FINALS REVIEWER IN ECO DEV
4. AGRARIAN SYSTEM IN LATIN AMERICA
Chapter 9: Agricultural Transformation and Rural
Development
1. FACTS ON AGRICULTURE
 Agriculture employs at least 60% of the labor
force in Asia and Africa, but it only accounts for
no more than 30% of GDP.
 Between 1950 and 1970, per capita food and
agricultural production grew less than 1% per
year in the developing world.
 The green revolution has helped increase
agricultural productivity in developing countries.
 China has shown the largest growth of per capita
food production in the last two decades.
 Africa has shown a significant decline in
agricultural productivity in the last two decades
 Major reason for poor agricultural performance
in developing countries - neglect of agricultural
coupled with a bias toward urban industrial
economy.
 Solution integrated rural development
2. RURAL DEVELOPMENT
 More than half of the world population lives in
rural areas
 Living conditions: Precarious & subsistent
 Wide spread poverty, growing inequality,
unemployment & rapid population growth
 Any development strategy to be meaningful
must focus on rural development
 Any such policy requires at least three basic
complementary elements:
 Increase productivity of small farmers
 Increase domestic demand through employment-
oriented urban development
 Diversify, non-agricultural, labor intensive rural
development strategy
3. TWO KINDS OF WORLD AGRICULTURE
A. Highly Efficient
 High labour and land productivity
 High output per worker
 Small number of Farmers can feed entire
nation
 Technological and biological improvements
B. Inefficient
 Diminishing returns to labour
 Low productivity
 Agricultural output can barely sustain farm
population
 Technological Stagnation
Agrarian System - The pattern of land distribution,
ownership, and management, and also the social and
institutional structure of the agrarian economy
Two Types of Agrarian System in Latin America
1. Latifundios 
2. Minifundios
Latifundios - very large landholdings that employ from
12 to even thousands of workers
Latifundios are inefficient : they do not exploit the
economies of scale of large production, but rather they
underutilize the land.
Minifundios - these are small farms that can only
provide for a single worker
Minifundios comprise up to 90% of the farms, but only
occupy up to 17% of total agricultural land.
5. AGRARIAN SYSTEM IN ASIA
 Asia suffers from land scarcity: a large number
of peasants are crowded in too little land
 Traditional agrarian structure is the village: the
community owns the land, and peasant families
can use it to provide goods and services to the
whole tribe
 European colonization changed the system by
encouraging private property ownership.
 This created:
landlords: who own the land, but usually live
in the city
sharecroppers and tenant farmers: who
actually work the land
 The transition from subsistence to commercial
production gave rise to the moneylender: he
provides cash to the farmer to cover for seeds,
fertilizers and food while the crop is harvested.
Land plays the role of collateral. 
 The money-lender phenomenon has led to many
peasants losing their land, being forced to
become tenants paying high rents, and being
trapped in poverty.

