LESSON 3

DEVELOPMENT CONCEPTS

TOPICS
1. Ideas and Theories of Economic Development
2. Determinants of Economic Development
3. Measurements of Economic Growth

LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. Discover ideas on economic doctrines and rule of nature including
the factors of economic development.
2. Identify determinant factors that affects the economic
development.
3. Identify measurements of economic growths, the real indicators
of economic growth.

TOPIC 1: IDEAS AND THEORIES OF ECONOMIC DEVELOPMENT

Economic ideas and theories are generally the products of existing conditions. There are ideas
and theories which considered as impossible dreams, but in the future, they may not be
impossible anymore. There are also some theories that are being ridiculed in the past but these
became useful and mankind are benefited from it.
ANCIENT ECONOMIC IDEAS
• Economic ideas were based on holy scriptures and codes of laws.
• Aristotle stressed the value of management of agriculture
• Plato explained the ideal state in his book "The Republic"

MEDIEVAL ECONOMIC THOUGHTS

• St. Thomas Aquinas preached distributive justice and
compensatory justice because of the feudalism.

THE ECONOMIC DOCTRINES OF MERCANTILISM

• Economic ideas were focused on the viral role of the state in
economic development.
• Manufacturing was given top priority.
• Thomas Mun who provided the ways of achieving favorable
foreign trade and contributed the idea of balance of payments.

PHYSIOCRACY - RULE OF NATURE

• Philosophers claimed that people are poor because they violated
the laws of nature, that those who obey and follow were
believed to promote their own good.
• The importance of agriculture are stressed out because they
claimed that all wealth came from the land.

LAISSEZ FAIRE THEORY

• Laissez faire is a French term, that connotes non-interference,
liberty or freedom. The government should not intervene in
economic affairs.
• Individuals should be free to choose their own economic
enterprise or occupation.

THE CLASSICAL THEORIES

• The real founder of the classical school of economics was Adam
Smith. He is the author of the famous book Wealth of Nations,
that explains how wealth of the nation is created and distributed.
• Acoording to Smith, the only source of wealth is production
through labor and resources.
• Smith claimed, that production under a free market economy
would be most efficient, Production is the real wealth.
THE CLASSICAL THEORIES
•Theory of Population. Thomas Malthus, a religious minister, saw the
growth of population and human miseries. He stated that population
explosion is the root cause of the problems of society.
•The Theory of Comparative Advantage. David Ricardo, one of the
famous classical economists. According to him, nations should export
the goods which they enjoy the greatest advantage, and should import
the goods which they have the greatest disadvantage.

THEORY OF KARL MARX

• Karl Marx developed his theory of scientific social evolution, that
in the beginning there was social equilibrium. However, when
new ideas and tools were introduced man became greedy for
power and wealth. This led to a class struggle between the
workers and the capitalists.
• Jean Sismondi stated that wealth should be measured in terms
of material things but in terms of human welfare.

THEORY ON PROGRESS AND POVERTY

• Henry George is an American author who wrote the book
Progress and Poverty. George argued that increase in the value
of land is not due to its fertility, but due to the growth of
population in the community and the progress of society.
• He proposed the single tax theory where all taxes should be
abolished, except tax on land.

KEYNESIAN THEORY OF EMPLOYMENT

• Employment determines the necessity of equating the aggregate
supply of goods with the aggregate demand for goods.
• There is more expenditure or consumption when people buy
more goods and services. This stimulated more investments that
results to an increase of employment and production.
• According to John Maynard Keynes, as long as returns of
investments are higher than interest rates, there is investment.

INNOVATION THEORY
• Joseph Schumpeter is the author of the innovation theory. He
emphasized the role of innovator in economic development.
• An innovation can be any change initiated by the entrepreneur
which leads to a faster and better development of an industry.
Such change may be in the form of an invention, method of
production or marketing strategy.
 TOPIC 2: DETERMINANTS OF ECONOMIC DEVELOPMENT

Economic development is not determined by economic factors alone, there are non-economic
factors that affects economic development. The diagram below shows some of the determinants
of economic development. The capital, technology and market are the example of economic
factors, while the remaining determinants are some of non-economic factors that has an
essential effect in the economy.

CAPITAL
TECHNOLOGY MARKET

SOCIAL FAMILY
STRUCTURE SYSTEM

Determinants of
POLITICAL Economic Development CULTURAL
CONDITION
VALUES

CORRUPTION
RELIGION

POPULATION
GEOGRAPHY

CAPITAL
The capital or physical goods, financial goods, and human capital are used to produce other
goods.
 ▪ Machines are used to accelerate production and distributions
▪ Infrastructures are the constructions of roads, better communications, irrigations
As a result, firms and organizations become efficient in their activities and each industry produce
better goods at lower cost.

TECHNOLOGY
Technology refers to better techniques or methods of production.
Importation of technology should be suitable to local conditions.
The economic, social, cultural, political, and managerial aspects
have to be taken into consideration in the application of a foreign
technology. Most of developing countries imitate technologies of
rich countries because this is cheaper than to develop their own.

