PRELIMS
#01 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
Living our way of life
Each of us live our life each day in different ways, circumtances, and conditions. Some live with affluence, some with
poverty, some with just enough to make both ends meet. Differences are noticeable in our physical attributes,
ownership and properties, society status, consumption pattern, education, health, employment, and a lot more. All of
these things speak of our standard of living. Going around places, you will see people living in beautiful and
confortable homes, with so much expensive foods on the table, dressed more than enough to be called decent,
working in high rise building with all amenities that goes with it, eating in flashy and expensive restaurant, driving
expensive cars, children and youth going to expensive school and universities, then also you wil encounter people
living in makeshift and shanty dwellings located in a crowded places, with no foods on the table, dressed just to cover
their stomachs, dressed as to cover their physical feature, working in uncomfortable working areas, eating just
anywhere to fill their stomachs, childen and youth playing in the streets because no school to go to, children and
youth trying to earn a living, running after public utility vehicles to take a ride back home or to work, somehow you will
also encounter people in less expensive houses, with less expensive and enough food on the table to be shared by
the whole household members, eating in less expensive restaurants, driving less expensives car usually acquired for
family use, dressed enough to show decency, children going to less expensive private and public schools and
universities. The contrast of how we live our lives is revealing and these contrasts are not just within our community,
our town, our province, our country but, entire world, almost all parts of the world from south to north, from east to
west. What makes it so? Is it not living is a shared experience one way or another and as such will affect each others
well-being?
A closer and detailed examination will help us to recognize that a large part of world population are living in absolute
poverty, a situation of being unable to meet the minimum levels of income, food, clothing, health care, shelter, and
other essentials, others are living in a subsistence level, a situation in being able to meet mainly personal
consumption, basic necessities of life like food, clothing and shelter, and small sector of world population live a
reasonably good life. But then, what makes it so? Is it not living is a shared experience one way or another as such
will affect each others well-being?
With such conditions of the well-being of world population, we are all responsible to effect changes, to reverse what
looks like irreversible conditions of the present world population well-being, a widening gap between affluence and
poverty. We need development, a process of improving the quality of human lives and capabilities by raising people’s
levels of living, self-esteem, and freedom.
Economics and Studies on Development
Economics - emphasizes profit maximization and marginal based production and consumption, rational decisionmaking, market mechanism and efficiency, utility measurements, and determination of equilibrium. It has a selfinterest, individualistic, and materialistic orientation. It is about the use of scarce resources, efficiency in production,
and allocations to satisfy human needs and wants.
Political Economy is a merging of politics with economics, it includes social and institutional processes in the use of
scarce resources and its allocation. It is an economic activity with political context that includes role of power in
economic decision making.
Development Economics is wider in scope, beside the efficiency use of scarce resources and its allocation,
economics is merged, with social, political, and institutional processes or system to achieve fast, wider, and higher
improvements in the levels of living of the people. Its concern is the utilization or use of economics, social, and
political requirements necessary to effect structural and institutional transformation or changes to efficiently bring
economic progress to widest segments of the population as much as possible. It recognizes the role of government
and coordinated economic decision-making and activities as essential components to transform the economy. It
draws relevant concepts and theories from other branches of economics and combine them with models and wider
multidisciplinary approaches derived from historical and contemporary development studies.
#02 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
What is Development
Before Development, in economic sense, is a state of achieving sustained growth rates of per capita income that
enable a country to increase its output at a rate faster than the population rate of growth. The overall economic wellbeing of a population which is the amount of real goods and service available to the average people for investment
and consumption are measured through the levels and rate of growth of real per capita Gross National Income
(monetary growth of per capita GNI less inflation rate). Development strategies are geared towards a planned
alteration of the structure of production and employment which saw a decline in agriculture and the rise in
manufacturing and services and emphasis is toward output measured by Gross Domestic Product (total amount of
the final output of goods and services produced within the economy, within the territorial area of the country usually
measured annually).
The experiences in 1950’s, 60’s, 70’s of different developing countries led to view economic development in different
perspective. The growth targets achieved by developing countries with no changes in the level of living of the
population shows that there is something wrong on how economic development is defined. Economic development
then is redefined in terms of the reduction or elimination of poverty, inequality, and unemployment within the context
of a growing economy. The phenomenon of development or economic development is no longer a mere question of
economics or quantitative measures of incomes, employment, and inequality. Development must be conceived of as
a multidimensional process that involves major changes in social structures, attitudes, and national institutions
coupled with acceleration of economic growth, reduction of inequality, and eradication of poverty. Development in
essence must represent the whole gamut of change by which the whole social system moves away from
unsatisfactory condition of life toward the better one.