6. STAGES OF AGRICULTURAL
DEVELOPMENT
1. SUBSISTENCE in first stage, agricultural
production is undertaken on the subsistence
level. Productivity in this stage is generally very
 low. Agriculture practiced in Africa resembles
this stage.
2. DIVERSIFIED- In second stage, agricultural
production gets diversified or mixed family
pattern of agriculture is practiced. In this stage,
farming family consumes only a small part of
the produce and significant part of production is
left for commercial sector that is sale in market.
Agriculture practiced in Asia
3. SPECIALIZED- In third stage, agriculture
production gets fully commercialized. Farmers
are engaged in high productivity specialized
agriculture with exclusive focus on commercial
market. Modern technology and equipment are
used on large scale in this stage. Agriculture
practiced in Latin America resembles this stage.  policies are only enjoyed by large-scale farmers.
CHARACTERISTICS OF SUBSISTENCE
FARMING
 Most output produced for family consumption.
 Land and labour are the main factors of
production, while capital investment is minimal.
 It is threatened by the failure of rains, and the
potential appropriation of the land by the money
lender.
 Labour is underemployed most of the year, but
highly occupied for planting and harvesting.
 Farmers are often resistant to technological
innovation due in part to the limited access to
credit, insurance and information: there is a lot
of uncertainty and risk involved in subsistence
farming.
TRANSITION TO MIXED AND DIVERSIFIED
FARMING
 A successful transition from subsistence to
diversified farming depends on the availability
of credit, fertilizers, crop information and
marketing facilities.
 Farmers need to feel secure that his family will
benefit from the change in order to guarantee
successful transition.
TRANSITION TO SPECIALIZED, MODERN
COMMERCIAL FARMING
 This type of farming usually emerges when
sectors of the economy, such as industrial sector,
have already developed.
 It usually involves capital intensive and labour
saving techniques of production.
7. RECOMMENDATIONS AND POLICIES
POLICIES OF AGRICULTURAL
DEVELOPMENT
Policy # 1: Encourage technology and innovation in
farms, not in the form of labour-saving machinery (since
developing countries are abundant in labour), but rather
in the form of hybrid seeds, irrigation and fertilizers.
Policy # 2: Better design of government policies to
guarantee equitable access of all farmers to credit and
technological innovations. Often the benefits of these
Policy # 3: Implementation of land reform coupled with
access to credit in order to provide rural families with
ownership of productive assets (land) and break the vice
circle of highly unequal distribution of rural income.
Policy # 4: A fully fledged integrated rural development,
which includes:
1. Not only increasing agricultural productivity,
but also encouraging nonfarm activities in the
rural areas;
2. Access to health, education and housing in rural
areas.
Chapter 10: The Environment and Development
“Each generation shall reap what the former generation
has sown.”—Ancient Proverb of China
10.1 Environment and Development: The Basic
Issues
What is the relationship between Environment and
Development?
 Environment is defined here as the entirety of
the physical world consisting of the world's land
masses, oceans, and atmosphere.
 Development is defined as the process of growth
and change in human social, political, and
economic systems.
Since resources are largely limited and finite,
humans must employ techniques that allow efficient and
lasting use of the available resources in the environment.
Sustainable development then becomes a tool to help
guarantee the continuing and long lasting use of
resources.
Economics and Environment: Economists have
increasingly focused on the important implications of
environmental issues for the success of development
efforts.
 Classic market failures lead to too much
environmental degradation.
 The interaction between poverty
and environmental degradation can lead to a
self-perpetuating process in which, as a result of
ignorance or economic necessity, communities
may inadvertently destroy or exhaust the
resources on which they depend for survival.
 Rising pressures on environmental resources in
developing countries can have severe
consequences for self-sufficiency, income
distribution, future growth potential, and the
fundamental quality of life.
The Effects of Environmental Issue to Economic
Development
 Imposing high costs on developing countries
through health related expenses  Scope:
 The reduced productivity of resources.
 The poorest 20% of the poor in both rural and
urban areas will experience the consequences of
environmental ills. 
 Severe environmental degradation, due to
population pressures on marginal land, has led to
falling farm productivity and per capita food
production.
 The cultivation of marginal land is largely the
domain of lower-income groups, the losses are
suffered by those who can least afford them.
 The inaccessibility of sanitation and clean water
mainly affects the poor and is believed to be
responsible for a preponderance of infectious
disease worldwide.
How do we address this environmental
issues? ECONOMIC DEVELOPMENT
10.2 Global Warming and Climate Change: Scope,
Mitigation, and Adaptation
Scope: In 2007, the Intergovernmental Panel on
Climate Change (IPCC) concluded that the developing
world, particularly the poorest countries, can expect
major consequences from global warming.  
 prolonged droughts; 
 expanded desertification; 
 reduced summer river flow and water
shortages; 
 increased severity of storms with heavy
precipitation and flooding and consequent
erosion; 
 longer and more severe heat waves; 
 decreased grain yields; 
 climate-induced spreading ranges of pests
and disease; 
 lost and contaminated groundwater; 
 deteriorated freshwater lakes, coastal
fisheries, mangroves, and coral reefs; and 
 coastal flooding
Scope: The IPCC identified four zones highly vulnerable
to greenhouse gas–induced climate change: 
 sub-Saharan Africa: due to drying
 Asian Megadeltas: due to flooding
 small islands: due to multiple
sensitivities
 the Arctic
 In 2010, the U.S. National Oceanic and
Atmospheric Administration (NOAA) released
a study drawing on 11 indicators of climate and
found that each one showed evidence of global
warming due to the influence of greenhouse
gases. 
 2012 and 2013 “Turn Down the Heat” reports
show severity of consequences for developing
countries. As the temperature rises above 2
degrees, approaching 4 degrees, there will be
extreme heat waves, rising sea levels, storms,
droughts, floods, and losses of grasslands,
farmlands, and marine ecosystem.
Problems primarily but not exclusively caused by the
developed countries
 The rapid industrial growth in Asia  
 Deforestation in developing countries
Mitigation: Mitigation – reducing climate change –
The goal of mitigation is to avoid significant human
interference with the climate system, and “stabilize
greenhouse gas levels in a timeframe sufficient to allow
ecosystems to adapt naturally to climate change, ensure
that food production is not threatened and to enable
economic development to proceed in a sustainable
manner”
Adaptation
 adapting to life in a changing climate  worker who joined those cultivating commonly held land
 involves adjusting to actual or expected future
climate
 the goal is to reduce our vulnerability to the
harmful effects of climate change.  
10.3 Economic Models of Environmental Issues
Privately Owned Resources: These are the owned by
an individual rather than by the government.
Common Property Resources: A resource that is
collectively or publicly owned and allocated under a
system of unrestricted access, or as self-regulated by
users.
Elinor Ostrom, the 2009 Nobel laureate in economics,
discovered that under some conditions, a fair and
efficient management of common property can be
achieved by the people who depend on it.
Neoclassical Theory: It has been applied to
environmental issues to determine what conditions are
necessary for the efficient allocation of resources and
how market failures lead to inefficiencies, and to suggest
ways in which these distortions can be corrected.
This approach is often referred to as “behavioral theory
of organization” or “human relations” approach in
organizations.
Property Rights: The acknowledged right to use and
benefit from a tangible (e.g., land) or intangible (e.g.,
intellectual) entity that may include owning, using,
deriving income from, selling, and disposing.
Four Conditions of Perfect Property Rights:
1. Universality- all resources are privately owned.
2. Exclusivity or “excludability”- it must be
possible to prevent others from benefiting from
a privately owned resource.
3. Transferability- the owner of a resource may
sell the resource when desired.
4. Enforceability- the intended market
distribution of the benefits from resources must
be enforceable.
Public Goods and Bads: Regional Environmental
Degradation and the Free-Rider Problem
The core economic problem was that each additional
created a negative externality by lowering the returns to
all other workers without providing any compensation.
Public Good is anything that provides a benefit
to everyone and the availability of which is in no
way diminished by its simultaneous enjoyment
by others. It can be local, national, or even
global in scope.
 Public Bad is any product or condition that
decreases the well-being of others in a non-
exhaustive manner. 
To make this public-bad problem into a public-good
framework, environmental conservation through the
protection of the environment provides a benefit to all
and is thus a public good.
Elinor Ostrom’s Design Principles (Derived from
Studies of Long-Enduring Institutions for Governing
Sustainable Resources)
Elinor Ostrom has summarized findings from research
on common property resource management, in the form
of eight conditions facilitating fair and efficient
management of common property by those who
depend upon it.
These are:
1. Clearly defined boundaries.
2. Proportional equivalence between benefits and
costs.
3. Collective-choice arrangements.
4. Monitoring.
5. Graduated sanctions.
6. Conflict resolution mechanisms.
7. At least minimal recognition of rights to
organize.
8. For resources that are parts of larger systems:
nested enterprises.
Elinor Ostrom’s Design Principles(Derived from
Studies of Long-Enduring Institutions for Governing
Sustainable Resources)
Elinor Ostrom notes, “The design principles are not
blueprints… They describe the broad structural
similarities among those self-organized systems that
have been able to adapt and learn so as to be robust
to the many social, economic and ecological
disturbances that occur over time.”

