Ssed 3144

Comparative Economic Planning (SSED-314)
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PREFACE
This module aims to equip students with knowledge and skills in economic planning. The main
objective of this module is to project and explain in a simple, systematic, and practical method
the concepts, principles, problems, policies, and programs for economic development. This
module will also expose students to the different planning models, types of planning models,
requirements of an implementable plan, and some principles in planning. More so, this module
will present some model economies for the purpose of comparison so they, in the process, may
see where most of the problems of our economy lie.
There are four topics in this module; the first two topics are for the preliminary coverage while
the second two are for midterms. This module has four essential parts which are targets, take off,
self-check, and self-reflect. It is hoped that this module will help its readers/users towards the
acquisition of learning that is comparable to what they would have acquired if lessons were done
in conventional classrooms.
Intended Learning Outcomes (ILO)
1. Demonstrate factual knowledge on important concepts and terms in economic planning

and development.
2. Explain the fundamental principles, theories and models in economic planning and
strategy.
3. Apply course materials along with techniques and procedures covered in this course to
understand fundamental economic problems and issues.
4. Demonstrate specific skills, competencies and thought processes sufficient to support
further study or work in this course or related fields.
5. Demonstrate reasoned argument to the solution of familiar and unfamiliar problems
relevant to the course.
6. Use appropriate, effective written and oral communication skills relevant to the course.
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Topic I: Real Concept of Development
Targets
1. Discuss the real concept of economic development.

2. Differentiate growth from development.
3. Discuss the obstacles to economic development and the different stages of economic growth.
Take Off
To begin, let me stimulate your mind with these questions?
1. Is Philippines a poor country? If yes, why do you say so? If no, why are a lot
experiencing poverty?
2. Are you happy with the economic status of our country right now?
3. Do you think that our leaders have done enough for the economy?
Content
The Meaning of Economic Development
Development is a progressive process. It involves the interaction of different factors. For

example, in the case of increasing the harvest of palay per hectare, various inputs are combined
like fertilizers, insecticides, irrigation, and technology, among other thing. These are properly
applied in order to produce more output. Such process is development.
Economic development is a progressive process of improving human conditions, such as

the reduction or elimination of poverty, unemployment, illiteracy, inequality, disease, and
exploitation. Evidently, economic development is not only an economic process. It involves both
economic and non-economic factors. Examples of economic factors are capital, technology and
market. Non economic factors are culture, religion, government, education, among other things.
The combination and interaction of these factors determine the extent and nature of economic
development. In fact, the non-economic factors have stronger influence on the economic
development of nations. Some countries are progressive while others are not because of the
aforementioned factors of development.
Classification of Countries
The economy of a country is measured by its gross national product (GNP) or per capita
Income. The basis of comparison is the economy of the highly developed countries, usually the
United States. If the GNP of a certain nation e near the GNP of the rich countries, it is classified
as intermediate. Those that are far below are classified as less developed. The rich ones are
classified as highly developed.
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Two-thirds of the countries of the world are poor Millions of people in these places live
on incomes averaging $70 a year. As of 1976, there were 34 low-income countries in the world,
Bhutan, a country near India, had a per capita income of $70 per annum. In the case of Israel
which is classified as a developed country, it had a per capita income of $10,500. For the highly
developed countries like the United States, and those in Western Europe, their real per capita
incomes are many times higher than those of the poorest countries. In the United States, the per
capita income is one of the highest. In fact, the poverty line of 1982 was $8.414 for a family of
four persons per annum. To The poor countries, such amount is already a fortune. No wonder
many people in the less developed countries like to live in the United States.
In the past, poor countries were called backward nations. This offended the sensibilities
of the countries concerned. So they were named as developing nations which was more pleasant.
However, at present they are commonly called less developed countries (LDC) or Third World
countries.
Countries which are backward, underdeveloped, agricultural, or less developed are

generally considered poor nations Nevertheless, there are few they are not necessarily poor.
Good examples of these are some are few countries that are underdeveloped but countries in the
Middle East. Countries which have advanced, industrial or developed economies are rich
countries. Those countries whose economies are between the highly developed and less
developed are called intermediate country/economies. Here are examples of classifications of
some countries based on their economic developments:
Highly developed countries
United States Russia
Japan Sweden
France West Germany
Denmark Canada
Australia Israel
Intermediate countries
Argentina Spain
Cuba South Africa
Libya Austria
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Saudi Arabia Poland
Singapore Venezuela
Less developed countries
Kenya Honduras
Somalia Peru
Tanzania India
Uganda Philippines
El Salvador Vietnam
Development and Growth
Is economic development the same with economic growth? Which comes first,
development or growth?
Development is a progressive and dynamic process. Growth is the result of a process.

