher) privatisation in the CR Was it
  successful or not?

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Essay topics

• Restitution process Was it really the process of
  past wrongs mitigation?
• Population decrease problem in the CR and the
  social security system How to solve it?
• Tax reforms in the post-communist countries Flat
  tax yes or no?
• Transformation, restitution, privatisation in
  agriculture
• Transformation of Czech agriculture Strong and
  weak points
• Restitutions in agriculture of the CR What is
  still missing?
• The role of agricultural cooperatives in the CR
  Why is their public image low?

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Essay topics

• Structural changes in Czech agriculture
• Position of New member countries in the frame
  of the Common Agricultural Policy EU
• Development of economic integration in Europe
• Czech accession to the EU, its impacts Why are
  Czech farmers not satisfied?
• Food consumption and nutrition policy
• Development of food consumption Comparison of
  the CR and US
• New phenomena in the CR Farmers Markets,
  internet sale of farm products, milkmats
• Organic farming in the CR
• Fair Trade with food products in the CR and US

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Essay topics

• Agricultural policy comparison
• Development of the EU CAP and its perspectives
• Agricultural market Protection or liberal trade?
• Multifunctional agriculture in the EU Strong and
  weak points
• Comparison of agricultural policy of the EU and
  US
• Position of women in Czech economy and society
• Economic position of Czech women compared to U.S.
• Position of woman in labour market reasons and
  possible solutions
• Harmonisation of family and job How it can be
  reached so that women had a real choice?
• Tools of positive discrimination for women Yes
  or no?

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Any questions?
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Main concepts

• What does the word economics mean ?
• In its original meaning, it comes from Greek
  words
• oikos house
• nomos order, rule, management

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Main Concepts

• So it depends on what we mean by the house. It
  can be
• household
• enterprise
• industry/sector
• country, state
• the Earth
• the Universe

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Development level
What does the concept of "development" mean in
the context of economy and its sectors? Developmen
t implies structural transformation. Structural
change occurs when the relative share of GDP and
employment accounted for by the primary,
secondary and tertiary sectors change. Structural
change results in a change in GDP and employment
figures for a given sector or industry. The
process of development requires structural
change. Typically economies develop by shifting
resources from agricultural mining to
manufacturing and eventually into the tertiary
(services) sector.
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Development level
According to that, originally the following types
of sectors of the economy were recognised (1)
Primary Sector This contain activities directly
related to natural resources eg agriculture,
forestry, fishing, mining, quarrying, and mining.
Primary industry tends to dominate the economies
of developing nations, but as secondary and
tertiary industries are developed, its share of
the economic output tends to decrease. (2)
Secondary Sector Secondary activities relate to
goods production in the economy, including the
processing of materials produced by the primary
sector eg energy production and construction. (3)
Tertiary Sector Tertiary activities relate to
services such as banking, finance, insurance,
retail, and education, transport, information,
and communications services.
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Development level

• With regard to the further development,
• these were further extended to
• primary sector
• secondary sector
• tertiary sector
• quaternary sector
• and some authors even define
• quinary sector