Limitations of the Public-Good Framework
The problem with the public-good pricing mechanism is
how to know which prices to charge. 
Collected fees can be used to provide a public good.
Although charging fees to the people benefiting from the
preservation of a resource may sound practical, it is
exceedingly difficult to collect payment from people.
When the collection of fees entails taxing deeply
impoverished populations with little or no cash income,
such a program becomes an impossibility.
Neoclassical theory can be useful for explaining why
market failures lead to the inefficient allocation of
resources in highly commercialized economies and how
these inefficiencies may be mitigated.
Free-rider Problem the situation in which people can
secure benefits that someone else pays for.
10.4 Urban Development and the Environment
Environment Problems of Urban Slums
1. Health threatening pollutants —  air
pollution
2. Unsanitary environmental conditions —
untreated sewage
3. Serious impact on poor — malnutrition
and poor health.
Industrialization and Urban Air Pollution
 Industrialization can lead to increases in waste
either directly through emissions or indirectly by
altering patterns of consumption and boosting
demand for manufactured goods.
 Urban Air Pollution—  air pollution
experienced by populations living in and around
urban areas (exhaust fumes from cars, furnaces
or wood stoves)
Problem of Congestion, Clear Water, and Sanitation:
Most Important Environmental Factors Affecting the
Health of the Urban Poor
 Inaccessibility of clean water  and environmental destruction in developing
 Lack of sanitation   countries.
Contaminated water and poor sanitation are linked to
transmission of diseases such as cholera, diarrhoea,
dysentery, hepatitis A, typhoid, and polio. 
Absent, inadequate, or inappropriately managed water
and sanitation services expose individuals to preventable
health risks.
10.5 The Local and Global Costs of Rainforests
Destruction
GREENHOUSE GASES - Gases that trap heat within
the earth’s atmosphere and can thus contribute to global
warming. 
BIODIVERSITY - The variety of life forms within an
ecosystem.
GLOBAL PUBLIC GOOD - A public good, whose
benefits reach across nation borders and population
groups. 
10.6 Policy Options in Developing and Developed
Countries
WHAT DEVELOPING COUNTRIES CAN DO
A range of policy options is available for governments in
developing countries. Seven stand out : 
1. Proper resource pricing 
2. Community involvement 
3. Clearer property rights and resource ownership 
4. Programs to improve the economic alternatives
of the poor 
5. Raising the economic status of women
6. Industrial emissions abatement policies
7. Proactive stance toward climate change and
environmental degradation
HOW DEVELOPED COUNTRIES CAN HELP
DEVELOPING COUNTRIES 
Industrial countries can help developing nations in their
efforts to improve the environment of development in 3
areas: 
1. TRADE POLICIES - The focus of much
current discussion concerning the environment is
the desperate need to break the cycle of poverty
 
2. DEBT RELIEF - wider access to international
markets not only raises incomes but also
improves the ability of heavily indebted
countries to service their debt. 
  Debt-for-nature swap The exchange of
foreign debt held by an organization for
a larger quantity of domestic debt that is
used to finance the preservation of a
natural resource or environment in the
debtor country. 
3. DEVELOPMENT ASSISTANCE - Substantial
new development assistance is necessary in
developing countries to achieve sustainable
development. 

WHAT DEVELOPED COUNTRIES CAN DO FOR

THE GLOBAL ENVIRONMENT 
Can directly contribute to global environmental
improvement through their own efforts to the following:

 Reduce harmful emissions including greenhouse

gases.
 Undertake R&D to develop green technologies
and pollution control for themselves and for
developing countries.
 Alter their own environmentally harmful
patterns of demand.

