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

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

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

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

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

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

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