Therefore, growth is the product of de development. For example, modern methods of planting
tobacco involve a process, and this is development itself. The result is more and better harvests,
and this is growth. In the case of students, their development is through education - formal and
informal.
Because of their proper education, they get good jobs with good incomes. They spend
their money for house and lot, and for modern appliances. Such material possessions represent
growth.
Economic growth is visible and measureable. Examples are roads, vehicles, houses,
buildings, hospitals, banks, schools, etc. These are the products of economic development. The
total market value of such products is the GNP of the country. However, economic development
does not stop. It has to create more and better goods and services. In the long run, economic
development embraces a series of economic growths. Thus, earlier economic growths help
subsequent economic development. Take for example, the case of England. In the beginning, it
was just a pastoral economy with primitive farming, and handicrafts industry. However, with the
infusion of better technology and machinery, the economy of England was transformed into a
factory system. The new economy created more employment and production. Such improved
economic conditions further accelerated economic activities until England became an industrial
economy. Being a rich nation, England can afford to buy the best tools and techniques of
production to achieve higher economic growth.
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Growth without Development
Is it really possible to attain economic growth without economic development? It has

been said that growth is the product of development.
Not a few less developed countries are apparently progressive. They have modern
buildings and well-developed fruit plantations. Their many corporations are very profitable. But
all of these are owned and managed by foreigners. Among the masses, poverty, ignorance,
squalor, and disease have been rampant. Only the foreigners and the few local elite have become
prosperous. There are countries in the Middle East which have experienced rapid economic
growth due to their incomes from oil. They have been able to construct modern buildings, and
other symbols of high living. However, there are no significant institutional changes in their
education, public administration, and health. Cultural lags are dominant in their societies. Even
their economic institutions are still in the process of development. Because of their big petro-
dollars, they can import skills, technology, management, and materials. In short, they can buy
development.
Development means more than imposing buildings, beautiful houses, elegant cars, money
or modern machines. It includes fundamental changes in society, ways of life, values and
institutions. An economic growth which belongs to foreigners or an economic development that
has been imported is meaningless as far as the masses are concerned, unless, they receive
reasonable benefits and compensations for their productive contributions to the economy.
However, from the position of the country, such growth or development is not real because it
does not belong to the country and its people.
On the other hand, development without growth is inconceivable. Whenever there is real
development, there will always be growth because growth is a natural consequence of
development.
The Objectives of Development
In the past, the traditional national objective of the less developed countries was to
increase their gross national products. Emphasis was given to material or economic progress. For
instance, if the real GNP in 1992 was P600 billion, and in 1993 it was P800 billion, then there
was tremendous increase in GNP or economic growth of the country.
However, the above example is not conclusive. And in many developing countries,
despite the perceptible economic growth, social and economic conditions are deteriorating. The
reason for this has been obvious to the common people. The fruits of development have not
reached them. Only the few top government officials, big landlords, and business tycoons have
been benefited. Such situation happened because government programs are in the wrong
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directions, and the ownership of the factors of production is not in the hands masses. As a result,
mass poverty, economic servitude, unemployment, and unjust distribution of income have been
more widespread.
In view of the proliferation of economic and social problems, especially from the
countryside where most of the people live, the leaders of the developing countries have realized
the root causes of such depressed conditions. Thus, the main focus now of development is
towards the social factors. Socially-oriented programs appear to dominate national development
objectives.
Philippine Development Objectives
Since the days of the New Society, several institutional re forms were introduced, like
agrarian reform, cooperative development, human settlements, banking reforms, and other vital
changes in education, public administration, labor, and investment. All these have been
envisioned to accelerate economic development of the country.
The whole development program of the Philippines has given top priority on the
equitable distribution of wealth and income, food production, employment, and wider
participation of the people in the affairs of their own communities. Nevertheless, the principal
target of development is the development of people. The rationale of human resources
development is that people are the most important factor of production.
According to former Prime Minister Cesar Virata, the government has been committed to
attain the three basic objectives which are concerned with:
1. The attainment of economic stability;
2. The equitable distribution of the fruits of economic development; and
3. The achievement of total human development for every Filipino.
Obstacles to Development
As mentioned earlier, the less developed nations have been eager to attain their economic
goals in a short possible time. The affluence and prosperity that they have seen in the highly
developed countries have stimulated them to adopt their technologies and development
strategies. Unfortunately, such aspirations are not easy to realize. There are many formidable
obstacles that stand on the path of the less developed countries.
Poor nations are deficient in capital. They cannot afford to buy sufficient modern tools of
production. Moreover, management and manpower skills are not adequate. The Western techno
logy which they like to adopt is difficult to implement because it requires imported technicians
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and machines. Besides, such foreign technology is capital-intensive and labor-saving. This only
worsens the massive unemployment problems of the poor countries.
Another obstacle is the population explosion. Poor countries are very rich in human
resources. Their birth rate is much higher than in the rich countries. This is a serious problem
because the rate of employment and production in the poor countries is very low. So, every year
more persons are to be fed and employed. Since it is not easy to control the growth of population
for cultural and religious reasons, and it is difficult to increase production, there is a growing gap
between the two. Hence, many poor countries become poorer, and they languish in the quagmire
of poverty and squalor.
However, the greatest obstacle to economic development is man himself. Before

improving his physical environment, he should be the first to be improved his attitudes and
values. De developing people requires institutional changes in public administration, social
structures, schools, courts, health services, among other things. This takes a longer time than
building factories or constructing roads and bridges. But the development of people is the only
real and enduring kind of development. It is the principal key to the progress of the poor nations.
Stages of Economic Growth
The development of nations encompasses an evolutionary process from the primitive to