THE ENVIRONMENT AND DEVELOPMENT 

 Emission Controls
 Research and Development
 Import Restrictions
CHAPTER 11: Development Policymaking and the
Roles of Market, State, and Civil Society
11.1 A Question of Balance
National governments have played an important role in
the successful development experiences of the countries
in East Asia.
Government often appears to have been more of a
hindrance than a help, stifling the market rather than
facilitating its role in growth and development.
This chapter examines the balance of and relationships
between states and markets in the process of economic
development
We examine the roles and limitations of planning and
development policymaking as practiced in developing
nations, consider the problems of economic transition to
more competitive market economies, and ask
fundamental questions as to the proper role of the state
and how public and private economic activity can best
be made mutually supporting
11.2 Development Planning: Concepts and Rationale
In the initial decades after the Second World War and
decolonization, the pursuit of economic development
was reflected in the almost universal acceptance of
development planning as the surest and most direct route
to economic progress.
Until the 1980s, few people in the developing world
would have questioned the advisability or desirability of
formulating and implementing a national development
plan. Planning had become a way of life in government
ministries, and every five years or so, the latest
development plan was paraded out with great fanfare.
National planning was widely believed to offer the
essential and perhaps the only institutional and
organizational mechanism for overcoming the major
obstacles to development and for ensuring a sustained
high rate of economic growth.
The Nature of Development Planning
Economic planning a deliberate and conscious attempt
by the state to formulate decisions on how the factors of
production shall be allocated among different uses or
industries, thereby determining how much of total goods
and services shall be produced in one or more ensuing
periods.
Economic plan a written document containing
government policy decisions on how resources shall be
allocated among various uses so as to attain a targeted
rate of economic growth or other goals over a certain
period of time
Comprehensive plan an economic plan that sets targets
to cover all the major sectors of the national economy
Partial plan a plan that covers only a part of the national
economy (e.g., agriculture, industry, tourism
Planning process The procedure for drawing up and
carrying out a formal economic plan.
PLANNING IN MIXED DEVELOPING
ECONOMIES
Most development plans have been formulated
and carried out within the framework of the mixed
economies of the developing world. These economies
are characterized by the existence of an institutional
setting in which some of the productive resources are
privately owned and operated and some are controlled
by the public sector
However, mixed economies are often
distinguished by a substantial amount of government
ownership and control. The private sector in developing
countries typically comprises four traditional forms of
private ownership and a more recent emerging one:
PLANNING IN MIXED DEVELOPING
ECONOMIES
Two principal components of development planning in
mixed economies:
1. The government’s deliberate use of domestic
saving and foreign finance to carry out public
investment projects and to mobilize and channel
scarce resources into areas that can be expected
to make the greatest contribution toward the
realization of long-term economic objectives
Economic infrastructure The capital embodied in
roads, railways, waterways, airways, and other forms of
transportation and communication plus water supplies,
electricity, and public services such as health and
education.
1. Governmental economic policy
The Rationale for Development Planning
The early widespread acceptance of planning as a
development tool rested on a number of fundamental
economic and institutional arguments. Of these we can
single out four as the most often put forward.
Market Failure Markets in developing economies are
permeated by imperfections of structure and operation.
Commodity and factor markets are often badly
organized, and the existence of distorted prices often
means that producers and consumers are responding to
economic signals and incentives that are a poor
reflection of the real cost to society of these goods,
services, and resources. It is therefore argued that
governments have an important role to play in
integrating markets and modifying prices.
Market failure A phenomenon that results from the
existence of market imperfections (e.g., monopoly
power, lack of factor mobility, significant externalities,
lack of knowledge) that weaken the functioning of a
market economy.
Resource Mobilization and Allocation This argument
stresses that developing economies cannot afford to
waste their very limited financial and skilled human
resources on unproductive ventures.
Attitudinal or Psychological Impact It is often
assumed that a detailed statement of national economic
and social objectives in the form of a specific
development plan can have an important attitudinal or
psychological impact on a diverse and often fragmented
population.
By mobilizing popular support and cutting across class,
caste, racial, religious, or tribal factions with the plea to
all citizens to work together toward building the nation,
it is argued that an enlightened central government,
through its economic plan, can best provide the needed
incentives to overcome the inhibiting and often divisive
forces of sectionalism and traditionalism in a common
quest for widespread material and social progress
Foreign Aid The formulation of detailed development
plans has often been a necessary condition for the receipt
of bilateral and multilateral foreign aid. With a shopping
list of projects, governments are better equipped to
solicit foreign assistance and persuade donors that their
money will be used as an essential ingredient in a well-
conceived and internally consistent plan of action.
11.3 The Development Planning Process: Some Basic
Model
Three Stages of Planning Most development plans have
traditionally been based initially on some more or less
formalized macroeconomic model. Such economy wide
planning models can be divided into two basic
categories: (1) aggregate growth models, involving
macroeconomic estimates of planned or required
changes in principal economic variables, and (2)
multisector input-output, social accounting, and
computable general equilibrium (CGE) models,
which ascertain (among other things) the production,
resource, employment, and foreign-exchange
implications.
AGGREGATE GROWTH MODELS:
PROJECTING MACRO VARIABLES
Aggregate growth model A formal economic
model describing growth of an economy in one or a few
sectors using a limited number of variables.
MULTISECTOR MODELS AND SECTORAL
PROJECTIONS
Input-output model (interindustry model) A
formal model dividing the economy into sectors and
tracing the flow of interindustry purchases (inputs) and
sales (outputs)
Aggregate growth model
It deals with the entire economy in terms of a limited set
of macroeconomic variables deemed most critical to the
determination of levels and growth rates of national
output: savings, investment, capital stocks, exports,
imports, foreign assistance, and so on. Aggregate growth
models provide a convenient method for forecasting
output (and perhaps also employment) growth over a
three- to five-year period.
Input-output model (interindustry model)
A much more sophisticated approach to
development planning is to use some variant of the
interindustry or input-output model, in which the
activities of the major industrial sectors of the economy
are interrelated by means of a set of simultaneous
algebraic equations expressing the specific production
processes or technologies of each industry.
Interindustry models range from simple input-
output models, usually consisting of 10 to 30 sectors in
the developing economies and 30 to 400 sectors in
advanced economies, to more complicated linear
programming or activity analysis models where checks
of feasibility (what is possible given certain resource
constraints) and optimality (what is best among different
alternatives) are also built into the model. But the
distinguishing characteristic of the interindustry or input-
output approach is the attempt to formulate an internally
consistent, comprehensive development plan for the
entire economy.
PROJECT APPRAISAL AND SOCIAL COST-
BENEFIT ANALYSIS
Project appraisal The quantitative analysis of
the relative desirability (profitability) of investing a
given sum of public or private funds in alternative
projects.
The methodology of project appraisal rests on the theory
and practice of social cost-benefit analysis,
Cost-benefit analysis A tool of economic analysis in
which the actual and potential private and social costs of
various economic decisions are weighed against actual
and potential private and social benefits.
The vast majority of day-to-day operational decisions
with regard to the allocation of limited public investment
funds are based on a microeconomic technique of
analysis known as project appraisal.
SOCIAL PROFIT The difference between social
benefits and social costs, both direct and indirect.
Shadow prices (or accounting prices) Prices that reflect
the true opportunity costs of resources.
Market prices Prices established by demand and supply
in markets.
Setting Objectives Given the difficulty of attaching
numerical values to such objectives as national cohesion,
self-reliance, political stability, modernization, and
quality of life, economic planners typically measure the
social worth of a project in terms of the degree to which
it contributes to the net flow of future goods and services
in the economy.
Terms related to social profitability.
COMPUTING SHADOW PRICES AND SOCIAL
DISCOUNT RATES
The core of social cost-benefit analysis is the calculation
or estimation of the prices to be used in determining the
true value of benefits and the real magnitude of costs.
6. ✓ Lack of Political Will
7. ✓ Conflict, Postconflict, and Fragile State
The 1980s Policy Shift Toward Free Markets