Innovations are practical application of an invention to production

for the market. But not all innovations are for the markets like political or social innovations are
intended for improving conditions in the government or society.

Less developed countries must focus on labor-intensive technology because of the oversupply of
unemployment and underemployment. While capital-intensive technology for industrial
countries because labor is scarce and therefore expensive.

MARKET
Transportation, communication and electricity greatly help in the growth of markets.
Capital and technology are directly involved for the growth of the market

A favorable market to both seller and buyer will lower the cost of
production. This will result to more products at lower prices, that will
increase the purchasing power of the buyer and so demand for the
products also increases.

A market becomes bigger when more people buy more goods.

Businessmen are willing to produce more if there is a good demand
for their products. Farmers are encouraged to raise crops that have
favorable markets.

SOCIAL STRUCTURE
A society which has a more equitable distribution of wealth and income and economic freedoms
provides a more fertile environment for economic development. Economic freedom or economic
liberty is the ability of people of a society to take economic actions.
Example: In the United States there is a large number of third-party arbitration
tribunals which resolve disputes under private commercial law.
The opportunities for improvement in an open economic society are open to all members of
society in social, political, and cultural aspect.

In a closed economic society, the wealth and income belong to very few families and does not
encourage economic development
Example: Caste system in India where poorest people as untouchables like slaves
which are social outcast. The Apartheid policy in South Africa, blacks are
considered the lowest in the social ladder. White who claimed to be
educated and therefore civilized

THE FAMILY SYSTEM

Family members in Western societies like US are more
individualistic and self-reliant. Adult children are financially
independent form their parents.

Extended family system is common to Philippines where

children depend on their parents, have the courage to
marry even if they are jobless because they know their
parents will take care of them

Close family ties hamper labor mobility, and the choice of better economic opportunities. Family
obligations and responsibilities restrict the economic opportunities. Some postpone their
marriages in order to fulfill their obligations. In highly developed countries, the government take
care of the aged and the jobless. So, children of poor families are relieved of the burden of
supporting their close relatives. They have more opportunities to work for their own future. And
this augurs well for economic development.

CULTURAL VALUES
Some cultural values have negative effects on economic development. Like bahala na, manana
habit, ningas cogon and other similar values are not conducive to economic development.
According to Prof.

Myrdal, industrialization requires efficiency,

mobility, discipline and punctuality that many Asians do not have. Such misplaced cultural values
do not encourage at all the production of local goods. They do not help the development of local
industries.
POLITICAL CONDITIONS
Considerable impact on economic development:
▪ Political stability and fair economic policies stimulate economic development
▪ Major government role is to provide high standard of living for its people, can be attained
through higher levels of investments which generate employment and production, and
through equitable distribution of wealth and income.
▪ Plans, policies and programs are tools of economic development through regime of good and
honest public administration.

CORRUPTION IN PUBLIC ADMINISTRATION

Government corruption is the number one obstacle to economic development. The very precious
scarce resources like money are not properly utilized for development due to graft and
corruption.

Various government offices that are considered as the most corrupt agencies by the Presidential
Anti-Corruption Commission or PACC from Mar-Sep 2018 and 2019 are:
2018 2019
▪ Department of Public Works and Highways Department of Health
▪ Bureau of Internal Revenue National Housing Authority
▪ Customs DPWH
This is based on the number of complaints filed against its officials and personnel.

RELIGION
During biblical times, materialism and the pursuit of wealth were despised and discouraged. This
practice is not favorable to economic development
▪ Economic growth tends to be slow and primitive.
▪ There is no need to for them to work harder and to search for innovations.
▪ They are just contented with simple living.

Economic development also depends on the values of its people. Many hates economic progress
because of its bad effect (pollution, traffic congestion, destruction of natural beauty of the
environment).

According to Max Weber, Protestant countries are more progressive. The presence of dominant
values like thrift, industry and entrepreneurial spirit among protestant nations. Protestantism is
the cause of growth of the capitalist nations.

Most of the countries who became colonies of Spain are Catholics. Catholic practices which are
not consistent in principles of economic development slowing down its development.
Example: Town fiestas are celebrated in honor of their respective patron saints.
Celebrations which are religious in nature like marriage, baptisms that are
conducted in expensive style. People borrowed money to fed hundreds of guests
 just for the sake of celebration. They become poorer and incur more debts in
trying hard to comply with religious traditions.

POPULATION
Rapid population growth is caused by the following:
▪ Increased life expectancy
▪ More births than deaths
▪ High proportion of the population of child-bearing age

Growing population positively affects economic development through the following

circumstances:
▪ Increased labor force for increased production
▪ Enhance demand for good and expands size of market
▪ Encourages capital formation

As its population grows, a country must expand employment opportunities, healthcare,

education, and infrastructure just to maintain its existing standard of living. In order to improve
the lives of people, output must grow faster than the population, which can be daunting task for
many less developed countries.

