ITC-ILO Master in Management of Development 2011/12 Module of Economics


AIM: Understand how the international cooperation and its modalities have been influenced by: - the historical economic and political context - the economic theories

The Official Development Aid system as well as that part of economics dealing with the concept of development originated at the end of ‘40s for two historical reasons: - reconstruction of the post-II war Europe (Marshall plan: large scale USA plan to help the European reconstruction, consisting of US$ 13 billion in economic and technical assistance) → successful → possible replication in other countries, namely in developing countries - new independent States after the process of decolonization → new economic problems →dichotomy between growth and development

We can individuate 4 different phases.

Until now, economists just dealt with the concept of growth. Starting from the end of ‘40s, dichotomy between growth (developed countries) and development (developing countries). In 1952, a French journalist, Alfred Sauvy, ideated the expression “Third World”, in analogy with the French Revolution. During the French Revolution, three “states” or classes: clergy, nobility and “the third state or

for example heavy industry has more linkages to other sectors than manufacturing industry). Harrod (UK) and Domar (USA) to study developed countries. According to Sauvy. 1939 and 1946). with zero-productivity (too many people are employed in agriculture). that should be incentivized to move and be employed in the industrial sector. In order to follow a path of industrialization. Once a process of growth is started. 1955). Problems of Capital Formation in Underdeveloped Countries) in all the industrial sectors. new purchasing power and then new demand for industrial goods. In this way. they should joint and work together to claim for their rights.Domar model. According to Hirschman (1958. This path consists in the transition from an agricultural society to an industrialized economic system. 4.Rodan (1943. the industrial sector grows. with a State planning. Which industrial sectors? According to Rosenstein. In 1955. Industrialization (all the theories). Agriculture is just seen as functional to industrialization (Lewis’s model. Conference in Bandung (Indonesia). 1954. The main (and weak!) logic of the economic theories was the following: 1. 5. this gap should be filled by international financial aids. where the productivity is high. The Strategy of Economic Development) without a State planning (that pushes down the individual entrepreneurship) and just in those sectors that present more backward and forward linkages (for example sectors that buy of supply inputs and intermediate goods from/to other sectors. its main logic was applied to developing . new wages.class”. To go in details. in order to create new employment.Role of international cooperation (based on the Harrod. Romano). 2. in which for the first time 29 developing countries met to discuss their economic and social problems and declare their neutrality with regard to the Cold War (First World: developed. Because the surplus of labor. Now (in 1952). Second World: socialist and communist countries). In order to develop. 1960). No attention on social problems (based on Kuznets’s theory. In agriculture there is a surplus of labor. countries need to save and invest. the production in agriculture will not decrease (because labor moving to industry has zero-productivity in agriculture) and there is a more efficient allocation of labor. To sum up: international financial aid → investment and industrialization → growth → social equity. However. The Harrod-Domar model was formulated in 1939 and 1946 by two economists. the precious role of agriculture in development will be explained by Prof. Tasgian lecture). All the investment should be concentrated in the industrial sector that needs a “big-push” of investment to take off. its benefits will spread across the population and the income distribution will improve (this point will be developed by Prof. the most part of world population lives in the “Third World” without rights and income. capitalistic and democratic countries. Economic Development with Unlimited Supplies of Labor). 3. that was represented by the 98% of poor population without rights and economic power. developing countries should follow the same path of growth followed by developed countries. wages in the industrial sector can remain constant (at a subsistence level + a little premium for moving) and this allows firms to get profits and re-invest them. Since developing countries have a gap of saving. Stages of development (based on Rostow’s theory. (Actually.

this definition for I can also be understood by reasoning. we can define I: It = k * (ΔY) = k * (Yt+1 -Yt) This is a mathematical derivation. we can also say that k = ΔK/ΔY (every time I changed my capital by ΔK. We need now to find a definition for I. that saving should be equal to investment. It = St. I need to increase my capital (ΔK = I) by 3*10 = 30 = I (for each unit of new output I need 3 unit of new capital). the new value of my capital is now equal to 10000 + 1000 = 11000. (capital = 1000*10 = 10000) and I invest by buying a new computer (I = 1000$). in the demand??? . The important point is: do firms know how much is great the increase in income and. i. Let’s call: Y = GDP (output. my output changes by ΔY). If k = 3 and I want to increase the production by 10 unit.e. each of them having a value of 1000$. Since k = K/Y. However. or that k = I/ΔY. How much? Since for having one unit of additional output I have to buy 3 more unit of capital.countries by other economists. The rational is to find an economic expression to find what determines the rate of growth of an economy. my investment should be equal to the desired increase in output times the capital I need for producing one more unit of output ( = K/Y = k). income) S = saving s = marginal propensity to save (ranging from 0 to 1) = 1-c c = marginal propensity to consume (ranging from 0 to 1) = 1-s I = investment K = capital k = capital/output ratio (greater than 1: for each unit of capital. then. I obtain less than 1 unit of output) = K/Y if k = 3 it means that I need 3 unit of capital to produce 1 unit of output We know that the saving is equal to a portion of income: St = sYt and that. If I want to produce more because I think that tomorrow the demand will increase. Knowing k. We know also that the change in capital is equal to the investment (ΔK = I). ΔK = 11000 – 10000 = 1000 = I. in equilibrium. In this way. Obviously. I have to invest more. in the demand. this means that the firms take their decision on investment on the basis of the expected increase in income and. We have already defined S. then. If the value of capital in my design firm is equal to 10 computers.