REASONS; Many economists, finance ministers in developing

1. Inflation and currency overvaluation countries, and the heads of the major international
2. Wage rates, capital costs, and unemployment. development organizations advocated increased use
3. Tariffs, quotas, subsidies, and import of the market mechanism as a key instrument for
substitution promoting greater efficiency and more rapid
4. Savings deficiency. economic growth. U.S. President Ronald Reagan
5. The social rate of discount made a famous reference to the “magic of the
marketplace” in a 1981 speech at Cancun, Mexico.

It involves a constant dialogue and feedback If the decade of the 1970s could be described as a

mechanism between national leaders who set priorities period of increased public-sector activity in the pursuit

and planners, statisticians, research workers, and of more equitable development, the 1980s and 1990s

departmental or ministry officials. witnessed the reemer-gence of free-market

economics.As part of their domestic-market
11.4 Government Failure and Preferences for
liberalization programs, a majority of developing
Markets Over Planning
countries, with differing degrees of seriousness of
Problems of Plan Implementation and Plan Failure purpose, gener-ally sought to reduce the role of the
public sector, encourage greater private-sector activity,
The results of development planning have been
and eliminate distortions in interest rates, wages, and the
generally disappointing.The widespread rejection of
prices of consumer goods.
comprehensive development planning based on poor
performance has had a number of practical The Government Failure
outcomes, the most impor-tant of which is the adoption
Just as markets are permeated by imperfections, so too
in a majority of developing countries of a more market-
is government subject to a variety of failures.Thus, while
oriented economic system.
in theory government can correct a market failure,
sometimes in practice it fails to do so despite costly
1. ✓ Theory versus Practice expenditure—and in some cases might only make
2. ✓ Deficiencies in Plans and their matters worse. Thus, government regulations may
Implementation improve industry efficiency, such as by breaking
3. ✓ Insufficient and Unreliable Data monopoly power; and it may otherwise improve social

4. ✓ Institutional Weaknesses welfare, such as by limiting pollution (as we saw in

Chapter 10). But poorly designed regulations could
5. ✓ Unanticipated Economic Disturbances,
stifle emerging industries or even facilitate corruption.
External & Internal
And once established, special interest groups may spring
up, which find ways to benefit from regulations through 8. Public management of externalities (both harmful and
rent seek-ing. Such groups may resist modifications in beneficial) and provision of public goods
regulations even long after conditions that led to them 9.Instruments for executing stabilizing monetary and
have changed; fiscal policies.
10.Safety nets—provisions for maintaining adequate
consumption for indi-viduals affected by certain
economic misfortunes, especially involuntary
11.5 The Market Economy unemployment, industrial injuries, and work disabilities
Sociocultural Preconditions and Economic 11.Encouragement of innovation, in particular, issuance
Requirements and enforcement of patents and copyrights
Markets accomplish many positive things, not least of 12.Security from violence, the most basic of all social
which is delivering goods that consumers want, where foundations
and when they want them, and providing incentives for
innovation. 11.6 The Washington Consensus on the Role of the
12 Market-Facilitating Legal and Economic Practices State in Development and Its Subsequent Evolution
1.Property rights clearly established and demarcated;
procedures for establishing property rights and Introduction
transferring them. ● For much of the 1980s and into the 1990s, the
2.Commercial laws and an independent judiciary to so-called Washington Consensus on
enforce them, especially contract and bankruptcy laws. development policy held sway. This consensus,
3.Freedom to establish businesses in all sectors encapsulated by John Williamson, reflected the
except those with significant externalities, without free-market approach to development followed
excessive licensing requirements; analogous freedom in those years by the IMF, World Bank, and key
to enter trades and professions and to attain government U.S. government agencies.
offices (equal economic opportunity). ● The Washington Consensus are striking at least
4.A stable currency and banking system, including a as much for what they do not contain as for what
reliable and efficient system for making transfers they do and It contained ten points.
5. Public supervision or operation of natural Elements of the Washington Consensus
monopolies (industries with increasing returns to  Fiscal discipline
scale) as occurs in industries where technological  Redirection of public expenditure priorities
efficiency requires that a firm be large enough to supply toward health, education, and infrastructure
a substantial fraction of the national market  Tax reform, including the broadening of the tax
6. Provision of adequate information in every market base and cutting marginal tax rates
about the characteristics of the products offered and the  Unified and competitive exchange rates
state of supply and demand, to both buyers and sellers  Secure property rights
7. Autonomous tastes—protection of consumers’
 Deregulation
preferences from influence by producers and purveyors
 Trade liberalization
  Privatization 11.8 Development Roles of NGOs and the Broader
 Elimination of barriers to direct foreign Citizen Sector
investment (DFI)
 Financial liberalization Nongovernmental organizations (NGOs)