the modern societies. However, there are still societies that have until now remained primitive in
their economic, social, and political institutions. The people are half naked, and produce their
food through primitive method of farming. On the other hand some modern societies have
deteriorated in their social and cultural institutions. They have barbaric or medieval values
although they live in a modern society.
The Industrial Revolution which began in the late 1700's in England paved the rapid
economic growth of Western Europe and the United States. Since that time, economic historians
have searched for a theory that would appropriately describe the natural economic evolution that
all nations will undergo through. One approach is the stages of economic growth based on the
exchange systems. That is from the barter economy to the money economy, and finally to a
credit economy. Another way of ca categorizing the stages of growth is through the dominant
productive sectors of the economy. According to this theory as stated by the British economist
Colin Clark, there are three stages involved:
Stage 1 - Agriculture is the principal source of employment and income in the agricultural
countries.
Stage 2 - Manufacturing industry becomes the major economic activity as a country develops.
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Stage 3 - Service industries grow to be the dominant feature of the economy as a country
develops further.
The doctrine of Rostow
Many other studies have been conducted on the stages of economic growth. However, the work
of Professor W. W. Rostow, an American economic historian, appears to be the most popular. He
is the author of the well-known book, Stages of Economic Growth. Based on the doctrine of
Rostow, the transition of the economy of one country from underdevelopment to development
passes through several stages such as:
1. Traditional society
2. Pre-conditions for take-off
3. Take-off
4. Drive to maturity
5. Age of high mass consumption
How could a poor or underdeveloped country take-off? Considering the shortcomings of

such countries in terms of capital, values and institutions, they need a big push to take-off. This
is easier said than done. It requires huge amount of money, and the restructuring of values and
institutions to fit them for development. Domestic savings are not enough for significant
investments. Foreign loans are mere trickles in proportion to their gigantic needs for national
development. Likewise, their public administration is not only inefficient but also corrupt. These,
and several more, are the major reasons why the poor countries have remained miserable for
centuries. Population explosion has even made their conditions worse. And in spite of this, the
rich countries still continue to exploit them - their laborers, raw materials, and markets.
Two Different Worlds
The unfair distribution of global wealth and income has created two different worlds. A
curtain of poverty separates the two different worlds. One world belongs to the rich while the
other one is for the poor.
The rich world is called North while the poor world South. The latter has not been able to
eliminate poverty, hunger, disease, squalor, and ignorance. In fact, their social and economic
conditions even became worse. On the other hand, the North has become richer. More than 90
percent of the manufacturing industry is located in the North.
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The countries of the South share a common situation. They are economically dependent
on the North. They feed the factories of the North with their raw materials and labor. They are
the consumers of the finished products of the North. And most of the countries of the South were
the colonies of the North.
The North-South dialogues have been going on for years to resolve their conflicts and to
improve their mutual interests. But the North appears to be unwilling to reduce its exploitations
on the South Nonetheless, concerned socially-oriented leaders strongly suggested that the North-
South dialogues must aim to give every society a full opportunity to develop as it wishes, and
satisfy the basic needs of its people at an acceptable pace. It must create a dynamic world in
which every country can attain its own development.
What Kind of a World Do We Want?
The gap between the rich and the poor countries has become wider. The poor countries
have become poorer and the rich countries have become richer. All over the world, 800 million
individuals live in extreme poverty. Most of them are found in Africa, Asia, and Latin America
(Central and South America).
In Africa, hungry men snatch meat from children and old people. Many battles have been
fought in the countrysides of Latin America in the name of poverty and exploitations. The
bloody revolutions of France, Mexico, Russia, and China were ex. executed by hungry and
oppressed peasants. Many more social un rests have been committed because of economic
exploitations and deprivations.
It has been said that God did not create poverty. Poverty is a product of defective man-
made institutions. Social, economic and political institutions do not only hamper development
but also they are inhuman. Death and hunger in Africa have been caused mainly by man himself.
The numerous and endless civil wars have accomplished nothing, except deaths to hundreds of
thousands of Africans, mostly children and women, and economic depressions. In the case of
Vietnam, many people have died not only from the war but also from the persecutions of their
own present government. Thousands of Vietnamese, including children and women have
escaped from their own country through small fishing boats. And only very few survive to see
the light of freedom in other shores.
The caste system in India, although abolished by their constitution, has remained an
institution. The untouchables belong to the lowest social structure of India. They are almost
slaves of the upper class. They do not only suffer from social and economic exploitations but
they are also killed for very slight reasons. A few years ago, a whole community of untouchables
was plundered by a group of Indians who belongs to the higher social class. They burned their
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houses, raped their women, and killed the men who were not able to escape their wrath. The poor
untouchables abandoned their village, and pleaded for Justice from the national government.
A Good Economic System
An economic system is responsible for improving economic conditions of the people.

