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Unit I –DEVELOPMENT CONCEPTS AND PRINCIPLES

Module 3 - COMPARATIVE ECONOMIC DEVELOPMENT THEORIES

Learning Objectives At the end of the module the students are expected to
1.​ Translate economic theories into practical application
2.​ Identify and compare Four (4) major economic theories of
development;
3.​ Realize the shortcomings of each theory and why it failed for some
reasons; and
4.​ Evaluate which feature of each theory is most applicable to our
country and why?

Discussion / Lecture

One would ask “what is the best formula to achieve economic development?”
Well, there is no exact formula for all societies. Each country has different goals and
policies distinct from the rest. Economists have conducted different studies to pursue
progress. This module intends to present the main economic theories on economic
development.

Economic theories try to explain economic phenomena, to interpret why and

how the economy behaves and what is the best solution - how to influence or to
solve these economic phenomena.

The application of development economics is complex and varied as the

cultural, social, and economic frameworks of every nation is different. Four
common theories of development economics include mercantilism, nationalism, the
linear stages of growth model, and structural-change theory

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Theories on Development Economics

1.​ Mercantilism

Mercantilism is thought to be one of the earliest forms of development

economics that created practices to promote the success of a nation. It was a
dominant economic theory practiced in Europe from the 16th to the 18th centuries.
The theory promoted augmenting state power by lowering exposure to rival national
powers.

Mercantilism is an economic theory that emphasizes self-sufficiency through a

favorable balance of trade. Mercantilist policies focus on the accumulation of wealth
and resources while maintaining a positive trade balance with other countries. By
maximizing exports and minimizing import.

Originating in 16th-century Europe, mercantilism began with the emergence of

the nation-state. The dominant economic theory was that the global supply of
wealth was finite, and it was in the nation’s best interest to accumulate as much as
possible. During that time, wealth was measured by a country’s quantity of silver and
gold. To accumulate more wealth, European countries, such as Britain and France,
would focus on maximizing their exports and minimizing imports, which resulted in a
favorable balance of trade.

For countries with a negative trade balance with a mercantilist country, the
difference would be paid back in silver or gold. To maintain a favourable trade
balance, the early mercantilist countries would enact imperialist policies by setting up
colonies in smaller nations.
The aim was to extract raw material to send back to the home country, where
it would be refined into manufactured goods. The goods would then be resold to the
colonies, allowing early mercantilist nations to accumulate wealth through a positive
trade balance.
Mercantilism monopolized markets with staple ports and banned gold and
silver exports. It believed the higher the supply of gold and silver, the wealthier it
would be. In general, it sought a trade surplus (exports greater than imports), did not

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allow the use of foreign ships for trade, and it optimized the use of domestic
resources.

As an economic theory, mercantilism relies on government intervention to

regulate international trade and protect domestic industries. Mercantilist policies
involve the protection of domestic corporations through regulations and the
promotion of trade surpluses. In the context of international trade, a favorable trade
balance is achieved through government regulations, such as tariffs and restrictions
on imports.

Modern mercantilist policies include tariffs on imports, subsidizing domestic

industries, devaluation of currencies, and restrictions on the migration of foreign
labor. Mercantilist policies can also explain the recent escalation of tariffs and trade
restrictions between the US and China.

The Modern Age economics which was headed by Adam Smith found faults
or limitations on Mercantilism:

1.​ The scholars (Adam Smith and David Hume) realized that the world’s
wealth is not finite, that it could be created by productive allocation of
labor resources.
2.​ Mercantilism failed to account the benefits of trade, comparative
advantage and economies of scale. Such realization of the failure of
mercantilism leads to the introduction of a market system, or the
application of demand and supply.
3.​ Under a mercantilist system, the restriction of imports meant
consumers obtained access to fewer goods at higher prices. Under a
system of free trade, consumers benefit from lower prices due to
increased competition and greater access to goods from across the
world.
2.​ Economic nationalism.

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Economic nationalism reflects policies that focus on domestic control of capital

formation, the economy, and labor, using tariffs or other barriers. It restricts the
movement of capital, goods, and labor.

Economic nationalists do not generally agree with the benefits of globalization

and unlimited free trade. They focus on a policy that is isolationist so that the
industries within a nation are able to grow without the threat of competition from
established companies in other countries.

The economy of the early United States is a prime example of economic

nationalism. As a new nation, it sought to develop itself without relying so much on
outside influences. It enacted measures, such as high tariffs, so its own industries
would grow unimpeded.

In recent times, economic nationalism is on the rise again.

Rise of Economic Nationalism and Its Implications

Although recently there has been a trend by some countries to try to go it

alone, such as the United Kingdom leaving the European Union, there are other
examples of economic nationalism-an ideology where governments assume that the
role of government is to intervene in the economy, intervene in the global economy
as the best way to protect a country’s economy and its people from the hardships
that they may have suffered by operating in a free market economy, under the
economic liberalism ideology. The “Make America Great” slogan and the decisions
by the U.S. to withdraw support from international organizations and multilateral
trade agreements the U.S .has championed since World War II is a good example of
economic nationalism.