Toward a New Consensus - Nonprofit organizations often involved in providing

❖ New emphasis on government's responsibility financial and technical assistance in developing

toward poverty alleviation and inclusive growth countries.

- nonprofit, voluntary, independent, civil society, or
❖ Provision of fundamental public goods
citizen organizations.
❖ Importance of health and education
Organizational Comparative Advantage for
❖ A recognition that markets can fail
international or national NGOs or Local
❖ Governments can help secure conditions for an Organizations
effective market based economy 1. Innovation.
11.7 DEVELOPMENT POLITICAL ECONOMY: 2. Program flexibility.
THEORIES OF POLICY FORMULATION AND 3. Specialized technical knowledge.
REFORM 4. Targeted local public goods.
Understanding voting patterns on policy reform 5. Common-property resource management
❖ Sometimes reform is designed to maximize the design and implementation.
benefits of the few 6. Trust and credibility.
❖ A widely favored approach to understanding 7. Representation and advocacy.
policy formation has been to examine the trade-
off between short-term costs of reform and its
Voluntary Failure- The inability of nongovernmental
long-term benefits, to both politicians and the
organizations and the citizen sector more broadly to
economy.
efficiently achieve social objectives in their areas of
Institutions and path dependency
supposed comparative advantage.
❖ The framework suggested by Nobel laureate
11.9 Trends in Governance and Reform
Douglass North is useful for understanding
qualitative differences in policy formulation Corruption
across countries. North distinguishes between
● The appropriation of public resources for private
institutions and organizations. Institutions are
profit and other private purposes through the use
“formal and informal rules of the economic
and abuse of official power or influence.
game.”
Democracy versus autocracy: which facilitates faster ● the abuse of public trust for private gain; it is a
growth? form of stealing. Indexes of corruption regularly

❖ comparative merits of democratic or autocratic rate the incidence of corruption far higher in

regimes for development performance developing countries than in developed

(especially economic growth) countries.

Decentralization John Cohen and Norman Uphoff, three dimensions:
kinds of participation, identity of participants, and how
● principle of “subsidiarity,” meaning that
participation occurs
feasible decisions are made at the most local
David Deshler and Donald Sock, “genuine
level.
participation,” include either citizen control or
● Local governments are closer to the urban and cooperation, with delegated power or partnership
rural problems they must address agreements between citizens and agencies, from
“pseudo-participation,” which can include placation,
● allowed for providing greater autonomy
consultation, or information without power sharing, as
Development Participation well as “therapy” and manipulation

Participation

According to World Bank, it often seems meant as a

strategy to reduce project costs or to deflect criticism

Potential objections to the principle of genuine

participation

First, the poorest countries need to make some policy

decisions and get some relief operations up and running
immediately.

