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

THE RISE OF DEVELOPMENT ECONOMICS Notes by Donatella Saccone

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.

1) 1950s-1960s: EMERGENCE OF DEVELOPMENT ECONOMICS AND INSTITUTIONALIZATION OF THE INTERNATIONAL COOPERATION SYSTEM
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

In order to follow a path of industrialization. this gap should be filled by international financial aids. 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. its benefits will spread across the population and the income distribution will improve (this point will be developed by Prof. that should be incentivized to move and be employed in the industrial sector. 1954. Economic Development with Unlimited Supplies of Labor). in order to create new employment. In 1955. new wages. In order to develop. the industrial sector grows. 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. developing countries should follow the same path of growth followed by developed countries. 3. where the productivity is high. Which industrial sectors? According to Rosenstein. This path consists in the transition from an agricultural society to an industrialized economic system. its main logic was applied to developing . they should joint and work together to claim for their rights. Because the surplus of labor. with zero-productivity (too many people are employed in agriculture). No attention on social problems (based on Kuznets’s theory. 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.class”.Role of international cooperation (based on the Harrod. Romano). All the investment should be concentrated in the industrial sector that needs a “big-push” of investment to take off. To go in details. Conference in Bandung (Indonesia).Domar model. 1939 and 1946). In agriculture there is a surplus of labor. In this way.Rodan (1943. with a State planning. 1955). Agriculture is just seen as functional to industrialization (Lewis’s model. the most part of world population lives in the “Third World” without rights and income. To sum up: international financial aid → investment and industrialization → growth → social equity. According to Sauvy. Since developing countries have a gap of saving. for example heavy industry has more linkages to other sectors than manufacturing industry). that was represented by the 98% of poor population without rights and economic power. new purchasing power and then new demand for industrial goods. Once a process of growth is started. capitalistic and democratic countries. 5. Stages of development (based on Rostow’s theory. countries need to save and invest. (Actually. According to Hirschman (1958. However. Industrialization (all the theories). Harrod (UK) and Domar (USA) to study developed countries. The main (and weak!) logic of the economic theories was the following: 1. 4. Now (in 1952). The Harrod-Domar model was formulated in 1939 and 1946 by two economists. Second World: socialist and communist countries). Tasgian lecture). 1960). 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. Problems of Capital Formation in Underdeveloped Countries) in all the industrial sectors. the precious role of agriculture in development will be explained by Prof. 2.

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

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

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

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

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