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

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

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

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

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

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

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