Second, unhealthy and unskilled people are probably not

able to participate effectively

third, objection is the costs of time

A Three-legged Stool

Distinctions between different types of participation


Chapter 12: International Trade Theory
and Development Strategy
12.1 Economic Globalization: An Introduction
Globalization
 increasing integration of national economies into
expanding international markets
 an emerging “global culture”
o people consume similar goods and
services across countries
o use a common language of business --
English
 increased openness of economies to
international trade, financial flows, and
direct foreign investment
 carries benefits and opportunities as well
as costs and risks
BENEFITS
 suggests exciting business opportunities
 efficiency gains from trade
 more rapid growth of knowledge and innovation
 transfer of knowledge to developing countries
facilitates faster growth
DRAWBACKS
 inequalities to both across and within countries
 environmental degradation may be accelerated
 international dominance of the richest countries
may be expanded and locked in
 some people and regions may be left further
behind
“Global trade is like a hundred lane highway criss-
crossing the world. If it is a free-for-all highway, with no
stop lights, speed limits, size restrictions, or even lane
markers, its surface will be taken over by the giant trucks
from the world’s most powerful economies.”
 Nobel laureate Muhammad Yunus, 2008
General Agreement on Tariffs and Trade (GATT)
 International body initiated in 1947
 set up to explore ways and means of reducing
tariffs on internationally traded goods and
services
led to the creation of the World Trade Organization
(WTO) in 1995
PROBLEMS
 rules have not been balanced
 benefited some countries but have benefited less
the poor countries
 Trade protectionism tends to fall most heavily
on the poorest developing countries
 Tariffs placed on imports from developing
countries is double compared to imports from
developed countries.
12.2 International Trade: Some Key Issues
International Trade
 exchange of goods and services between
countries
 allows countries to expand their markets and
access goods and services not available
domestically
 played a central role in the historical experience
of the developing world
Primary Products
 products derived from all extractive occupations
(e.g. farming, fishing, mining, foodstuffs, and
raw materials)
 like commodities such as: coffee, cotton, cacao,
sugar, palm oil, and copper
KEY ISSUES:
 Substantial percentage of the economy’s income
is derived from exports of agricultural and other
primary products (commodities) in some of the
smaller countries
 Many other developing countries must still
depend on non-mineral primary-product exports
for a relatively large fraction of their foreign-
exchange earnings
 Export Dependence
extends to services (tourism) which is “exported” when
foreign visitors purchase domestically produced services
(e.g. hotel stays, restaurant meals, local transportation,
theme park admissions, tour packages, etc.)
“out of 141 developing countries, 95 are more than 50%
dependent on commodity exports…. In most sub-
Saharan African countries, the figure is 80%.”
- United Nations Conference on Trade and
Development (UNCTAD), 2006
KEY ISSUES:
 Many developing countries rely on the
importation of raw materials, machinery, capital
goods, intermediate producer goods, and
consumer products to fuel their industrial
expansion and satisfy the rising consumption
aspirations of their people
 Many developing countries are dependent on
one or a few commodity exports
 Import demands in majority of developing
nations exceeded their capacity to generate
sufficient revenues from the sale of exports
 In a number of developing countries, severe
deficits on current and capital accounts have led
to a depletion of international monetary reserves,
currency instability, and a slowdown in
economic growth
CURRENT ACCOUNT
 portion of a country’s balance of payments that
reflects the market value of the country’s
“visible” (e.g., commodity trade) and
“invisible” (e.g., shipping services) exports and
imports.
CAPITAL ACCOUNT
 portion of a country’s balance of payments that
shows the volume of private foreign investment
and public grants and loans that flow into and
out of the country
Free Trade
 importation and exportation of goods without
any barriers in the form of tariffs, quotas, or
other restrictions
 promotes static economic efficiency and optimal
resource allocation
Commodity Terms of Trade
 ratio of a country’s average export price to its
average import price
 relationship or ratio between the price of a
typical unit of exports and the price of a typical
unit of imports
INCOME ELASTICITY OF DEMAND
 responsiveness of the quantity of a commodity
demanded to changes in the consumer’s income
PRICE ELASTICITY OF DEMAND
 responsiveness of the quantity of a commodity
demanded to a change in its price
EXPORT EARNINGS INSTABILITY
Wide fluctuations in developing country earnings on
commodity exports resulting from low price and income
elasticities of demand leading to unpredictable
movements in export prices.
PREBISCH-SINGER HYPOTHESIS
 argument that the commodity terms of trade for
primary-product exports of developing countries
tends to decline over time.
12.3 The Traditional Theory of International Trade
 Trade/Barter transactions
o Trading of goods directly for other
goods in economies not fully monetized.
 Comparative Advantage Model
Principle of comparative advantage
 Assert that a country should, and under
competitive conditions will, specialize in the
export of the products that can produce at the
lowest relative cost.
Free Trade Theory
 Comparative Advantage
Production of commodity at a lower opportunity cost
than any of the alternative commodity that could be
produce.
 Specialization
Concentration of resources in the production of relative
few commodities.
 Absolute advantage 
Production of commodity with the same amount of real
resources as another producer but at a lower absolute
unit cost.
Factor Endowment Theory: The Neoclassical Model

The neoclassical model of free trade, which postulates
that countries will tend to specialize in the production of
the commodities that makes us of their abundant factors
of production (land,labor, capital, ect.)
Factor endowment theory is based on two crucial
propositions:
1. Different products require productive factors in
different relative proportions.
2. Countries have different endowments factor of
production.
Trade Theory and Development: The Traditional
Arguments
1. Trade is an important stimulator of economic
growth.
2. Trade tends to promote greater international and
domestic equality.
3. Trades helps countries achieve development by
promoting and rewarding the sectors of
economy where individual countries possess a
comparative advantage.
4. International prices and cost of production
determine how much a country should trade in
other to maximize its national welfare.
5. To promote growth and development, an
outward looking international policy is required.
12.4 The Critique of Traditional Free-Trade Theory
in the Context of Developing-Country Experience
Basic assumption of the traditional neoclassical trade
model:
1. All productive resources are fixed in equality
and constant in quality across nations and fully
employed.
2. Technology of production is fixed and freely
available to all nations.
3. Factors of production are perfectly mobile
between different productions activities within
nations.
4. National government plays no role in
international economic relations.
5. Trade is balanced for each country at any point
of time.
6. Gain from trade that occur to any country benefit
the nationals of the country.
12.5 Traditional Trade Strategies and Policy
Mechanisms for Development:
Export Promotion versus Import Substitution
Outward-looking development 
 policies Policies that encourage exports, often
through the free movement of capital, workers,
enterprises, and students; a welcome to
multinational corporations; and open
communications
Inward-looking development
 policies Policies that stress economic self-
reliance on the part of developing countries,
including domestic development of technology,
the imposition of barriers to imports, and the
discouragement of private foreign investment
Traditional, Trade-related Development Strategies
Import substitution 
 A deliberate effort to replace consumer imports
by promoting the emergence and expansion of
domestic industries
Export promotion
 Governmental efforts to expand the volume of a
country’s exports through increasing export
incentives, decreasing disincentives, and other
means in order to generate more foreign
exchange and improve the current account of its
balance of payments or achieve other objectives.
To sum up, the standard argument for tariff
protection in developing countries has four major
components:
1. Duties on trade are a major source of government
revenue in a majority of developing countries because
they are a relatively easy form of taxation to impose and
even easier to collect.
2. Import restrictions represent an obvious response to
chronic balance of payments and debt problems.
3. Protection against imports is said to be an appropriate
means for fostering economies of scale, positive
externalities, and industrial self-reliance as well as
overcoming the pervasive state of economic dependence
in which many or most developing countries
understandably perceive themselves. By pursuing
policies of import restriction, developing countries can
gain greater control over their economic destinies while
encouraging foreign business interests to invest in local
import-substituting industries, generating high profits
and thus the potential for greater saving and future
growth.
Tariff Structures and Effective Protection
Nontariff trade barrier
  A barrier to free trade that takes a form other (2) the secular deterioration in the terms of trade for
than a tariff, such as quotas or (possibly primary producing nations,
arbitrary) sanitary requirements.  (3) the rise of “new protectionism” against manufactured
Nominal rate of protection  and processed agricultural goods from developing
 An ad valorem percentage tariff levied on countries, and 
imports (4) the presence of market failures that reduce the ability
of developing countries to move up to export higher-
Effective rate of protection value products.
 The degree of protection on value added as
opposed to the final price of an imported product
—usually higher than the nominal rate of 12.6 The Industrialization Strategy Approach to
protection. Export Policy