Economies and Social Systems
Economic system should be analyzed within the context of entire social system of a country or even in global context.
Social system means interdependent relationships of economic and non-economic factors and about the structure of
the organizations and institutions of a society that includes their values, attitudes, power arrangements or structure,
and traditions.
Values means principles, standards, or qualities that a society considers worthwhile.
Attitudes means the frame of mind or feelings taken by an individual, group, or society toward material gain, wealth
sharing, work, and others.
Institutions means rules of conduct or generally accepted ways or norms of doing things, it can be construed as
constraints to human interactions.
Role of Values in Development Economics
Since economics is a social science, we must recognize the ethical and normative premises about what is or what
ought to be? Objectives like poverty elimination, universal education, social and income equality, rule of law and due
process, self-reliance, democracy, property rights and others are derived from value judgement about what is and
what ought to be. The validity of economic analysis and positive economic prescriptions should be evaluated from
underlying value premises. The value premises agreed upon by those responsible for national decision-making in
which the economic development goals and corresponding public policies are derived from can be pursued based on
theoretical and quantitative analysis.
#03 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
Three Core Values of Development
The core values represent common goals sought by all individuals and societies and may be also use as a
conceptual basis and guidelines for understanding the meaning of development.
1. Sustenance: The ability to meet basic needs. Sustenance means the basic goods and services, food
clothing and shelter, that are necessary to sustain an average human being at the bare minimum level of
living.
2. Self-esteem: To be a person. Self-esteem means the feeling of worthiness that a society enjoys when
social, political, and economic system promote human values such as respect, dignity, integrity, and selfdetermination.
3. Freedom from Servitude: To be able to choose. Freedom means a situation in which society has at its
disposal variety of alternatives from which to satisfy its wants and individuals enjoy real choices according to
their preferences.
Three Objectives of Development
To increase the availability and widen the distribution of basic life-sustaining goods such food, clothing, shelter,
health and protection.
To raise levels of living that includes higher income, provision of more jobs, better education, and greater attention to
cultural and human values which enhance material wellbeing and generate greater individual and national selfesteem.
To expand the range of economic and social choices available to individuals and nations by freeing them from
servitude and dependence, not only in relation to other people and nation-states, but also to the forces of ignorance
and human misery.
Amartya Sen’s capability approach
Sen argues that poverty cannot be measure or utility as conventionally understood; what matters for well-being is not
just the characteristic of goods and services but what use consumer can and does make of commodities. As in Sen’s
functioning, which is what a person does with the commodities of given characteristics that they come to possess or
control. Sen noted that functioning depends on 1. Social conventions in force in the society in which the person live,
2. The position of the person in the family and in the society, 3. The presence or absence of festivities such as
marriages, seasonal festivities, 4. Physical distance from the homes of friends and relatives. Sen defines Capabilities
as “the freedom that a person has in terms of the choice of functioning, given his personal features and his command
over commodities.” Sen’s perspective helps explain why there are now emphasis on health and education, social
inclusion and empowerment in development issues. For Sen, human “well-being” means being well as in basic sense
of being healthy, well nourished… and others.
Development and Happiness: Happiness is part of human well-being, and greater happiness may in itself expanse an
individual’s capability to function. Empirical findings shows that average level of happiness or satisfaction increases
with country’s average income.
#04 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
Comparative Economic Development – In Global Context
It is more appropriate to discuss economic development with comparison between different economies in
such a way that we will find whether the policies made have solve the lingering problems of development.
Both developed and developing countries have made substantial progress when it comes to economic
development. However, output per worker, life expectancy, literacy, income, and other indicators
of economic development differ much between developed and developing countries that inequality seems a
feature striking enough to acknowledge the presence of contrast in our global economy. We will begin
understanding economic development with the developing countries.
Developing World – classifications of countries
The Organization for Economic Cooperation and Development (OECD) and the United Nations classified
countries according to their economic status. The World Bank ( International Bank for Reconstruction and
development) has provided a classification that ranked economies with population not less than 30,000
according to their levels of Gross National Income (GNI) per capita: On year 2011 level, A. Low-income
countries (LICs) GNI per capita of $1,025 or less; B. Lower-middle-income countries (LMCs) GNI per capita
of $1,026 to $4,035; C. upper-middle-income countries (UMCs) GNI per capita $4,036 to $12,475; D. highincome OECD countries GNI per capita $12,475 or more.