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Development level
According to Matt Rosenberg Primary Sector The
primary sector of the economy extracts or
harvests products from the earth. The primary
sector includes the production of raw material
and basic foods. Activities associated with the
primary sector include agriculture (both
subsistence and commercial), mining, forestry,
farming, grazing, hunting and gathering, fishing,
and quarrying. The packaging and processing of
the raw material associated with this sector is
also considered to be part of this sector. In
developed and developing countries, a decreasing
proportion of workers are involved in the primary
sector. About 3 of the U.S. labor force is
engaged in primary sector activity today, while
more than two-thirds of the labor force were
primary sector workers in the mid-nineteenth
century.
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Development level
Secondary Sector The secondary sector of the
economy manufactures finished goods. All of
manufacturing, processing, and construction lies
within the secondary sector. Activities
associated with the secondary sector include
metal working and smelting, automobile
production, textile production, chemical and
engineering industries, aerospace manufacturing,
energy utilities, engineering, breweries and
bottlers, construction, and shipbuilding. Tertiar
y Sector The tertiary sector of the economy is
the service industry. This sector provides
services to the general population and to
businesses. Activities associated with this
sector include retail and wholesale sales,
transportation and distribution, entertainment
(movies, television, radio, music, theater,
etc.), restaurants, clerical services, media,
tourism, insurance, banking, healthcare, and
law. In most developed and developing countries,
a growing proportion of workers are devoted to
the tertiary sector. In the U.S., more than 80
of the labor force are tertiary workers.
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Development level
Quaternary Sector The quaternary sector of the
economy consists of intellectual activities.
Activities associated with this sector include
government, culture, libraries, scientific
research, education, and information
technology. Quinary Sector Some consider there
to be a branch of the quaternary sector called
the quinary sector, which includes the highest
levels of decision making in a society or
economy. This sector would include the top
executives or officials in such fields as
government, science, universities, nonprofit,
healthcare, culture, and the media. Some authors
(e.g. Australian) relate that the quinary sector
refers to domestic activities such as those
performed by stay-at-home parents or homemakers.
These activities are typically not measured by
monetary amounts but it is important to recognize
these activities in contribution to the economy.
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Traditional Modern Sectors

• The Traditional sector refers to established
  age-old procedures e.g. agriculture methods and
  common land ownership.
• The Modern sector refers to a system based on
  specialisation, commuting, use of latest
  technologies
• Many urban areas in developing countries are
  dualistic modern formal activity exists side by
  side with large informal sector
• Traditional manufacturing may exist next door to
  modern manufacturing
• Commercial farms may exist alongside subsistence
  family holdings.

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Formal Informal Sectors

• Economic activities declared to the government
  make up the formal sector of the economy.
  Undeclared economic activity makes up the
  informal (shadow) sector of the economy.
• The characteristics of the informal sector
  include
• self-employment
• small scale enterprise
• labour intensive production using simple
  technology
• monopolistic competition
• complete absence of official regulation

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Classical production function
Q f (C, L) Q .. product C .. capital L
.. labour
Used, among other, also by Karl Marx, who (of
course) stressed the equality of labour to
capital or even primary importance of labour over
capital .
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As a matter of fact

• Marx stressed labour for the reason we could
  understand, if we remember the definition of
  value added (or surplus-value, as Marx called
  it).
• As it is created both by the inputs of capital
  and labour, Marxs basic idea was that profit
  should be distributed evenly among the owners of
  both these production factors

Intermediate consumption
Labour
Fixed capital consumption
Profit
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Qualitatively new elements

• new generation information technologies
• feedback ? growing yields bring innovation growth
  
• globalisation ? growing role of net industries
• accelerated production factors mobility
• effective production factors utilisation

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Aggregate production function ( Solow, R.M.,
1956 )
Q f (C, L, e) Q .. product C .. capital L
.. labour e .. technological development
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NEW ECONOMY
New Economy
New Economy

• The notion emerging since the end of the 90ies,
  used for example to explain the long-term success
  of the U.S. economy ( low inflation rate, low
  unemployment and high productivity growth rate up
  to the recent time )

• Impact of information and communication
  technologies (ITC) on the results of economic
  activities