However, economic condition does not only mean material sufficiency like money, food or
houses. It also includes economic freedoms and justice. A person who has plenty of food to eat
and clothes to wear, but could not choose his job or he has no freedom to choose how and where
to spend his income, is certainly not happy. The effectiveness of an economic system is
measured by the following criteria:
-Abundance -Growth
- Stability - Efficiency
- Security - Justice and equity
- Economic freedoms
The needs of the poor masses are simple. They have no love for expensive jewelries,
palaces, sleek cars, and other conspicuous display of wealth. All they really dream are their basic
needs, the college education of their children, and some modest properties like a decent house.
Schumacher, author of Small is Beautiful, stated that people in the rural areas of the less
developed countries are simple individuals, and their needs are also simple. The economic
system should only in the beginning produce simple pro ducts for them. Thus, there is no need
for modern technology which is not only appropriate but also expensive.
The real test of a good economic system is the welfare of the poorest of the poor. If the
goods and services of the system have touched their lives, and they are contented, then it is a
good economic system. In this connection, the 1986 Constitution states:
The goals of the national economy are a more equitable distribution of opportunities,
income, and wealth; a sustained increase in the amount of goods and services produced by the
nation for the benefit of the people; and an expanding productivity as the key to raising the
quality of life for all, especially the underprivileged.
Self-Check
Hi, hope you had fun reading and hope you learned a lot. Indeed, the previous discussion
enlightened you with a lot of concepts that you must know as a student specializing in social
studies. To check your learning, please answer these four questions below:
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1. What is the difference between economic growth and economic development?

2. Why do poor countries do not like to be called as backward countries?
3. Are the obstacles to development discussed previously present in our country?
4. Why is man the greatest barrier to development?
Self-Reflect
Please continue the statement based on you want to say.
If I will be consulted by our policy makers, I will suggest that

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For me, a good economic system is one that is

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Topic II: IDEAS AND THEORIES OF ECONOMIC DEVELOPMENT
Targets
1. explain the different theories of economic development.
2. share insights on how the theories of economic development are reflected in today’s
economic events.
3. give own opinion on how foreign trade can be improved.
Take Off
Think of your favourite economist then think again of the reason on why he/she became your
favourite economist. If you have means, you may search for his/her personal background to understand
more his/her economic standpoint.
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Content
Economic ideas and theories are generally the products of existing conditions. Difference
in time and place usually has different situations, and therefore ideas and theories are not the
same. For instance, ideas and theories during the ancient, medieval, and modern times in various
regions of the earth have not been all the same. There are also ideas and theories which are
considered as impossible dreams, but in the future they may not be impossible anymore. In the
same manner, there were many ideas in the past that were publicly ridiculed. But at present these
are now realities, and they benefit mankind.
Ideas and theories may be intended to change or improve existing conditions. If the
problem is unemployment, some bright individuals with bright ideas emerge. Keynes became
famous because he was able to offer good theories on how to solve the Great Depression. Some
countries have become progressive because they have citizens who have good ideas, and these
are implemented. It is rather unfortunate that in many less developed countries, the good ideas of
their own people are ignored. They prefer to imitate the ideas, manners, products, technology,
and economic models of the rich countries, especially the United States. In the Philippines, not a
few inventions were created by Filipinos. But these were bought and further developed into
commercial scale by foreigners.
This chapter presents the various important economic ideas and theories of development
from the ancient times to the present. In addition, growth models are explained in simplistic
forms, avoiding sophisticated equations, graphs or technical approach. This is to achieve better
communication rather than impressions.
Ancient Economic Ideas
Ancient economic ideas were based on the Holy Scriptures and codes of laws. Such ideas
centered on the ways of making a living. The Bible and the Holy Men regulated economic
practices and relationships. Justice and mercy were encouraged. Greed and extortion were
despised. The pursuit of excessive wealth met social disapproval.
The famous Greek philosopher Plato was also against the accumulation of wealth
through lucrative trade or commerce. To him, agriculture is very important, and he was in favor
of specialization of production. He said that there is a need for diversity of occupations since no
person is self-sufficient, and people have many wants. In his book The Republic, he explained an
ideal state. He said that the members are to be educated from childhood for their responsibility,
and they are to be chosen through competitive examination. There is no gap between the rulers
and the ruled because the former are not allowed to own properties, except for what is necessary
to support them.
Another great Greek philosopher Aristotle likewise stressed the value of management of
agriculture. Like Plato, he was not favor of too much wealth. He did not like usury and trade.
However, he disagreed with Plato about communal property. Aristotle claimed that this is not
feasible and that it destroys individual incentives. On the other hand, Xenophon, classmate of
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Plato when they had been the students of Socrates, was in favor of capitalism. He proposed that
the government should promote trade and shipping. He also encouraged the formation of more
silver mining companies to increase general wealth. Moreover, he was in favor of joint-stock
companies, specialization, and division of labor. Just like the other ancient intellectuals,
Xenophon considered agriculture as the basis of wealth.
Medieval Economic Thoughts
Feudalism reached its peak during the Middle Ages in Europe. Agriculture was the
source of livelihood. With the rebirth of trade and commerce in the Mediterranean region, and its
rapid subsequent growth, the merchant class became wealthy and powerful. The once powerful
feudal lords lost their influences. Ideas of cooperation developed among the merchants to protect
their own interests, and to attain their common objectives. As a result, merchant guilds were
organized. Later on craftsmen guilds were also formed. Such guilds were in full control of many
economic activities in Europe at that time. They also funded the construction of public works,
and the splendid churches and cathedrals of Medieval Europe.
During the later part of the medieval period, the church became very powerful. It was an
active participant not only in religious affairs but also in political and economic activities. Most
of the scholars and writers were churchmen. The most admired of them was St. Thomas Aquinas.
He preached distributive justice and compensatory justice. The former refers to fair distribution
of goods among the members of society. The latter means just wage and price.
Aquinas condemned usury and other unfair practices of capitalism. However, the position
of the church regarding capitalism appeared ridiculous because it also actively participated in
profitable businesses. Despite the opposition of the church, trade and commerce grew. The
security of the church and the feudal lords were threatened. Their powers started to fall as
capitalism began to rise.
The Economic Doctrines of Mercantilism
The great thinkers of Europe, like Machiavelli, Bodin, and Serra, influenced much the
growth of capitalism. They asserted the supremacy of the state over all other sources of powers,
including the church. Economic ideas then were focused on the vital role of the state in economic
development. They claimed that it is the duty of the state to create and accumulate wealth.
Wealth came from gold and silver and a wealthy nation was considered powerful and
prestigious. Countries without gold and silver mines could acquire such precious metals through
favorable international trade, and colonies with gold and silver mines. As a result, the big
European nations fought one another in getting more colonies. As a matter of fact, the notorious
English pirate, Francis Drake, specialized in capturing the ships of other countries loaded with
gold. One of these was a galleon which he seized near the California coast which sailed for
Manila. And he became a hero of England for his high seas adventures.
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To achieve the objectives of mercantilism, manufacturing was given top priority.