High income countries with one or two highly developed export but with significant parts of population
remain uneducated, in poor health and social development are viewed as low for country’s income as such
classified as developing. Some high-income countries having lingering economic problems are also
classified as developing countries. Also, a special distinction is made among upper-middle-income or newly
high-income economies as newly industrializing countries (NICs) which are countries at a relatively
advance level of economic development with a substantial and dynamic industrial sector and with close
links to the international trade, finance, and investment system. Another classification is made according to
the degree of indebtedness like the World Bank’s classification of severely indebted, moderately indebted,
and less indebted. The United Nations Development Program (UNDP) classifies countries based on their
level of human development that includes educational attainment and health as low, medium, high, and
very high. Another known classification is the United Nations designation, as of 2012, of the least
developed countries for inclusion a country should meet three criteria: low income, low human capital, and
high economic vulnerability. The classification of countries as developed and developing is a useful guide
for analytical purposes.
Basic Indicators of Economic Development
1. Real income per capita adjusted for purchasing power- The Gross National Income (GNI) per
capita is the common measure of the overall level of economic activity and being used as a
summary index of the relative economic well-being of people in different countries. Gross National
Income (GNI) per capita is the total domestic and foreign value added (portion of a product’s final
value that is added at each stage of production) claimed by a country’s residents without making a
deductions for depreciation (the wearing out of equipment and other forms of capital that is
written off to the value of capital stock) of the domestic capital stock ( total amount of physical
goods existing at a particular time that have been produced for use in the production of other
goods and services). The GNI comprises Gross Domestic Product, which is the measure of the
total value for final use of output produced by an economy both by residents and non-residents,
plus the difference between the income residents receive from abroad for factor services (labor and
capital) less payments made to nonresidents who contribute to the domestic economy.
#05 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
The GNI per capita comparisons between developed and less developed countries use the official
foreign-exchange rates to convert national currency figures into U.S. dollars which does not reflect
the relative domestic purchasing power of different currencies. The use of Purchasing Power Parity
instead is helpful to make a relative comparison of GNIs and GDPs as conversion factors.
Purchasing Power Parity (PPP) means as the number of units of a foreign country’s currency
required to purchase identical quantity of goods and services in the local developing country
market as $1 would buy in the United States as such two currencies are at purchasing power parity
when a unit of domestic currency can buy the same basket of goods at home or abroad. In using
PPP, nontraded services is lower in developing countries since wages are much lower, and PPP
measures of GNI per capita estimates is higher than using foreign-exchange rate as a conversion
factor. Adjustments for differing relative prices across countries are made so as to measure living
standards.
R= ePf / P
R- real exchange rate
e – dollar price of foreign exchange
P and Pf – price levels (domestic and foreign)
2. Health as measured by life expectancy, undernourishment, and child mortality- Life expectancy
is the average number of years newborn children live subject to mortality risks prevailing for their
group at the time of their birth. Undernourishment means consuming little food to maintain normal
levels of activity. Birth rate is also an indicator since high fertility can be both a cause and a
consequence of underdevelopment.
3. Educational Attainment as measured by literacy and schooling – Literacy means a fraction of adult
males and females reported or estimated to have basic abilities to read and write.
Diversity and Commonality of Developing Countries
Though developing countries have in common in their historical and economic attributes which led them to
experience development problems that is being studied within same analytical framework in development
economics it is proper to take note of the diversity even within those areas of commonality because
different development problems require different policies and strategies for development.
Ten (10) areas of commonality with diversity in the developing countries
1. Lower levels of Living and Productivity- The wide disparity in income shows large gaps in output
per worker between developed and developing countries. Low level of income leads to low level of
investment in education and health, in plant and equipment, and infrastructure that lead to low
productivity and economic stagnation. Income growth rates varied in different developing countries
with rapid growth in East Asia, slow or even no growth in sub-Saharan Africa, and intermediate
growth rates levels in other regions.
#06 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
The common misperception that low-income result from a country’s too small to be self-sufficient or
too large to overcome economic inertia does not hold semblance of reality since there is no
correlation between country size in area or population and economic development. The 12 most
populous countries belong either in low-income, lower-middle-income, upper-middle-income, and
high-income countries. While the least populous countries primarily belong to lower-middle-income
and upper-middle income countries.
2. Lower levels of Human Capital – Compared with developed countries, much of the developing
countries have lagged in its average levels of nutrition, health (measured by undernourishment and
life expectancy), and education (measured by literacy). There are complementarities between
progress in health and education example in World Bank, World Development Indicators Data of
1990-2012 Under-5 Mortality Rates, under-5 mortality rates improve as mother’s education levels
rise.
3. Higher levels of Inequality and Absolute Poverty- In global scale, the poorest 20% of people
receive about 1.5 % of world income which corresponds to about 1.2 billion people living in
extreme poverty on less than $1.25 per day at purchasing power parity. The large gap in per capita
incomes between rich and poor countries shows enormous global economic disparities. However,
it is also necessary to research on the gap between rich and poor within each developing country.
