REPORTED BY: AISHA NIMFA S. ABANTAS DOCTOR OF PUBLIC ADMINISTRATION-STUDENT MINDANAO STATE UNIVERSITY MAIN CAMPUS

1. ECONOMIC
DEVELOPMENT
THEORY
REPORTED BY:
AISHA NIMFA S. ABANTAS
PA 303 – BUREAUCRACY AND DEVELOPMENT

2. Economics important subjects:
-To increase
economic growth
- Welfare of society

3. ECONOMIC DEVELOPMENT
THEORIES:
A. CLASSICAL
B. KEYNESIAN
C. NEOCLASSICAL
D. POST-DEVELOPMENT
E. ENDOGENOUS

4. Economic Growth depends on:
MAIN INPUTS:
1. Land
2. Labor
3. Capital
4. Technology
OTHER INPUTS:
1.Social
2.Economic
3.Political structures
A. Classical Economics:

5. Classical Growth Model:
Basic Ingredients that appear in Modern Theories of
Economic Growth:
- Basic approaches of competitive behavior and equilibrium dynamics.
- The role of diminishing returns and its relation to the accumulation of
physical and human capital.
- The interplay between per capita income
- The growth rate of population
- The effects of technological progress in the forms of increased
specialization of labor.
- Discoveries of new goods and methods of production, and
- The role of monopoly power as an incentive for technological advance.

6. 1. Classical Economists:
 Concern about the sustainability of Economic Growth
was a major concern of the classical economists,
 with the pessimism of:
 1. Thomas Malthus(1766-1834)- a British Economist
best known for his Theory that human populations
tend to outgrow their agricultural production
capabilities, resulting in famines and other disasters.
2. David Ricardo (1772-1823)- British Economist best
known for developing the Comparative Advantage
economic theory which states that for international
trade, countries most benefit from producing goods
with low production opportunity costs.
 contrasting with the optimism of Adam Smith.

7. Adam Smith
(1723-1790)
- Father of Capitalism.
- A Scottish political economist.
- He analyzed the dynamics of wealth of nations
and welfare of individuals and societies.
- He stated that the importance of stable legal
framework in which invisible hand of the market
and open trading system could function.
- His assumptions was that humans were self
serving by nature but that as long as every
individual were to seek the fulfillment of her/his
own self-interest, the material needs of the
whole society would be met.

8. The Main Factors Affecting
the Engine of Economic Growth:
by: Adam Smith (1776)
- Population growth
- Capital growth
- The division of labor (technological progress)
-Institutional Framework of the Economy
(competitive-free traded market economy).

9. Adam Smith’s Determinants
of Economic Growth:
1. Division of labor
2. Education
3. Human capital
4. Learning by doing
5. Increasing returns to
scale
6. Technological change
7. Externalities
8. Institutional factors
such as global free-
competitive market
economy
9. The role of government

10. Smithian Growth Process:

11. 1870–1929 Economists’ Research:
-was heavily influenced by the ‘marginalist
revolution’ ( which is a sudden change of
direction in economic science, a shift from
classical to a new approach based on a
subjective theory of value and the analytical
notion of marginal utility).
-was therefore predominantly micro-oriented.
-And being directed towards issues relating to
the efficient allocation of given resources.

12. B. Keynesian economics Theory
is based on Two Main Ideas:
- Aggregate demand is more likely than
aggregate supply to be the primary cause
of short-run economic event like a
recession.
- Wages & prices can be sticky, and so, in
an economic downturn, unemployment
can result.

13. John Maynard Keynes
(1883-1946)
- He argued that government spending was a critical factor driving
aggregate demand. That meant an increase in spending would
increase demand. Second, Keynes argued that government spending
was necessary to maintain full employment.
- He advocated deficit spending during the contractionary phase of
the business cycle. in recent years, politicians have used it even
during the expansionary phase. President Bush's deficit spending in
2006 and 2007 increased the debt.
- It also helped create a boom that led to the 2007 financial crisis.
President Trump increased debt during stable economic growth.

14. John Maynard Keynes
(1883-1946)
- Father of Macroeconomics.
- British economist who developed Keynesian
economics theory in the 1930s.
- He provided the idea that the government should
play an active role in their countries” economies,
instead of just letting the free market reign.
- He advocated federal (national) spending to
mitigate downturns in business cycles.