Agriculture was no longer appreciated because of its natural shortcomings. Serra claimed that
manufactured products could be sold readily abroad than agricultural products. He further stated
that agricultural goods are perishable and bulky, and he mentioned other limitations, like limited
areas of land and the great dependence of agriculture on the weather conditions.
It was Thomas Mun who provided the ways of achieving favorable foreign trade. Being
an experienced foreign trader himself, he was a real expert. In fact, he contributed the idea of the
balance of payments. He explained about the exports and imports of goods and services. Foreign
trade is favorable if exports are greater than imports. The writings of Mun, an Englishman,
dominated the whole concept of mercantilism in Europe.
Physiocracy — Rule of Nature
Many significant changes took place in Europe, especially in England and France, during
the 18th century. Such developments included the growth of cities, the increase of wealth, the
creation of science, and the search for better ideas: The Enlightenment in England and France
greatly stimulated thinkers and philosophers to question the old doctrines and thoughts.
Eventually, dependence on the Greek philosophy and the church dogma began to diminish.
The expansion of science and the increasing number of various inventions opened up
some realities of life and the world. People started to rationalize human behaviour and the
existence of institutions. They concluded that it was not the will of God that created the
conditions in the world. Rather, it was the product of causes and effects which conformed to the
laws of nature. However, those who still believed in God stated that the will of God was
expressed in the natural law.
Philosophers claimed that people are poor because they violated the laws of nature. An
example of this is when one is lazy, extravagant or a drunkard. He is likely to make hi life
miserable. A man who neglects his health has a greater chance of getting sick. On the other hand,
those who obey and follow the laws of nature were believed to promote their own good. In the
same manner, an economy or society that conforms to such laws would be successful, according
to the thinkers.
Wealth came from the land
In France not long before the Revolution, the first modern school of thinkers to call
themselves economists emerged. They subscribed to the concept of natural law as both basic and
benevolent. Later on this school was named Physiocracy which means the rule of nature. They
stressed the importance of agriculture because they claimed all wealth came from the land. In
support of their theory, they explained that people could not exist without food and natural
resources. The farmers therefore are the real producers. Industrialists, traders, and craftsmen are
not in the real sense productive. It is only agriculture which can double or create more goods. For
example, one seed can produce more fruits. One animal can breed more animals. In fact, it is the
farmers who feed and provide jobs to the manufacturers, traders, and industrialists. Such
aforementioned views of the Physiocrats are still valid in agricultural countries. The farmers are
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the backbone of the whole national economy. Without them it is really difficult for the people to
survive and the economy to operate.
The ideas of the Physiocrats were against those of the Mercantilists who considered
money as the real wealth. They criticized the theory of the favorable foreign trade of the
Mercantilists. To the Physiocrats, favorable trade only drained the resources of the country,
because it gave .more goods than it received. They believed the real wealth of any nation are the
products of agriculture and not money in the form of gold and silver. The economic ideas of the
Physiocrats came from the ancient doctrines. The Greek philosophers and Roman writers also
considered agriculture as the real wealth. Since mercantilism was a failure in Europe, except for
England, and that it had many shortcomings, the Physiocrats argued that their country should
return to agriculture.
Laissez Faire Theory
Laissez faire is a French term, and it was introduced by the Physiocrats. It connotes non-
interference, liberty or freedom. In economics, it means the government should not intervene in
economic affairs. Just let the forces of the market interact with one another. This is in accordance
with the natural law, and the results would be good for the individuals and society, according
to the Physiocrats.
Giving grants and subsidies to industries was rejected by the Physiocrats. They said that
it is a form of corruption and favoritism since the industry is non-productive — unlike
agriculture. Quesnay, the leader of the Physiocrats, stated that prices of manufactured goods are
higher than the prices of their raw materials. The difference should represent the actual cost of
labor that produced the goods. Therefore, he said, market should be based on the cost of labor.
Individuals should be free to pursue their own particular economic interests. They should
be free to choose their own economic enterprise or occupation. The government should not help
or hinder them. All these are in conformity with the laws of nature, according to the Physiocrats.
If such economic freedoms are allowed to take their own course, they believed businessmen,
consumers, and the whole society would be better-off. Such theory was developed further by the
classical economists under the leadership of Adam Smith, a Scotsman.
The Classical Theories
The real founder of the classical school of economics was Adam Smith. He was well-
educated in the classics, mathematics, and philosophy, and he became a professor of moral
philosophy at Glasgow University. He lived at the beginning of the Industrial Revolution. His
close association with the intellectual elite like Quesnay, Rousseau, and many other great
thinkers broadened perspectives. In 1776, his famous book Wealth of Nations was published. It
explains how wealth of the nation is created and distributed. For many years, such book became
the bible of economics.
Smith being greatly influenced by the ideas of the Physiocrats believed in the merits of
the free competition concept. He said that a free market mechanism could provide more benefits
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to individuals and society than an economy run by the government like in the case of