Inequality varies among developing countries with much lower inequality in Asia. Somehow, we
must research on at how income is distributed and who benefits from economic development and
why.
4. Higher Population Growth Rate- Global population increases from just under 1 billion in 1800 to
1.65 in 1900 to over 6 billion in 2000 to 7 billion in 2012. Rapid population growth started in Europe
and other developed countries but in recent account, most population growth has been confined in
the developing world. In comparison with developed countries which have birth rates near or even
below replacement levels (zero population growth), the low-income developing countries have a
very high birth rate. More than 5/6 of all the people of the world live in developing countries and
around 97% of net population growth (births less deaths) in 2012 happened in developing
countries. There is a wide range of Crude Birth Rates (the number of children born alive each
year per 1,000 population).
5. Greater Social Fractionalization- Low-income countries usually have social divisions such as ethnic
and linguistic groupings known as Fractionalization. The bigger the ethnic, linguistic, and religious
diversity in a certain country the more chances that internal strife and political instability will occur.
Conflict affects the realization of an otherwise been positive development progress. However,
ethnic or religious diversity do not necessarily lead to inequality, turmoil, or instability, and the
impact of which could not be made. There are instances of successful economic and social
integration of minority ethnic population like in Malaysia and Mauritius. In the United States,
diversity is cited as source of innovation and creativity. In a sense, the composition of social
divisions, ethnic, or religious, or linguistics of a developing country. Either or not it will lead to
conflict or cooperation are important determinants of the success or failure of development
initiatives.
6. Larger Rural Population but Rapid Rural-to-Urban Migration- Economic Development is also
characterize by a shift from agriculture to manufacturing to services. In developing countries, there
is a higher share of population living in rural areas and correspondingly less in urban areas. Rural
areas in comparison to urban areas are poorer and with none or few markets, limited information,
and social stratification. An influx of hundreds of millions of people from rural to urban areas fueled
rapid urbanization coupled with its own urban problems.
#07 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
7. Lower levels of Industrialization and Manufactured Exports- High productivity and incomes
associated with industrialization lead to modernization and economic development as such
industrialization become high national priority of developing countries. The share of employment in
agriculture in developing countries is higher than the developed countries however there is low
productivity in agriculture in developing countries compared to other sectors in their own
economies. Developing countries, along with lower industrialization, have a high dependence on
primary exports such as agriculture and mineral exports. In some degree, most developing
countries ventured into manufacturing of goods for exports though with less advanced skills and
technology.
8. Adverse Geography- Primarily, developing countries are in tropical and subtropical region as such
susceptible more to tropical pests and parasites, endemic diseases, water resource constraints,
and extreme heat. Before colonization, some tropical and sub-tropical regions had a higher income
per capita than Europe. The presence of common and adverse geographic features of developing
countries compared to temperate zones countries suggest that it is advantageous to study tropical
and sub-tropical developing countries.
9. Underdeveloped Markets-The legal and institutional foundations for markets in developing
countries are extremely weak as such imperfect markets and incomplete information are prevalent
that makes domestic and financial markets work inefficiently. Some of the aspects of the market
developing countries lack: 1. A legal systems that enforces contracts and validates property rights,
2. S stable and trustworthy currency, 3. An infrastructure of roads and facilities that facilitates
economic activity and markets, 4. A well-developed and efficiently regulated banking and insurance
systems, 5. Substantial market information for consumers and producers regarding prices,
quantities, and qualities of products and resources along with creditworthiness of potential
borrowers, 6. Social norms that facilitates successful long-term business relationships.
10. Lingering Colonial Impacts and Unequal International Relations- Most developing countries are
once colonies of Europe or other foreign powers. Colonial era institutions are often favored or are
focused on extraction of wealth instead of creation of wealth. Colonial history matters not only
because of stolen resources but because colonial powers determine whether the legal and other
institutions would encourage either investment by the broad population or facilitate exploitation of
human and other resources for the benefit of the colonizing elite and create or reinforce inequality.
Development-facilitating or development-inhibiting institutions tend to have a long-life span.
Relatedly, developing countries are less well organized and influential in international relations,
with sometimes adverse effects for development.
#08 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
The difference between the developed countries in their early stages and of the low-income countries today
The status of developing ocuntries today is significantly different from that of the present developed
countries when they made a start on there era of modern economic growth.
Eight significant differences in their initial conditions( developed and developing countries):
a. Physical and human resource endowments
- the current developing countries ae less endowed with natural resources, though some
developing countries are lucky to have abundant supplies of petroleum, minerals, and raw
materials needed to meet world demand, however most of the developing countries where
large population resides have a poorly endowed natural resources specifically in Asia. Some
developing countries specifically in africa enjoys a vast range of natural resources but high
investment capital is necessary to exploit them which until now inhibited by a wide domestic
conflict and attitudes of western nations toward them.