17. Laissez-faire economics
needs, in order to work:
1. Capitalism
2. Free Market
Economy
3. Rational Market
Theory

18. 1. Capitalism
It is an economic system in which
private entities own the factors of
production which are essential to any
economy, as they are the building
blocks for all goods and services. The
four factors of production are land,
labor, capital, and entrepreneurship.

19. 2. Free Market Economy
- Capitalism requires a market economy (which is an
economic system in which individuals, rather than the
state, own most of the resources) to set prices and
distribute goods and services. Businesses sell their wares
at the highest price that consumers will pay. At the same
time, shoppers look for the lowest prices for the goods
and services they want. Workers bid their services at the
highest possible wages that their skills will allow, and
employers strive to get the best employees for the least
compensation.
- Like an auction, the free-market sets prices for goods
and services that reflect their market value. It gives an
accurate picture of supply and demand at any given
moment.

20. 3. Rational market theory
- assumes that all investors base their decisions
on logic rather than emotion.
- Consumers research all available information
about every stock, bond, or commodity. All
buyers and sellers have access to the same
knowledge.

21. Keynesian Versus Classical
Economic Theories:
1. Keynesian Economics:
- Government spending is
necessary to maintain full
employment.
- Government spending on
infrastructure, unemployment
benefits, and education will
increase consumer demand.
2. Classical Economics:
- Increasing business growth will boost
the economy.
- Promotes Laissez-faire economics which
is a theory that restricts government
intervention in the economy. It holds that
the economy is strongest when all the
government does is protect individuals'
rights. That the Government should play a
limited role and target companies, not
consumers.

22. Roy F. Harrod in 1939, and
Every Domar in 1946.
THE HARROD-DOMAR MODEL
- is a classical Keynesian model of economic growth. It's development economics to
explain an economics' growth rate in terms of the level of saving and Productivity of
Capital. It suggests that there is no natural reason for an economy to have balance
growth.
- The model was developed independently by Roy F. Harrod in 1939, and Every
Domar in 1946. The Harrod-Domar model was the precursor to the exogenous
growth model.
- The Harrod-Domar model suggests that economic growth rates depends on two
things:
1-Level of saving (higher savings enable higher investment).
2-Capital-output ratio, a lower Capital-Output ratio means investment is more
efficient and the growth rate will be higher.
RATE ECONOMIC GROWTH=LEVEL OF SAVINGS ÷ CAPITAL OUTPUT RATIO

24. Harrod-Domar model:
R.F. Harrod (1939) and E.D. Domar (1946)
-shows that in which conditions growth follows
stable or unstable path.
-also shows that the market mechanism may
not provide stable growth rate in the long run.
-Therefore, they confirmed that the proposal
of Keynes which capitalist system was
inherently unstable is valid not only in the
short run but also in the long run.

25. Harrod-Domar model:

26. Marshall Plan:
- On April 3, 1948, US President Harry
Truman signed the Economic Recovery Act of
1948. It became known as the Marshall Plan,
named for Secretary of State George
Marshall, who in 1947 proposed that the
United States provide economic assistance to
restore the economic infrastructure of
postwar Europe.
- It heavily inspired the LINEAR STAGES OF
GROWTH MODEL.

27. LINEAR STAGES OF GROWTH
MODEL:
- Assumes that economic growth can only be
achieved by industrialization.
- Growth can be restricted by local institutions and
social attitudes.
- States that a correctly designed massive injection
of capital coupled with intervention by the public
sector would ultimately lead to industrialization
and economic development of a developing
nation.

28. WALT W. ROSTOW
(1916-2003)
- He argued that economic
development could be led by
certain strong sectors.
- Identified five stages through
which developing countries had to
pass to reach an advanced
economy.

30. LINEAR STAGES OF GROWTH MODEL:

31. RULES OF DEVELOPMENT:
by: WALT W. ROSTOW
- He stated that a country needs to follow some
RULES OF DEVELOPMENT to reach the TAKE-OFF:
- The investment rate of a country needs to be
increased to at least 10% of its GDP
- One or two manufacturing sectors with a high rate
of growth need to be established.
- An institutional, political and social framework has
to exist or be created in order to promote the
expansion of those sectors.