Target: growth rate of 7% If we know that k=3. Result: the role of cooperation in ’50 and ’60 was just limited to massive transfer of capital from developed to developing countries. developing countries exported raw materials (low value) and imported manufacturing and capital goods (high value) and this determined a negative trade balance. in particular in Latin America. in ‘50s and ‘60s some alternative theories of development were formulated. the saving gap (21%-15%=6%) should be provided in form of financial foreign aids. In particular. We know that It = k * (ΔY) = k * (Yt+1 -Yt) and that in equilibrium It = St = s * Yt . (Actually. This paradigm was applied to various Latina American countries in ’50 and ’60 (ex. In order to reach a rate of growth of 7%. According to their theory (structuralism). Moreover. have a low rate of saving. This means that the rate of growth of a country is positively related to its capacity of saving. in 1964 there was the first UN Conference on Trade and . Through this mechanism. Did it work? This point will be developed by Dr Bertoli’s lecture). Since developing countries. given their low income. the gap of saving necessary to grow should be provided by international aids. in order to substitute imported goods with domestically-produced goods. Then: sYt = k (Yt+1 -Yt) = k (ΔY) (Yt+1 -Yt)/ Yt= s/k In other words: (ΔY)/Y = s/k = g g is called warranted rate of growth. Example. in which they were seen by developed countries just as a source of raw materials and a market to which export manufacturing and capital goods.Let me show this point. we can calculate the necessary saving rate: s/3=7 s=7*3=21% Let’ s suppose that a developing country just saves the 15% of its income. At a first stage. domestic firms should be protected by international competition by trade barriers (tariffs). two economists have been representatives of this approach. Chile. the economic structure of developing countries was just a consequence of the international economic dynamics. Argentina). Brazil. Prebisch (Argentina) and Singer (Germany). so it is able to grow just at 5% (=15/3). The proposed solution was a policy of import-substitution.

Result: the ’80 were called the “lost decade” in fighting poverty. In 1982 Mexico was the first country to declare the impossibility to pay back its debt. the failure of the previous theories of development was clear: even if on average developing countries had registered a growth rate of 3%. Hollis Chenery. . that will become a permanent organization in Geneva with the name of UNCTAD. In 1987 Giovanni Andrea Cornia wrote the essay “Adjustment with a Human Face” and in the 1990 World Development Report (WB) fighting poverty was put again at the center of the role of international organizations. “Redistribution with Growth”. privatizations.. further increased. USA Federal Reserve increased interest rates to fight the rise of law. poverty and inequality did not change. education etc. Prebisch was the first secretary of UNCTAD. 4) 1990s AND 2000s: FIGHTING POVERTY AND MDGs In the two following decades. Political context: conservative government in developed countries (Reagan in USA and Thatcher in UK) and conservative economists in international organizations (Anne Krueger and Stanley Fischer at the WB. but also concrete assets (access to water.) → Cycle project management and the active role of NGOs.). The role of international organizations was reviewed and the focus was shifted to people’s basic needs (nourishment. WB Chief Economist. health. sanitation projects.governance and institutions (development cannot occur without good institutions!) (this point will be developed by the module of Economics of Institutions) . free markets and free trade. WASHINGTON CONSENSUS AND STRUCTURAL ADJUSTMENT. human rights and intellectual property rights (this point will be developed by the module of Law) . while social issues were put aside. developing countries had to implement a series of rigorous policies (public expenditure cuts. The focus was on public accounts. from an historical point of view.) called by the economist John Wlliamson in 1989 Washington Consensus (US Treasury Department. international aid should provide not only financial resources. deregulations etc.Development. water. already high. 3) 1980s: DEBT CRISIS.. In ’70. The debt crisis started. In particular. that caused an increasing inflation and hurt both developed and developing countries importing oil. housing. The foreign debt of developing countries. he’s now Governor of the Bank of Israel). since the poor were seriously hurt by the policies of structural adjustment. The aim of international organizations as well as of development economics was not only “growth” but also “redistribution” (1974. new concepts have enriched the theories of economic development and the approach of international organizations in fighting poverty: . As a consequence.) 2) 1970S: ATTENTION ON SOCIAL ISSUES BUT. houses etc. FMI and WB in Washington). As a consequence. 1973 and 1979: oil crisis. However. to promote the trade right of development countries. In order to have a rescheduling of their debt. the ’70s created the basis for what happened in ’80.

Dalmazzone’s lecture) .the role of agriculture for economic development (this point will be developed by financial stability (this point will be developed by Prof.globalization and the role of FDI (this point will be developed by Prof.migration (this point will be developed by Prof.importance of technological progress (second part of my lecture) .women’s empowerment . Tasgian’s and Prof. inequality and poverty (this point will be developed by Prof.ownership and bottom-up development strategies . Valli’s lecture) . Romano’s lecture) .environmental sustainability (this point will be developed by and human capital (this point will be developed by Prof. Venturini’s lecture) . Badhuri’s lectures) . Deaglio’s lecture) . Balcet’s lecture) .children’s rights (this point will be developed by Dr Bertoli’s lecture) .globalization.

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