mercantilism which even established trade monopolies. This theory still is the bone of contention
among many economists and political leaders. Some favor a free enterprise while others
advocate government intervention in the economy.
Smith was not only able to influence thinkers and scholars in his country but also in other
countries. The more popular ones were Thomas Malthus, the author of population theory, and
David Ricardo who developed the law of comparative advantage. Likewise, the economies ideas
of Karl Marx came from the writings of Adam Smith. Subsequent topics explain the aforesaid
theories.
Production is the real wealth
Adam Smith explained in his economics book how the wealth of a nation is increased,
and the manner of its distribution. According to him, the only source of wealth is production
through labor and resources. He wrote that wealth can be increased through of labor and the use
of machinery. Moreover, he noted that improvements in transportation can promote the growth
of commerce and industry. Nevertheless, Smith provided the conditions for increasing the wealth
of the nation, such as the size of the market, labor efficiency, and the total population. He said
that individual welfare depends on the ratio of total production to total population.
Under a free market economy, Smith claimed that production would be most efficient.
Through free competition, only the best producers survive. This means they are the most
efficient — and the consumers can get the best quality and the lowest price product. This cannot
happen under monopoly. Such free competition views of Smith also applied to wages and
interests. According to him, both are determined by demand and supply. For example, if the
demand for labor is greater than the supply of labor, then wage increases.
Smith, in claiming that production is the only source of wealth, was more or less referring
to industrial production which was taking place in his society. The application of division of
labor and machinery is more appropriate in industry. At that time, most of the farmers of Great
Britain were tenants, and they were exploited. For this reason they gave up their farms, and
worked in factories. So his theory of wealth has been based on industrialization, and not on
agricultural development. Therefore, in this respect, he differed from the other earlier thinkers
who favored agricultural development.
Although Smith stressed free competition, and the non-intervention of the government in
economic affairs, he made some exceptions. For instance, he encouraged the government to
promote shipping. He favored the imposition of tariffs for bargaining purposes and for equalizing
competitions. Furthermore, Smith stated the role of the government should be confined to
defense, justice, education, public works, and protection of foreign trade. And of course, the
government could engage in public finance. The basic principles of taxation came from Adam
Smith.
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Theory on population
The Industrial Revolution which started during the later part of 1700's developed in an
environment of laissez faire. It was just beginning during the time of Adam Smith, and he was
not able to witness its results. When he explained the good results of free competition, he had in
mind the virtues of people. But things did not materialize for the good of individuals and society.
Instead, the powerful capitalists emerged, and exploited the workers.
The flannel weaving industry in the rural collapsed because of the more efficient factory
system. Consequently, there was a great influx Of rural people in the urban communities looking
for jobs. This created both social and economic problems. The capitalist took advantage of the
situation. They gave very low wages to their workers, and forced them to work up to 17 hours.
The government did nothing to help the workers. Poverty and squalor became widespread among
the workers. 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.
Malthus said that the rate of population growth is higher than the rate of food production.
He did make some dismal predictions of the future of mankind. To control population growth, he
proposed late marriages and abstinence. Such ideas constitute what is now the famous
Malthusian theory.
The dismal predictions of Malthus have not taken place in the developed countries. Their
higher stage of economic growth has become a very effective birth control device, and their
modern production technology has given them enough food supply. It is only the less developed
countries which are now afflicted with the Malthusian theory. They have a very high birth rate
but they have very low food productivity. Many of them are already dying from hunger and
malnutrition.
The theory of comparative advantage
David Ricardo, one of the famous classical economists, developed the theory or law of
comparative advantage. Based on theory, nations should export the goods which they enjoy the
greatest advantage, and should import the goods which they have the greatest disadvantage. This
simply means — do not produce the product if it is cheaper to buy it. Ricardo explained this
theory by giving two countries and two products as examples. The comparative advantage refers
to the lesser number of hours or days of producing the product. To illustrate —
Countries Rice Calculator
Japan 120 days 10 days
Philippines 90 days 15 days
The above illustration shows that Japan has a comparative advantage in calculator while
the Philippines in rice. Following the theory it would be better for Japan to produce calculator
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and just buy rice from the Philippines. In the case of our country, it would be more economical
not to produce anymore calculator. Just import from Japan, and concentrate in rice production.
The classical economists, like Ricardo, equated the value of a product with the cost of
labor that went into its production. Thus, a product which takes more hours or days in producing
has a higher price or value than a product with lesser hours of producing it. For example, if it
takes 4 hours to catch a wild rooster and only 2 hours to catch a big fish, then the price of the
rooster is twice that of the fish. In the aforementioned illustration, it is cheaper or Japan to buy
the rice than to produce it.
The theory of comparative advantage is being practiced in international trade. Agricultural