32. CRITICISM:
Because of the focus on the need for
investments in capital, the Linear
Stages of Growth Models are
sometimes referred to as suffering
from CAPITAL FUNDAMENTALISM.

33. Capital Fundamentalism:
- embodies the belief that the rate of physical capital.
accumulation is the crucial determinant of economic growth.
- viewed capital accumulation as central to increasing the rate of
economic growth.
- the notion that physical capital accumulation is the primary
determinant of economic growth – have been often ascribed to
Harrod's and Domar's proposition that the rate of growth is the
product of the saving rate and of the output-capital ratio.

34. W. Arthur Lewis (1915-1991)
DUAL-SECTOR MODEL:
- A British economist who wrote an influential paper on the ‘dual economy’ in
1954. He observed that in many developing economies (usually a former
colonial country) that the economy was split into these different two segments.
- Lewis observed that in the agricultural sector, productivity was often very low,
and farmers often lacked the traditional profit incentive and dynamism usually
found in a free market economy.
- He argued that given the disparity in productivity, developing economies
could make substantial economic growth by encouraging labor to move from
the unproductive agricultural sector to the more profitable and productive
manufacturing sector (and recently service economy).
- He stated that Developing countries which concentrated on just agriculture
were doomed to low savings, low productivity and low growth.

37. Andre Gunder Frank
(1929-2005)
 -He was a German-American sociologist and economic
historian who promoted Dependency Theory after 1970
and World-Systems Theory after 1984.
 -A dependency theorist whose central contention was
that poor states are impoverished and rich ones
enriched by the way poor states are integrated into the
"world system".

38. Dependency theory (1950)
 -It argues that the underdevelopment of poor nations
in the Third World derived from systematic imperial
and neo-colonial exploitation of raw materials .
 -It is the notion that resources flow from a
"periphery" of poor and underdeveloped states to a
"core" of wealthy states, enriching the latter at the
expense of the former. A central contention of
dependency theory is that poor states are
impoverished and rich ones enriched by the way poor
states are integrated into the "world system".

39. Immanuel Maurice Wallerstein
(1930-2019)
 - was an American sociologist and economic
historian. He is perhaps best known for his
development of the general approach in
sociology which led to the emergence of his
world-systems approach.
 - He was the most prominent figure behind the
world-systems theory.
 - who argued that in economics there are three
types of economic nations - the core, the semi-
periphery, and the periphery.

40. World Systems Theory (1974)
 -is a sociological and economic theory.
 -is a fundamental unit of analysis for social evolution. Also
known as world-systems analysis or the world-systems
perspective, it is a multidisciplinary, macroscale approach to
world history and social change.
 -is a way of categorizing the countries in our world based on
their economic power. Countries are categorized as either
core, peripheral, semi-peripheral, or external.
 -It is also important to remember that countries' status in
world systems theory are always changing. These changes are
due to factors like military actions, geographic expansion, and
changes in industrial production levels in a given country.

41. World Systems Theory
Classifications of Countries:
 1. Core countries- are wealthy, militarily strong, and hold
significant social power and colonial power. (Australia, United
Kingdom, Canada ,Finland ,France ,Germany ,Japan ,and United
States)
 2. Semi-peripheral countries- have some of the characteristics
of core and peripheral countries. (Brazil, China, India , South
Africa, South Korea, and Taiwan)
 3. Peripheral countries- are poor, have exploitable resources,
and do not possess great social stability or government.
Afghanistan ,Argentina ,Bangladesh .Cambodia .Central African
Republic ,Cuba ,Greece ,Philippines and Zimbabwe)
4. External areas- are countries or regions that fall outside of
the scope of world systems theory.

42. Structuralism versus
Dependency:
- Structural Change Emphasis is on traditional neoclassical theories
designed to generate GDP growth.
- Optimistic that the right mix of economic policies will generate
beneficial patterns of self-sustaining growth.
- Underdevelopment is a result of internal constraints such as insufficient
savings and investment or lack of education and skills.
- International Dependence Emphasis is on international power
imbalances and the need for fundamental economic, political and
institutional reforms both domestic and worldwide.
- Pessimistic in that they offer an appealing explanation of
underdevelopment, but they offer little formal or informal explanation of
how countries can initiate and sustain development.
- Underdevelopment is an externally induced phenomenon Economic
Development: classic theories.