Population is a great burden if the rate of population growth is higher than the rate of production
growth. Then the problem is not population but production, in the case of rich countries:
Hongkong and Singapore which are overpopulated but they are prosperous. While Brazil is a
country with abundant natural resources and with few people but they are poor.

https://www.census.gov/newsroom/stories/2019/world-population-day.html
Last revised: October 2, 2019
GEOGRAPHY
Geography refers to climate, soil, natural resources, topography and the structure of land.
Countries with abundant natural resources have greater potentials for economic development.

Examples:
Africa
▪ Giant continent but only 7% of its land is arable.50% is used for food production
▪ Very limited agricultural land with natural hazards
Japan
▪ 16% of land is arable
▪ 90% of raw materials imports for its industries
▪ Through combination of capital and technology
Israel
▪ Formerly was a barren land. In the beginning it had a pastoral land.
▪ Through modern agricultural technology, its arid land became fertile and verdant.
▪ It is now an exporter of farm crops, aside from industrial goods.
Japan and Israel have poor natural resources but achieve remarkable economic growth.

Transportation and communications are likewise affected by geographical structure.

Geographical disadvantages can be eliminated or reduced through the proper use of technology
and capital.

TOPIC 3: MEASUREMENTS OF ECONOMIC GROWTH

Economic development is not purely an economic process. There are more non-economic factors
affecting the economic development, some are explained on previous topic. No single
measurement can show the actual progress of a country. The various traditional measurements
of economic growth are not really adequate, and they are misleading. (GNP and PCI)

Some Limitations and Shortcomings of GNP and PCI

▪ national income accounting in less developed countries is understated (produced
and consumed. ex: backyard gardening, poultry, piggery, other small scale for family
consumption)
▪ inadequacy and inaccuracy of statistics (analysis on data encounter several
problems, ex: the real value of the products, the biases of the researchers, other
statistical errors) estimates
▪ dollar conversion. there are local currencies that are overvalued (GNP becomes
higher) or undervalued (lower) in relation to the US dollar.
The PCI of countries may be used to indicate the standard of living of the people.

Measurement of Economic Growth

Quantifying the values of all goods and services produced every year by the citizens of a country
is still the most possible and practical way of determining the rate of economic growth. Gross
National Product or GNP is the total market value of all final goods and services produced by
citizens of a country in one year while Per Capita Income or PCI shows the income among
members of society. The GNP and PCI serves as data for planning and policy formulation for both
government and business sectors.

Products of development are only meaningful and substantial if they belong to the citizens and
if the lives of the masses are positively affected. There is also what we call dual economies where
both extremes of wealth and poverty exist side by side.

Reduction or The Real Indicators of Economic Growth

Elimination of Poverty Development economists like Todaro and Seers
have suggested the elimination of GNP as a
yardstick. Instead, they proposed to measure
Eradication of Minimizing economic growth in terms of poverty,
Inequality Unemployment inequality, and unemployment.

The Real Products of Development

The real products of development are the people. A country is only as progressive as its people.
Its pervading institutions, attitudes and values reflect the quality of its people. It is most
important to focus development programs on the development of people or human resources.

The economic development of the nation must also include the improvement of economic
welfare of its people with sample indicators below:
GLOBAL MULTIDIMENSIONAL POVERTY INDEX
The Oxford Poverty and Human Development Initiative (OPHI) developed the global
Multidimensional Poverty Index (MPI) with the UN Development Programme (UNDP). The Global
MPI is an international measure of acute multidimensional poverty covering over 100 developing
countries.

The global MPI can be used to create a comprehensive picture of people living in poverty, and
permits comparisons both across countries and world regions, and within countries by ethnic
group, urban/rural area, subnational region, and age group, as well as other key household and
community characteristics. For each group and for countries as a whole, the composition of MPI
by each of the 10 indicators shows how people are poor.

DIMENSIONS DEPRIVED IF LIVING IN THE HOUSEHOLD

INDICATOR WEIGHT
OF POVERTY WHERE…
An adult under 70 years of age or a child is
Nutrition 1/6
undernourished.
Health
Any child under the age of 18 years has died in
Child mortality 1/6
the five years preceding the survey.
Years of No household member aged 10 years or older
1/6
schooling has completed six years of schooling.
Education Any school-aged child is not attending school up
School
to the age at which he/she would complete class 1/6
attendance
8.
The household cooks with dung, wood, charcoal
Cooking fuel 1/18
or coal.
The household’s sanitation facility is not
Sanitation improved (according to SDG guidelines) or it is 1/18
improved but shared with other households.
The household does not have access to
improved drinking water (according to SDG
Drinking water 1/18
guidelines) or safe drinking water is at least a 30-
Standard minute walk from home, round trip.
of living Electricity The household has no electricity. 1/18
Housing materials for at least one of roof, walls
and floor are inadequate: the floor is of natural
Housing 1/18
materials and/or the roof and/or walls are of
natural or rudimentary materials.
The household does not own more than one of
these assets: radio, TV, telephone, computer,
Assets 1/18
animal cart, bicycle, motorbike or refrigerator,
and does not own a car or truck.