• Different opinions and approaches to the problem

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Problem of sectors based on biological processes
Q f (C, L, B, e) Q .. product C ..
capital L .. labour B .. biological factors
(land, animals..) e ..
technological development
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Some economists also stress the role of human
capital
Q f (C, L, HC, B, e) Q .. product C ..
capital L .. labour HC . human capital
(education, promotion, flexibility..) B ..
biological factors (land, plants,
animals..) e .. technological development
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What is Human Capital
The term Human Capital (HC) was first
circulated in the 50s and is now generally used
as an all-encompassing term for the knowledge,
skills, competencies and other attributes
embodied in individuals or groups of individuals
acquired during their life and used to produce
goods, services or ideas in market
circumstances. As the father of the idea, the
economist Jacob Mincer is usually regarded
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Jacob Mincer (1922-2006) was an outstanding U.S.
economist of Polish origin (born in Polish
Tomaszow). He was most notable for his ideas of
the role of human capital in economics. His
papers on labour economics use so-called
Mincerian Equations, which utilise human capital
as a variable to explain the determination of
wages in a statistical estimation. He spent most
his life as a professor of economics at the
Columbia University (from which he received his
Ph.D.)
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Human capital

• can be summed up in a formula devised by
• Thomas Davenport
• (ability, knowledge, skill, talent behaviour)
• x effort x time
• quality of labour,
• i.e. human capital
•             

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Social capital

• Social capital describes the pattern and
  intensity of networks among people and the shared
  values which arise from those networks.
• While definitions of social capital vary, the
  main aspects are citizenship, neighbourliness,
  trust and shared values, community involvement,
  volunteering, social networks and civic
  participation.

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Definition of Social Capital

• ".the rules, norms, obligations, reciprocity and
  trust embedded in social relations, social
  structures and societys institutional
  arrangements which enable members to achieve
  their individual and community objectives.
• Narayan (1997) Voices of the Poor Poverty and
  Social Capital in Tanzania, World Bank,
  Washington D.C., USA.

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However,

• most economic theories regard as the main drive
  of development just economic development,
  measured by the economic performance.
• This is usually understood as the level of the
  created value added, i.e. GDP
• According to the historical experience, economic
  theories speak of business (economic development
  cycles)

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Types of economic/business cycles

• The main types of business cycles enumerated by
  Joseph Schumpeter and others in this field have
  been named after their discoverers or proposers
• the Kitchin inventory cycle (35 years, Joseph
  Kitchin),
• the Juglar fixed investment cycle (711 years,
  Clement Juglar)
• the Kuznets infrastructural investment cycle
  (1525 years, Simon Kuznets, Nobel Prize
  Laureate)
• the Kondratiev wave (4560 years, Nikolai
  Kondratiev)
• the Forrester cycles (200 years, Jay Wright
  Forrester).
• the Toffler civilisation cycles (1000-2000 years,
  Alvin Toffler)
• Even longer cycles are occasionally proposed,
  often as multiples of the Kondratiev cycle.

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Most cycle theorists agree, however,

• with the "Schumpeter-Freeman-Perez" paradigm of
  five waves so far since the industrial
  revolution, and the sixth one to come. These five
  cycles, so-called Kondratiev Waves, are
• The Industrial Revolution--1771
• The Age of Steam and Railways--1829
• The Age of Steel, Electricity and Heavy
  Engineering--1875
• The Age of Oil, the Automobile and Mass
  Production--1908
• The Age of Information and Telecommunications--197
  1
• According to this theory, we are currently at the
  turning-point of the 5th Kondratiev.

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Theories of Development Economics

• The origins of modern development economics are
  often traced to the need for, and likely problems
  with the industrialization of eastern Europe in
  the aftermath of World War II .
• The most well-known are
• Linear-stages-of-growth model
• Structural-change theory
• International dependence theory

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Linear-stages-of-growth model

• An early theory of development economics, the
  linear-stages-of-growth model was first
  formulated in the 1950s by W.W.Rostow
• The linear-stages-of-growth model states that
  there are a series of five consecutive stages of
  development which all countries must go through
  during the process of development. These stages
  are
• traditional society
• pre-conditions for take-off
• take-off
• drive to maturity
• age of high mass-consumption
• Such theories have been criticized for not
  recognizing that, while necessary, capital
  accumulation is not a sufficient condition for
  development. That is to say that this early and
  simplistic theory failed to account for
  political, social and institutional obstacles to
  development

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Structural-change theory

• It deals with policies focused on changing the
  economic structures of developing countries from
  being primarily comprised of subsistence
  agricultural practices to being a more modern,
  more urbanized, and more industrially diverse
  manufacturing and service economy.
• There are two major forms of structural-change
  theory
• W. Lewis two-sector surplus model, which views
  agrarian societies as consisting of large amounts
  of surplus labor which can be utilized to spur
  the development of an urbanized industrial sector
• Hollis Chenerys patterns of development
  approach, which is the empirical analysis of 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.