43. Economic Growth depends on:
MAIN INPUTS:
1.Labor
2.Capital
3.Technology
C. Neoclassical Economy:

44. Robert Solow (1924-present)
 He is an American economist.
 Was awarded the Economic Science Prize for the
important contributions to theories of economic growth.
 Solow growth model focuses on long-run economic
growth.
 A key component of economic growth is saving and
investment. As it raises the capital stock and thus raises
the full-employment, national income and product.

45. Neoclassical
Solow (1956)
- Solow relaxes the assumption of
constant relation between capital
and labor and ran the model under
neoclassical conditions.
- Solow emphasizes that his study devotes
a model of long-run growth which
accepts all the Harrod-Domar
assumptions except that of fixed
proportions.

46. Trevor Swan (1918-1989)
 - He was an Australian Economist.
 - He independently developed the neoclassical
growth model.
 SWAN (1956) was published 10 months later than
Solow (1956), but included a more complete analysis
of technical progress.
 - He was best known for the “Solow-Swan Growth
Model”, but more commonly reference is made only
to the “Solow Growth Model”.

47. Neoclassical Model of Economic
Growth:
 - Constructed by Solow (1956) and Swan (1956)
 - it is the theoretical engine for the following growth
models to be improved.
 - it missed the empirically obvious point that the
knowledge associated with technological change is
continually growing as the result of production experience.
 - one of the main problems of the neoclassical growth
model is that changes in technology cannot explained by
the model and in the model steady-state growth is zero, if
an economy grows at steady state, what the source of this
growth is unknown.

48. Neo
-classical
Growth
Model:

49. Economic equilibrium
 - Economic equilibrium is a situation in which economic
forces such as supply and demand are balanced and in
the absence of external influences the (equilibrium)
values of economic variables will not change. For
example, in the standard text perfect competition,
equilibrium occurs at the point at which quantity
demanded and quantity supplied are equal.
 - STABLE EQUILIBRIUM- the condition of a system in
which all competing influences are stably balanced, in a
wide variety of contexts.

50. Solow Growth model
 - It focuses on long-run economic growth. A key component of
economic growth is saving and investment. An increase in saving and
investment raises the capital stock and thus raises the full-
employment, national income and product.
 - It is an exogenous model of economic growth that analyzes changes
in the level of output in an economy over time as a result of changes
in the population growth rate, the savings rate, and the rate of
technological progress.
 - refers to an exogenous neoclassical model of economic growth
representing enhanced capital accumulation, technological progress,
and increased labor used to achieve short-term equilibrium. It shows
that the economies of every nation will reach a steady state or
converge at the same level of savings, labor, depreciation, and
production growth.

51. Solow–Swan Growth model or
Solow Growth Model:
 - The Solow–Swan model or exogenous
growth model is an economic model of
long-run economic growth. It attempts to
explain long-run economic growth by
looking at capital accumulation, labor or
population growth, and increases in
productivity largely driven by technological
progress.

53. D. POST-DEVELOPMENT
THEORY (1980s-1990s)
 - Is a school of thought which question the
idea of national economic development
altogether.
 - The goal of improving LIVING STANDARDS
leans on arbitrary claims as to the
desirability and possibility of that goal.

54. WOLFGANG SACHS
(1946-present)
 - a post-development theorist that stated that
the idea of development is just a “mental
structure”, which has resulted in a hierarchy of
developed and underdeveloped nations, of
which the underdeveloped nations desire to
be like developed nations.
 - He said that Development thinking has been
dominated by the West and is very
ethnocentric.

55. MAJID RAHNEMA
(1924-2015)
 - Another leading post-development scholar.
 - He said that things like notions of poverty are very
culturally embedded and can differ a lot among cultures.
 - That the institutes which voice the concern over
underdevelopment are very Western-oriented and post-
development calls for a broader cultural involvement in
development thinking.
 - Post-development proposes vision of society which
removes itself from the ideas which currently dominate it.

56. E. Endogenous Growth
Theory:
 - holds that economic growth is primarily the result
of endogenous and not external forces.
 - Endogenous growth theory holds that investment
in:
1. human capital
2. innovation
3. knowledge
- are significant contributors to economic growth.