countries export raw materials and import finished products from the industrial countries. The
problem is that the prices of raw materials and other agricultural products are very low in the
world markets. And yet the prices of finished products are very high. The industrial countries
control the operations of the world markets, and they can manipulate prices of goods to the
disadvantage of the less developed countries which are basically agricultural economies.
Theory of Karl Marx
The economic ideas of Karl Marx were basically derived from the classical economists.
He only qualified his theory of value by emphasizing that labor must be socially necessary. Marx
maintained that the workers are the real producers of goods. And yet, he claimed the benefits of
production go to the capitalists and not to the workers.
Using the process of "dialectics" of Hegel, Marx stated that there is a class conflict
between the workers and the capitalists. He said that the workers constitute the "thesis" which is
the positive, and the capitalists the "antithesis" which is the negative. The opposition of the two
groups would result to a new system called "synthesis,"
Karl Marx developed his theory of scientific social evolution by saying that in the
beginning – when it was still a primitive society - there was social equilibrium. However, when
new ideas and new tools of doing things were introduced, the old system was disturbed. Man
became greedy for power and wealth. Man was greatly concerned with material things. This led
to a class struggle between the workers and the capitalists. The latter have wanted to accumulate
wealth at the expense of the workers.
In the class struggle between the workers and the capitalists, Marx predicted the downfall
of capitalism due to its limitations. However, such prediction did not come true. There were no
revolutions in the industrial countries. Capitalism has not disappeared; instead it has expanded
and become stronger. Compared with other economic systems, countries with capitalistic
societies have high standard of living, such as the United States, Japan, Canada, and the others.
The free enterprise economy still shows the greatest potential for economic growth. Profit motive
is still a very good incentive in encouraging the private individuals to participate in business. In
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fact, the Russian agriculture is a failure primarily because of its economic system. Farmers are
more efficient when they are given economic incentives.
However, the ideas of Karl Marx are not without significance. His warnings greatly
contributed to the welfare of the working class. Workers have become more united and
organized their labor unions. On the other hand, capitalists have improved their management
policies towards their workers. However, in many parts of the world, capitalists still exploit their
workers. Such abuses are rampant in the less developed countries where there is over-supply of
labor, and poverty is widespread. Poor people are forced to accept low wages. Agricultural
workers experience more miserable working condition, especially the casuals in plantations.
Such exploitations are the root causes of many troubles in the rural areas, like in Central and
South America.
Promotion of Human Values
Jean Sismondi, a noted Italian writer, disagreed in many ways with Adam Smith. He
stated that wealth should not be measured in terms of material things but in terms of human
welfare. He pointed out that no nation can be considered prosperous if the conditions of the poor
have not been improved.
He rejected the laissez faire theory which provided freedoms to individuals to seek their
own self-interests for their own welfare and that of society. Sismondi asserted that the state
should interfere to prevent the unfair distribution of wealth spawned by un- restrained capitalism.
The main contention of Sismondi is focused on the welfare of the poor. He was more
interested in social justice rather than in the accumulation of wealth by the industrial system
manipulated by the powerful capitalists for their own materialistic inclinations.
The economic ideas of Sismondi were the products of his observations of capitalism.
Like the other socialist thinkers, he was outraged to witness the human miseries created by the
existing economic system. Thus, he proposed an active role for the government in protecting
human values.
Factors of Economic Development
Friedrich List was a German professor of economics and political science. He also did
not agree with the ideas of the classical economists about production, free trade, and free
competition. According to List, the progress of a nation is great not in proportion to the
accumulation of wealth, but in proportion to the development of the productive forces. Such
forces refer to natural resources, science, arts, government laws, education, peace and order,
morality, and the harmonious relationships of the various industries and occupations. As an
example, he mentioned some of the great productive forces, such as the Christian religion,
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monogamy, postal system, transportation, invention of the alphabet and printing, freedom of
conscience, parliamentary legislation, etc.
Another disagreement of List with the classical economists was free trade based on the law of
comparative advantage. He claimed that such law favors only England because of its higher
stage of industrialization. He cited the cases of younger nations like Germany and the United
States which could not develop their economies if they applied free trade. List said they could
not compete with the products of England.
Nevertheless, List was in favor of free trade among nations if they are all developed. He
proposed that a nation should protect its industries by means of tariffs during its early stage of
industrialization. Once such industries become viable and strong, protection would be lifted
according to List. Likewise, he mentioned that once a nation becomes highly developed, it could
practice laissez faire.
Theory on Progress and Poverty
The book Progress and Poverty made its American author Henry George famous. He saw
the rapid economic growth in California during the 1870's amidst widespread poverty. Such
condition stimulated him to analyze the different theories of distribution among the factors of
production, like labor, capital, and land. He was not satisfied with the doctrines of the classical
economists regarding wages, profits, and rents.
In his analysis, he concluded that rent is the root cause of 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 said that one can become rich by purchasing not the
best farm but a piece of land near the center of a fast growing city. It does not matter, he said,
whether this is the most fertile land or solid granite.
o Henry George, rent is an unearned income. The reason for such view is simple. During
the early days, land could be acquired free through proper application from the government.
Others got their lands through inheritance or by historical accident. Because of the sudden
growth of population and business, land rents have increased. Thus, the landowners are the
beneficiaries of unearned incomes. Businessmen pay the rents. If rents increase, they have to pay
more. This means the cost of production or business gets higher. But such cost is paid ultimately
by the consumers when they buy the goods of the businessmen. The latter let the buyers pay the
rents in the form of higher prices. This makes the economic conditions of the poor more
depressed.
Key to progress
Henry George proposed that increase in rent and value of land should be taken by the
government in the form of tax. All taxes should be abolished, except tax on land. However,
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improvements introduced by the landowners are not covered by the single tax theory of George.
Only the unearned incomes from the land should be taxed. George believed that such revenues
could finance all government expenses, and there would be no need for other taxes.
Consequently, this new tax program stimulates trade and commerce. Likewise, workers would
no longer bear the heavy bur den of paying taxes on production and consumption. Moreover,
George claimed that landowners would be encouraged to improve their landholdings to gain
profits rather than give their unearned incomes to the government. These would generate more
produc tion and competition. Articulating the good points of his single tax theory, George
predicted a paradise for the whole society. He said, if adopted it would mean full employment,
eradication of slums, and the steady rise of wages due to rapid increase in labor demand.
The theory of single tax became popular. Some local governments tried it under limited
applications. But it was not successful. However, the idea of unearned earnings of the landlords
has gained the approval of social reformers and philosophers.
The crusade or George for a single tax scheme did not succeed. Landowners were very
powerful even during his time. The rapid increase in population which George saw was brought
about by the "gold rush" in California. Together with the rapid increase in mining companies, the
value and rent of land went up tremendously. The poverty that George saw was the product of a
prolonged depression in the economy. This was the result of business cycles.
Modern Theory of Employment
Employment is determined by supply of and demand for labor. A decline in employment