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International dependence theory

• It 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.
• These theories view developing countries as being
  economically and politically dependent on more
  powerful, developed countries which have an
  interest in maintaining their dominant position.
  There are three different, major formulations of
  international dependence theory
• neocolonial dependence theory
• false-paradigm model
• dualistic-dependence model.

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Growth indicator controversy

• As the main indicator of economic growth, or even
  as the general national well-being,
• per capita Gross Domestic Product
• is used by most developmental economists .
• However, these measures are criticized as not
  measuring economic growth well enough, especially
  in countries where there is much economic
  activity that is not part of measured financial
  transactions, both in developed as well as
  developing countries

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Deriving of GDP
Gross output
Intermediate consumption
Gross value added GDP
Depreciation
N D P
Labour input
Profit
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GDP or GNP
Example
In the developing country XY, a foreign company
developed its activities and reaches a remarkable
profit, namely because of cheap labour. However,
GDP is calculated with regard to the area where
value added has been created, therefore it
increases GDP of the country XY.
GDP
If GDP is defined as
Labour
D
Profit
IC
what share of the value added then really remains
in the country XY ?
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GDP or GNP
But there is no need to go as far as that. A
similar situation regards

Of course in the CR !
Where ?
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Activities not included into GDP

• Environmental impacts and depletion of
  non-renewable resources
• Economic activities not entering the market
• shadow economy
• household activities
• unpaid labour
• voluntary social activities
• Free time and individual health care

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Let us imagine the following situation
Two women of 35, both secondary school graduates,
mothers of 2 children.

• Mother A
• is a housewife
• does the household activities by herself
• uses minimum of paid services
• is active in humanitarian NGO
• takes care of her children and their education
• her children are successful in school, active in
  hobbies, have no problems

• Mother B
• works in erotic club
• household chores are done through paid services
• no voluntary public activities
• is a heavy smoker
• has not enough time for children, who have
  problems in school
• they are also game addicts and spend a lot of
  money on it
• eventually they employ social workers and
  institutions

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The question is
Which of the two mothers contributes more -
directly or indirectly - to the GDP creation and
therefore to the economic growth ?
The right answer Mother B
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Alternative solutions
NEW - Net Economic Welfare GPI - Genuine
Progress Indicator HDI Human Development
Index SEEA - System of Economic and
Environmental Accounts
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GPI includes

• Economic value of civil activities and voluntary
  work
• Ecomic value of unpaid household activities and
  child care
• Costs of underemployment
• Value of free time
• Natural resources utilisation
• Environmental impacts both positive and negative
• Socio-economic impacts ( income re-distribution,
  life costs security index)
• Human and social capital (health, education,
  criminality)

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Example of GPI estimate in the USA
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HDI Human Development Index

• Is combined from three partial indicators
• life expectancy represents the average length
  of life and the health state of population (
  connected also to
• education level reflects the knowledge level
  of population, 2/3 weight is adult population
  literacy index and 1/3 combined has the combined
  indicator of basic , secondary and university
  education
• average real GDP per capita per year
• in USD PPP expresses average life standard
• It can reach values between 0 -1

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The main question then is
If GDP does not really express the full level of
development, why are we not utilising the
mentioned alternative indicators instead?
The answer is simple While GDP can be mofre or
less precisely computed, other indicators are
either incomplete (like HDI), or they can be only
estimated (like GPI)
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Thank you for attention!