57. Endogenous growth models:
Romer (1986, 1987, 1990, 1994), Lucas (1988, 1993), Grossman-Helpman (1991), Aghion-Howit (1992)
 - The knowledge and the processes of
creating knowledge are important parts of the
production, which reflect no diminishing
returns. As firms and workers are experienced
on production, they can produce more
efficiently, which is called learning-by-doing.

58. Endogenous Growth Model

59. Exogenous Growth Model

60. ENDOGENOUS versus
EXOGENOUS GROWTH MODEL:
 - We have two equations in r* and g*, so we can plot this as in figure 1.
Notice that the intersection of the two curves yields the equilibrium growth
rate. Suppose that r=A increases. Then it is apparent from the figure that g*
will increase. Hence the focus of attention in endogenous growth models is
to understand the determinants of r=A. In particular, concern centers on the
role of policy in affecting r=A.
 - Now we contrast this with the exogenous growth model. In this case the
growth rate is exogenous. Hence, we have figure 2. Comparing the two
pictures we see that in the exogenous growth model, a change in any of the
parameters that determine the return to consumption affect r*, but not the
g* or growth rate. In the endogenous growth model such changes affect the
g* or growth rate, but not the r* or interest rate.

61. The law of diminishing returns:
 - is an economic principle stating
that as investment in a particular
area increases, the rate of profit
from that investment, after a
certain point, cannot continue to
increase if other variables remain
at a constant. As investment
continues past that point, the rate
of return begins to decrease.

62. VARIABLES affecting Endogenous
Technological Change such as:
1. 1. Human capital
2. 2. Research and development,
3. 3. Education,
4. 4. Government policies,
5. 5. Physical structure,
6. 6. Spillover effects,
7. 7. Externalities
8. 8. Institutional factors etc.

63. STRUCTURAL
ADJUSTMENT
PROGRAMMES (SAP’s)

64. SAP’s important aspects:
(World Bank & IMF)
1. Fiscal Austerity (reduction in government spending)
2. Privatization (for money, efficiency, performance)
3. Trade liberation, currency devaluation and the
abolition of marketing boards. (comparative
advantage on global market)
4. Retrenchment of the government and deregulation
(to stimulate the free market)

65. Headwinds in global economic recovery
After more than two years of the pandemic, the world economy
is still struggling to get back on track.
-The International Monetary Fund (IMF) forecast global growth
in 2022 at 3.2 percent, a significant decline from the 6 percent
rebound posted in 2021.
-Global growth is expected to fall further to 2.7 percent in 2023,
with a 25 percent probability that it could fall under 2 percent.
-The three largest economies in the world—the United States
(US), European Union, and China—are all expected to struggle
with their immediate post-pandemic economic growth recovery.
1. 2023 SAP’s:

66. -In addition, almost half of more than 70 economies
monitored by the IMF are expected to face a technical
recession, measured as at least two consecutive quarters
of economic contraction, in the upcoming year.
-This uneven recovery, shaped by the various factors
affects major commodity supplies. International supply
chains, still recovering from the pandemic, are also less
predictable given the uncertainty of the international
economic environment.
2. 2023 SAP’s :

67.  -Many industrial and developing countries
accumulated debt to finance countercyclical fiscal and
social protection responses to COVID-19. Total global
debt rose by 30 percentage points of world GDP in
2020 alone; the largest single-year increase in world
debt since the 1970s.
 - In the same year, the total debt breached 200 percent
of GDP in emerging markets, while total debt topped
300 percent of GDP in industrial countries.
3. 2023 SAP’s:

68.  - The surge in sovereign debt spreads and monetary
policy tightening among in countries to temper
inflationary expectations have since created pressure
on borrowing costs for many emerging market
economies and developing countries.
 - The strength of the US dollar, driven in part by the
Federal Reserve’s monetary tightening as well as the
“flight to safety” during volatile times, is likely to
create additional pressure on both domestic inflation
(due to exchange rate pass-through) and on
borrowing costs for many countries.
4. 2023 SAP’s:

69. AmBisyon Natin 2040
“By 2040, the Philippines shall be a prosperous,
predominantly middle-class society where no
one is poor. Our peoples will enjoy long and
healthy lives, are smart and innovative, and will
live in a high-trust society.”

70. ALLAH BLESS
and
THANK YOU.