Economic nationalism is also referred to as “Mercantilism” and in a wider sense

referred to in international relations theory as “Realism,” tends to be a zero-sum
game. It is an approach where countries tend to be in conflict and develop policies
that help them gain at the expense of another country or countries. In an increasingly
interdependent world, political and economic cooperation between countries is a
positive sum game because both sides win. The benefit may not be equal, but both

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sides benefit. On the other hand, economic nationalism undermines the cooperation
established at Bretton Woods after World War II where institutions such as the IMF,
WTO, and others established multilateral approaches to solve global problems to the
benefit of the majority.

Economic nationalism is similar to mercantilism but its emphasis is not only in

trade, it is more on protectionism. It is against economic liberalism.

Linear Stages of Growth Model

The theorists of the 1950s and early 1960s viewed the process of
development as a series of successive stages of economic growth through which all
the advanced nations of the world had passed. As all the modern industrial nations
of the world were once undeveloped peasant agrarian economies.

Accordingly, their historical experience in transforming their economies from

poor agri. subsistence societies to modern industrial giants had important lessons for
backward countries of Asia, Africa and Latin America. In this respect, we discuss the
Rostow's stages of economic growth.

W.W. Rostow's Stages of Economic Growth:

W.W. Rostow was an American economist who presented 'Stages of

Growth' model of development. According to Rostow, the process whereby all the
developed industrial nations of the world transformed themselves from
backwardness to prosperity can be described in terms of a series of stages. These
stages of economic growth are:

(1) Traditional society, (2) Pre-conditions to take-off, (3) Take-off, (4) Drive to
maturity, (5) High mass consumption.

(1) Traditional Society:

The traditional society is one whose production functions are based upon
pre-Newton science and technology. This unchanging technology places a ceiling on

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productivity. In this society a higher proportion of resources is devoted to agriculture.

Man is valued on a family basis, not on the basis of his capabilities. Long Fatalism
prevails in such society. The ranges of possibilities for grandchildren are the same as
they were for grandfather. The society is ruled by those who owned or controlled
land. These landlords used to have a long chain of servants and soldiers. This
society was available during the Medieval Ages in Europe.

https://study.com/academy/lesson/what-is-a-traditional-economy-definition-characteri
stics-advantages-examples.html

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https://study.com/academy/lesson/what-is-a-traditional-economy-definition-characteri
stics-advantages-examples.html

(2) Pre Conditions to Take Off:

It is a period of transition where the conditions for take-off are developed.

Historically, it was due to the invasion of advanced societies which destroyed the
culture of traditional society. This paved the way for the emergence of new ideas. In
this way, when the new ideas develop people start thinking about economic progress
which could provide a better life for the present and future generation. Once the
changes set in, they feed on themselves. It is the education which broadens the
mental outlook of the people, and it induces the people to accept new challenges. In
this way, the new entrepreneurs come forward to take risks.

Due to establishment of financial institutions savings and investment are

mobilized in SOC (Social Overhead Capital). But still the society is characterized by
low productivity. Still there is a need to build an effective national state against the
traditional land lordism. According to Rostow, the transition is a multi-dimensional
phenomenon. A country with 75% of its population in agri. will have to be shifted to
industry, trade and commerce. The view to have more children will have to be

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replaced by fewer children. The income will have to be shifted from the feudal to
those who will spend it on productive items. The man will be valued on the basis of
his competence. Moreover, during this transitional period, the following major
changes will occur:

(i) Crucial Role By Agriculture: For the sake of transition the self-sufficiency
in agri. is required. Such self-sufficiency is justified on the following grounds:

(a) To meet the increased needs of growing population.

(b) With agri. surplus foreign exchange can be earned to meet the import bill of
capital goods.

(c) The overall increase in the productivity due to agri. development will provide
stimulus to other sectors of the economy.

In short, agri. sector must supply expanded food, expanded markets and expanded
funds to the modern sector.

(ii) Growing Outlays on SOC: According to Rostow in this period the

resources are diverted to SOC. The SOC has three distinctive characteristics:

(a) The gestation period is long, (b) It is lumpy, (c) It is beneficial for the community.

Due to these reasons it is the duty of the state to provide SOC as during 1815
to 1840 the SOC was provided by state in US and UK.

(3) Take Off Stage:

The take-off stage is a break-through in the history of the society. The

take-off stage remains for more than two or three decades. In this stage three
conditions must be satisfied:

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(i) The rate of investment must rise from 5% to 10% of GNP.

(ii) The development of one or more substantial manufactured sectors with the high
growth rate.

(iii) The existence of social, political and institutional framework which could give
impulses to modern sector expansion.