- In case of human resources, Paul Romer said that developng countries of today “are poor
because their citizens do not have access to the ideas that are used in industrial nations to
generate economic value”. According to Paul Romer, the technology between rich and poor
nations can be classified into two components:1. Physical Object Gap which includes
factories, roads,machineries and others, 2. Idea Gap which includes knowledge about
transaction processess, worker motivation, inventory control, market distribution, and others..
The Idea Gap which Thomas Homer Dixon referred to as Ingenuity Gap which is about
application of innovative ideas to solve practical social and tchnical problems lies at the core of
development divide between rich and poor nations. It is necessary that a country has an ability
to exploit its own natural resources with the use of its own people’s managerial and technical
skills and ingenutity to achieve sustain economic growth.
b. Relative levels of per capita income and GDP
- In comparison with what developed country had in 19th century, the people living in most of
today’s developing countries have low level of per capita income. A large part of population of
developing countries today are living at a minimum levels of subsistence, though developed
countries also experienced such living conditions but its not as wide and as large of a fraction
of the population of today.
- The developed countries in their modern growth era are economically advance than the rest of
the world as such they could take advantage of their relatively strong financial position, while
developing countries of today started their growth process at the low end of international per
capita invcome level.
c. Climatic differences
- Most developing countries are located in the tropical and subtropical climatic zones while
economically advanced countries are located in temperate zones. The extereme heat and
humidity pose significant problems such as soil quality deterioration, depreciation of many
natural goods, low productivity of selected crops, weak regenerative growth of forest, and poor
health of animals. It also causes workers’ discomfort, weak health, and weaken desire in
strenous physical work that contribute to their low productivity and efficiency. A necessary
development assistance should be considered to alleviate such conditions.
#09 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
d. Population size, distribution, and growth
- European and North Americn countries have natural population growth rate of not more than
2% annually before and during their early growth years. Western nations experienced a slow
rise in population growth. The increase of their population growth rates resulted from
decreasing death rates and a slow rise in birth rates.
- Populations of many developing countries increases in excess of 2.5 % in recent decades and
increasing still at a fast rate. Developing countries have a considerable high ratios of personto-land than the European nations in their early growth years since population growth is
concentrated in few areas. In absolute size comparison, no nation that set out on a long-term
economic growth reached the present-day population size of India or egypt or Pakistan or
Brazil nor approached the natural rates of increase in comparison with that of Bangladesh or
Philipppines or Kenya or Guatemala. Many observers doubt whether high long-term growth
rate and industrial revolution of contemporary developed countries could have been attained
had their population been expanding rapidly.
e. Role of International Migration
-
f.
The 19th and early 20th centuries are characterized by a widespread and large-scale
international migration of rural populations. Periods of famine, pressure on land, and limited
economic oppportunites in urban industry in coutries like Italy, Germany, Ireland had pushed
unskilled rural workers to migrate to labor scarce countries like North America and Australia.
Up to to World War II, international emigration was both distant and permanent. Since World
War II, international migration exist between European countries which is both short distance
and temporary in nature. The driving force to such migration is the transfer of surplus labor to
labor shortage nations which is both permanent and nonpermanent in nature. The labor
migration gave rise to dual benefits for the country the unskilled workers came from: their
home governments were relieved of the cost of unemployment and at the same time earned a
much needed foreign exchange from the remittances sent home by the workers. The restrictive
nature of immigration laws nowadays became a debated issue globally. Yet despite the
restrictions migrations continues today either of illegal migrants or documented migrants.
- The present day international migrations is characterized by a migration of highly educated and
skilled professionals and technicians from developing countries to developed countries, a
brain drain. Majority of such migrants move on a permanent basis which is a loss of valuable
resources necessary for futrue economic progress of developing countries. Migration, if
permitted, brings poverty-reducing benefits both to migrants and their families and to those
relatives, left behind in the origin country, through remittances. The brain drain can be brain
gain if migration encourages more people to acquire skills and knowhow.
The Growth Stimulus of International Trade
- European and North American nations, in 19th century, with stable political structure and
flexible institutions, were able to participate in the dynamic growth of international trade
exchanges on the basis of relatively free trade (trade in which goods can be exported without
any barriers in the form of tarfiffs, quotas, and other restrictions), free capital movements, and
the unfettered international migration of unskilled labor surplus.
- Developing countries, in 20th century, encounter difficulties to achieve rapid growth rate on the
basis of world trade. The exports expanded but not as fast as the exports of developed
countries, and their terms of trade(the ratio of the price receive from exports and the price to
pay for imports) declined over decades as such export volume should grow faster just to earn
foreign currency for imports.
