Economics

1. Economic theories and
perspectives on development
Marina Della Giusta
m.dellagiusta@rdg.ac.uk
‘The earth provides enough resources for everyone’s
need, but not for some people’s greed’
Ghandi

2. Menu
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.

3. 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)

4. 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
1945-mid1950s
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)

5. …mid1960s-1980
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???)

6. 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
money

7. 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
capabilities.
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

8. 3. Sustainable development
"Anyone who believes exponential growth can go on forever
in a finite world is either a madman or an economist."
Kenneth Boulding (1910-1993)
Read: http://limitstogrowth.net/Essay.html

9. 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

10. 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
people?
Cost to other life forms: extinction and the welfare of other animals and
planet (Calculate your own ‘ecological footprint’:
http://adbusters.org/metas/eco/truecosteconomics/)
“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)

11. What then?
United Nations Definition of Development The basic purpose of development is to
enlarge people's choices. In principle, these choices can be infinite and can change
over time. People often value achievements that do not show up at all, or not
immediately, in income or growth figures: greater access to knowledge, better
nutrition and health services, more secure livelihoods, security against crime and
physical violence, satisfying leisure hours, political and cultural freedoms and sense
of participation in community activities. The objective of development is to
create an enabling environment for people to enjoy long, healthy and creative
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
http://dieoff.org/page88.htm)

12. 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?
• http://hdr.undp.org/en/statistics/data/hdi_gdp/

13. 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.
0
10
20
30
40
50
60
70
80
90
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
%
very
happy
% very
happy
real income
per head

14. 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
unhappiness.
Consumption taxes: (Robert Frank) we should tax consumption
and not income (as that taxes savings) and have unbound
upper rates.
Watch this:http://www.thersa.org/events/vision/vision-
videos/robert-frank---10-june-2009.
Check out readings on Blackboard, get in touch if you want to
know more…m.dellagiusta@rdg.ac.uk