(4) Drive to Maturity Stage:

According to Rostow 40 years after the take-off stage there is a long interval.
During this interval the economy experiences a regular growth and modern
technology is extended over to a bulk of resources. On the basis of entrepreneurial
and technological development everything is produced which is desired. There may
be a shift in emphasis from coal, iron and heavy engineering to machine tools,
chemicals and electrical equipment.

Germany, France, UK and US passed through this period during the end of
the 19th century. 10% to 20% of GNP is ploughed into investment and output grows
more than the increase in population. The goods which were earlier imported now
are produced at home. In short, the economy becomes a part of the international
economy.

(5) Age of High Mass Consumption Stage:

​ Societies achieved maturity in the 20th century; real incomes rose and the
people became aware of and anxious to have a command over the consumption of
the fruits of a mature economy. The leading sectors of the economy produce
consumer durables like TV, fridges and automobiles etc. Here, society pays more
attention to social welfare and social security than on economic growth. The US
passed through this stage in 1913-14, and then in the post war period of 1946-56.

The linear stages of the growth model were used to revitalize the European
economy after World War II.

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This model states that economic growth can only stem from industrialization.
The model also agrees that local institutions and social attitudes can restrict growth if
these factors influence people's savings rates and investments.

The linear stage of growth model portrays an appropriately designed addition

of capital partnered with public intervention. This injection of capital and restrictions
from the public sector leads to economic development and industrialization.

Structural-Change Theory

The structural-change theory focuses on changing the overall economic

structure of a nation, which aims to shift society from being a primarily agrarian one
to a primarily industrial one.

For example, Russia before the communist revolution was an agrarian

society. When the communists overthrew the royal family and took power, they
rapidly industrialized the nation, allowing it to eventually become a superpower.

The Three Structural Changes are as follows:

Structure 1 – Agriculture is the principal source of employment and income is

the agricultural country.

Structure 2 – Manufacturing industry becomes the major economic activity as

a country develops.

Structure 3- Service industries grow to be the dominant feature of the

economy as a country develops further.

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Activities

I.​ Identification.
____________________1.) It was a dominant economic theory practiced in Europe
from the 16th to the 18th centuries.
____________________2.) They focus on a policy that is isolationist so that the
industries within a nation are able to grow without the threat of competition from
established companies in other countries.
___________________3.) Relies on government intervention to regulate
international trade and protect domestic industries.
____________________4.) It is similar to mercantilism but its emphasis is not only
in trade, it is more on protectionism.
____________________5.) Monopolized markets with staple ports and banned gold
and silver .
____________________6.) Failure of it leads to the introduction of a market system,
or the application of demand and supply.
____________________7.) It was due to the invasion of advanced societies which
destroyed the culture of traditional society.
____________________8.) One whose production functions are based upon
pre-Newton science and technology.
____________________9.) The theorists of the 1950s and early 1960s viewed it as
a series of successive stages of economic growth through which all the advanced
nations of the world have passed.
____________________10.) The theory that aims to shift society from being a
primarily agrarian one to a primarily industrial one.

II.​ Video Presentation of files about economic theories and stages of economic
development. Reflection Paper becomes a requirement.
III.​ Long Quiz

SAQ
ASAQ

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References:

https://www.investopedia.com/terms/d/development-economics.asp
https://www.google.com/search?q=what+is+economic+theory&oq=what+is+ec
onomic+theor&aqs=chrome.0.0l2j0i20i263j0l2j69i57j0l2.11261j0j15&sourceid=c
hrome&ie=UTF-8
https://www.lewisu.edu/experts/wordpress/index.php/rise-of-economic-nationa
lism-and-its-implications/
https://economicsconcepts.com/linear_stages_theory_and_rostow's_stages_o
f_economic_growth.htm
https://www.google.com/search?q=cartoon+images+of+traditional+economy&
sxsrf=ALeKk02D4SWGeaqJJBXEWlVtjrkM62R_rQ:1612759229654&tbm=isch&
source=iu&ictx=1&fir=c7Oq1gM21FgPCM%252CTZUXMRsdpgbmvM%252C_&v
et=1&usg=AI4_-kRyQCBHp6L8TJ5kWTjONDUsl-6MqQ&sa=X&ved=2ahUKEwjM
m_envNnuAhUC62EKHVb_A70Q9QF6BAgKEAE#imgrc=nK_OwzoI3Y206M
https://revisesociology.com/2017/09/19/modernization-theory/
https://webcourses.ucf.edu/courses/1311758/pages/modernization-1950s-1960
s
https://www.investopedia.com/terms/i/industrialization.asp
https://www.investopedia.com/terms/s/savings-rate.asp

Answers

I. Identification
1. Mercantilism
2. Mercantilism
3. Mercantilism
4. Economic Nationalism
5. Mercantilism
6. Mercantilism
7. Pre Conditions to take off
8. Traditional Society
9. Linear Stages of Growth Model
10. Structural-change theory

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