#10 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
-
Add up to it is that the world commodity prices are subject to large and potentially destabilizing
price fluatuations. Moreover, when developing countries achieve low cost production of
competitive product with the developed countries, the developing countries in turn resort to
various forms of trade restrictions such as tariff and nontariff barriers. In recent years, some
developing countries benefited from expanded manufactures exports to developed countries,
particularly china and other east and southeast asian countries.
g. Basic Scientific and technological research and development capabilities
- The process of scientific and technological advance in all its stages, from product development
to research, is concentrated in the rich nations. Also, research funds flow toward solving
technological and economic problems of concern rich nations for their own economic priorities
and resource endowments.
- When it comes to significant area of technological and scientific research, developing nations
are extremely in disadvantageous position in comparison to developed countries.
h. Efficacy
- The developed countries enjoy relatively stronger political stability and flexible institutions.
Even in their early industrialization stage, they had economic rules in place that provided
relatively broad access to opportunity for those who have entrepreneurial drive. While
developing countries inherited high inequality and poor institutions that facilitate extraction
rather than provide incentives for production established by colonial powers. Today such
extraction can be carried out by local elites and foreign interest groups.
Living standards divergence and convergence between developed and developing nations
Today, the ratio of real living standards between richest countries and poorest countries approaches 100 to
one. As noted by Lant Pritchett, developed countries have enjoyed far higher rates of economic growth
averaged over two centuries than today’s developing countries which is a process known as divergence (a
tendency for per capita income to grow faster in high-income countries than in lower-income countries so
that the income gap widens across countries overtime. In comparing development performance among
developing countries and between developed and developing countries, we can also consider that with
strenuous economic development effort, living standards between developed and developing nations will
exhibit convergence (the tendency of per capita income to grow faster in lower-income countries than in
higher-income countries so that lower -income are catching up overtime).
Two possible reasons of “catching up” (convergence)
1. Technology transfer- moving immediately to high-productivity techniques of production is possible
or doable. It decreases the time needed to doble the output of worker.
2. Factor accumulation- in developed countries, the need for more capital on output decline because
of their existing high levels of physical and human capital. Instead, a high investment rate growth is
expected in developing countries that will help increase capital accumulation until equal levels of
capital and output per worker is achieved.
Development should be perceived as a multidimensional process involving the reorganization and
reorientation of entire economic and social system that means beside improvements in incomes and output
it must include changes in institutional, social, administrative structures and also popular attitudes,
customs, and beliefs.
It is helpful to explore historical and intellectual evolution about how and why development does and does
not take place.
#11 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
Classical Theories of Economic Development
The four major and often competing theories of economic development:
a. The linear-stages-of-growth model
b. Theories and patterns of structural change
c. The International-dependence revolution
d. Neo-classical, free market counter-revolution
In 1950’s and 1960’s, theorists viewed the development process as a series of successive stages of
economic growth through which all countries must pass. It was an economic theory of development which
proposed that the right quantity and mixture of savings, investment and foreign aid are necessary
ingredients to proceed along the path of economic growth that had been historically applied by more
developed countries.
1. The linear-stages-of-growth model – this theory of economic development says that a country
passes through sequential stages in achieving development.
American economic historian Walt W. Rostow advocated the linear-stages-of-growth and
according to W. W. Rostow, the transition from underdevelopment to development can be
described in terms of a series of steps or stages through which all countries must proceed.
W. W. Rostow stages of economic growth:
a. The traditional society
b. The pre-conditions for takeoff into self-sustaining growth
c. The take-off
d. The drive to maturity
e. the age of high mass consumption
One of the development staregies to effect take-off is the use of domestic and foreign savings to generate
sufficient investment to accelerate economic growth and the economic mechanism by which more
investment leads to more growth is described in the Harrod-Domar growth model which is the functional
economic relationship in which the growth rate of gross domestic product (g) depends directly on the
national net savings rate or national net saving ratio (s) ( savings expressed as a proportion of disposable
income over some period of time) and inversely on the national capital-output ratio (c) (a ratio that shows
the units of capital required to produce a unit of output over a given period of time).
Change in Y / Y = s / c
Example: capital output ratio is 3, aggregate net saving ratio is 6 percent, then GDP growth rate is 2
percent per year, (.06/3=.02). If net saving ratio increases to 15 percent then (.15/3= 5) percent GDP
growth rate increases to 5 percent
An increase in the proportion of national income saved will increase GDP.
Criticism of the theory of linear stages of growth
The theory of linear stages of growth’s development mechanism does not work always because more
savings and investments are not sufficient condition ( a condition that when present causes or guarantees
that an event will or can occur) for accelerated rates of economic growth though it is necessary condition (a
condition that must be present, although it need not be in itself sufficient, for an event to occur).