Foreign-Exchange Rates, Exchange Controls, Industrialization strategy approach - A school of

and the Devaluation Decision thought in trade and development that emphasizes the
importance of overcoming market failures through
Exchange control  government policy to encourage technology transfer and
 A governmental policy designed to restrict the exports of progressively more advanced products.
outflow of domestic currency and prevent a  The industrialization strategy approach began
worsened balance of payments position by primarily as an empirical literature but has
controlling the amount of foreign exchange that developed a theory to help explain why an
can be obtained or held by domestic citizens interventionist strategy toward exports can
Devaluation  accelerate growth and improve development
A lowering of the official exchange rate between one outcomes more than a strict free-trade approach.
country’s currency and all other currencies. The theories developed in this approach are
focused on identifying and redressing market
Trade optimists  failures encountered in the process of
 Theorists who believe in the benefits of free industrialization
trade, open economies, and outward-looking
development policies.  12.7 South-South Trade and Economic Integration
Trade pessimists  The United Nations Development Programme (UNDP)
 Theorists who argue that without tariff reported in its 2013 Human Development Report that
protection or quantitative restrictions on trade, from 1981 to 2011, South-South trade increased from
developing countries gain little or nothing from less than 8% to more than 26% of world merchandise
an export oriented, open-economy posture. trade.
In.

Trade Optimists and Trade Pessimists:
Summarizing the Traditional Debate
Trade Optimist Arguments
 Trade optimists tend to underplay the role of
international demand in determining the gains
from trade. Instead, they focus on the
relationship between trade policy, export
performance, and economic growth. They argue
that trade liberalization (including export
promotion, currency devaluation, removal of
trade restrictions, and generally “getting prices
right”) generates rapid export and economic
growth because free trade provides a number of
benefits.
Economic integration occurs whenever a group of
nations in the same region join together to form an
economic union or regional trading bloc by raising a
common tariff wall against the products of nonmember
countries while freeing internal trade among members
The traditional theory of customs unions and economic
integration focuses on the static resource and production
reallocation effects.
Examples include fertilizer and petrochemical plants,
heavy industry like iron and steel, capital goods and
machine tool industries, and small-farm mechanical
equipment.

Trade Pessimist Arguments - Trade pessimists tend to On the other hand, over the past two decades there has
focus on four basic themes: been steadily increasing inequalities among developing
(1) the limited growth of world demand for primary countries in rates of growth and of incomes per capita;
exports, 
this also tends to widen disparities in their priorities and
interests.

12.8 Trade Policies of Developed Countries: The

Need for Reform and Resistance to New Protectionist
Pressures

The integration among NAFTA and EU members may

itself pose one of the biggest impediments to
developing-world exports to North America and Europe.

Developed countries’ economic and commercial policies

are most important from the perspective of future
developing-country foreign-exchange earnings in three
major areas: tariff and nontariff barriers to their exports;
adjustment assistance for displaced workers in
developed-country industries hurt by freer access of
labor-intensive, low-cost developing-country exports;
and the general impact of rich-country domestic
economic policies on developing economies.

Developed countries cut tariffs on manufactures by an

average of 40% in five equal annual reductions.
Developing countries in turn agreed to not raise tariffs
by “binding” in recent trade reforms. Despite these
reductions, developing countries still face tariffs that are
10% higher than the global average, while the least
developed countries face tariffs that are 30% higher.
2. Trade in agricultural products came under the
authority of the WTO and were to be progressively
liberalized. Although progress was made at first,
agricultural subsidies subsequently returned to record
highs.
3. For textiles and apparel, the Multifiber Arrangement
quotas, which long penalized exports of developing
countries, were phased out in 2005, with most of the
progressive reductions taking effect toward the end of
the period. But tariffs on textile imports were reduced
only to an average of 12%—three times the average
level of tariffs on other imports.