#12 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
In 1970s, the linear-stages of growth model was replaced by two competing schools of thought:
a. Theories and Patterns of Structural Change- It used modern economic theory and statistical
analysis to portray internal process of structural change that a developing country must undergo if
it is to succeed in generating and sustaining economic growth. 2.a. Theory of Structural Change
(The hypothesis that underdevelopment is due to underutilization of resources arising from
structural and institutional factors that have their origins in both domestic and international dualism.
Development thus requireas more than just accelerated capital formation, 2.b. Theory of Patternof-Development Analysis of Structural Change (an attempt to identify characteristics features of the
internal processes of structural transformation that a typical developing economy undergoes as it
generates and sustains modern economic growth and development).
b. The International Dependence Revolution -It viewed underdevelopment in terms of international
and domestic power relationships, institutional and structural economic rigidities, and the resulting
proliferation of dual economies and dual societies both within anfd among the nations of the world.
2. Theories and Patterns of Structural Change
2.a. Theory of Structural Change is the structural transformation (The process of transforming an economy
in such a way that the contribution to national income of manufacturing sector will surpasses the
agricultural sector contribution) of primarily subsistence economy which was formulated by Nobel Laureate
W. Arthur Lewis known as Lewis two-sector model (A theory of development in which surplus labor from
the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs
the surplus labor, promotes industrialization, and stimulates sustained development).
In Lewis two-sector model, underdeveloped consist of two sectors, 1) a traditional, overpopulated rural
subsistence sector chracterized by zero marginal labor (surplus labor) productivity 2) and a high-
productivity modern, urban industrial sector into which surplus labor from susistence labor is gradually
transferred. A surplus labor means the excess of labor over and above the quantity demanded at the going
free-market wage, however in Lewis two-sector model, surplus labor means the portion of the rural labor
force whose marginally productivity is zero. The focus of the two-sector model is both on the surplus labor
transfer from subsistence sector and the growth of output and employment in the modern sector.
Criticisms of the Lewis two-sector Model
a. It assumes that the rate of labor transfer and employment creation in the modern sector is
proportional to the rate of the modern sector capital accumulation. The faster the rate of capital
accumulation, the higher the growth rate of modern sector and the faster the rate of new job
creation. However, what if capital accumulated is used in other undertaking beside using it to
create new job.
b. The notion that surplus labor exist in rural areas while there is full employment in the urban areas.
Suppose there is no or little surplus labor from rural area which is what research indicated.
c. The notion of competitive modern sector labor market that guarantees the continued existence of
constant real urban wages up to the point where supply of rural surplus labor is
exhausted.However, the tendecy of urban wages is to rise substantially.
d. Its assumption of diminishing return in the modern industrial sector. Yet there is a much evidence
of increasing returns prevailing in this sector.
#13 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
2.b. Pattern-of-Development Analysis of Structural Change is an attempt to identify characteristics features
of the internal processes of structural transformation that a typical developing economy undergoes as it
generates and sustains modern economic growth and development.
The best known model on the pattern of development analysis of structural change is the one based on the
empirical of work Hollis C. Chenery and his colleagues, who examined the patterns of development for a
number of developing countries. Their empirical studies both cross sectional and time-series of countries at
different levels of per capita income led to identification of different characteristic features of the
development process those are the
1. Shifts from agricultural to industrial production
2. Steady accumulation of physical and human capital
3. Change in consumer demands from emphasis on food and basic necessities to desires for diverse
manufactured goods and services
4. Growth of cities and urban industries as people migrates from rural areas
5. Decline in family size and overall population growth
Conclusions and implications:
The model recognises the differences that arise among countries in the pace and pattern of development
depending on their circumtances. The limitation on the model appoach is on the risk to draw about
causality. The empirical studies on this model led to the conclusion that the pace and pattern of
developement can vary according to the domestic and international factors, which mostly beyond the
control of individual developing countries. It is argue that there is really certain patterns occuring in almost
all countries during the development process.
3.
International-Dependence Revolution
International-Dependence Revolution views developing countries as beset by institutional, political, and
economic rigidities, both domestic and international, and caught up in a dependence and dominance
relationship with rich countries. This has three streams of thought:
3.a. The neocolonial dependence model- is a model whose main proposition is that
underdevelopment exists in developing countries because of continuing exploitative economic,
political, and cultural policies of former colonial rulers toward less developed countries.
The coexistence of rich and poor countries in an international system dominated by an
unequal power relationship between the center (developed countries) and the periphery (
developing countries) makes the attempts of poor nations to be self-reliant and independent
difficult and almost impossible.
3.b. False-paradigm model – the proposition that developing countries have failed to develop
because their development strategies have been based on an incorrect model of development
(input from western economists) , one that, overstresses capital accumulation of market
liberalization without giving due consideration to needed social and institutional change.
This model attributes underdevelopment to faulty and inapproriate advice given by wellmeaning but often uninformed, biased, and ethnocentric international experts (advisers) from
developed-country assistance agencies and multinational donor organizations.
3.c. Dualism – The coexistence of two situations or phenomena (one desirable and other not) that
are mutually exclusive to different groups of society. Example: poverty and affluence, growth and
stagnation, modern and traditional economic sectors, high literacy and wide low literacy.
#14 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
Four key arguments of the concept of Dualism
a. Different set of conditions can coexist in a given space (superior and inferior)
b. The coexistence is chronic and not merely transitional.
c. Not only do the degrees of superiority or inferiority fail to show any signs of
diminishing, but they even have an inherent tendency to increase. (ex. Workers
productivity gap between rich and poor nations labor force)
d. The interrelationships between the superior and inferior elements are such that the
existencce of the superior elements does litlle to or nothing to pull up the inferior
element. It may actually serve to push it down (developing its underdevelopment)
Conclusions and implications:
The dependence, false-paradigm, and dualism theorist place emphasis on international power imbalances
and on needed fundamental, economic, political, and institutional reform both domestic and international or
globalwide. The international dependence theories weaknesses lies on
a. They give no insight on how countries initiate and sustain development
b. The actual economic experience of developing countries that have pursued revolutionary
campaigns of industrial nationalization and state run production has been mostly negative.
If we take the international dependece theory at face value, the conclusion is that developing countries
should entangle less with developed countries, instead pursue a policy of Autarky (a closed economy that
attenpt to be competely self-reliant), or inwardly directed development, or trade only with other developing
countries.
In 1980s, the political ascedancy of conservative governments in developed countries (U.S.A., Canada,
Britain, Germany) came with Neo-classical Counterrevolution in Economic Theory and Policy.
4. Neo-Classification Counterrevolution, Free Market Counterrevolution
The Neo-classical Counterrevolution is the resurgence of neocalssical free-market orientation toward
development problems and policies, counter to the interventionist dependence revolution of the immediate
previous decade.
The central argument of the Neo-classical counterrevolution theorists is that underdevelopment results from
poor resource allocation due to incorrect pricing policies and too much state intervention of active
developing-nation governments. They argue that by permitting a) competitive free market (the system
whereby prices of commodities or services freely rise or fall when the buyer’s demand for them rises or falls
or the seller’s supply of them decreases or increases) flourish, b) privatization of state-owned corporations,
c) promoting free trade and export expansion, d) attracting investors from developed countries, and e)
eliminitate too may government regulations and price distortions in factor, product, and financial markets,
both economic efficiency and economic growth will be stimulated.
Neo-classical counterrevolution consists of three approaches
1. Free-market approach – theoretical analysis of the properties of an economic system operating
with free markets, often under the assumption that an unregulated market performs better than
one with governemnt regulation that means markets alone are efficient.
#15 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson & William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by Tereso Tulao Jr.,Gerardo Largosa,Christina Castill
D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003
2. Public choice or new political economy approach – the theory that self-interest guides all
individual behavior and that government are inefficient and corrupt because people use
government to pursue their own agendas that means minimal government is the best
government.
3. Market-friendly approach – the notion promulgated by the World bank that successful
development policy requires governments to create an environment in which markets can
operate efficiently and to intervene only selectively in the economy in areas where the market
is inefficient. Market-friendly approach accepts the notion that market failures (a market’s
inability to deliver its theoretical benefits due to the existencce of market imperfections such as
monopoly power, lack of factor mobility, lack of knowledge, and significant externalities) are
more widespread in developing countries in areas such as investment coordination and
environmental outcomes.
Conclusions and Implications:
Dependence theorists saw underdevelopment as an externally induced phenomenon while neo-classical
saw the problems of underdevelopment as an internally induced phenomenon of developing countries
which is caused by too much government intervention and bad economic policies. There is little doubt that
market price allocation usually better than state intervention however, many developing countries are so
different in structure and organization from their Western counterparts that the behavioral assumptions and
policy precepts of traditional neoclassical theory are sometimes questionable and often incorrect.
Competitive free markets generally do not exist nor necessarily desirable for a long-term economic growth
and social perspective given the institutional, cultural, and historical context of many developing countries.
Nevertheless, the reality of institutional and political structure of many developing countries makes the
attainment of appropriate economic policies based on either market or public intervention a difficult
endeavor. It is then best to assess each individual country’s situation on a case-to-case basis which means
developing nations should adopt local solutions in response to domestic constraints.