means that wages are nigh in relation to the prices of goods. Producers are not willing to
manufacture goods if they know they are going o lose. So they get more workers if they are
willing to accept lower wages. This means they make more profits. Thus, the main point of the
theory is that the cause of unemployment is high wages. There is more employment when wages
are lower. Such ideas constitute the classical theory of employment. This was accepted for many
years.
However, during the Great Depression in the United States in the 1930's, there was
widespread unemployment. Even if people were willing to accept low wages, there was no
demand for jobs. Hence, the validity of the classical theory of employment was tested, and it
failed. It was John Meynard Keynes, an English economist, who found the answer to the
American problem. He claimed that high wages could not be the cause of unemployment. He
cited the example that workers in America could not find jobs at any wage.
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Keynesian theory of employment
Based on the Keynesian theory of employment, which is a modern theory, employment

determines the necessity of equat ing the aggregate supply of goods with the aggregate demand
for goods.
When people buy more goods, it means there is more expend iture or consumption. This
condition stimulates more investments which also increases employment and production.
Businessmen put up more factories because they expect greater demand tor their products. There
are other factors which determine investment, such as price, cost of production, interest rate,
competiti0, etc. However, the m0st important factor is the expectation of profit or returns of
investment. According to Keynes, as long as returns or investments are higher than interest rates,
there is investment. Even t the interest rate is very low, it does not follow that investment
increases. During the Great Depression there were no investors even if they were offered very
low interest on bank loans. The reason was that there was no profit expectation. On the other
hand, a very high interest rate does not discourage a borrower if he feels he will make more
profit in his projected investment.
Keynes proposed to the United States government to spend more money in order to solve
their depression. So, many public works were constructed which created massive employment.
The situation generated income for the people. They started buying more goods and Services.
This encouraged the private business sector to meet the growin8 demand of the people. As a
result, employment was also created by the private sector. They needed more people in
producing goods and services. Such favorable conditions accelerated further economic activities.
And the Great Depression disappeared. Keynes became the "father of modern economics
Innovation Theory
Joseph Schumpeter is the author of the innovation theory. He placed emphasis on the
role of the innovator in economic development. The innovator is the economic leader or the
entrepreneur who has the courage and imagination to handle old systems, and be able to
transform theory into practice.
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.
Because of innovations introduced by few daring entrepreneurs, the industry concerned

became profitable. Such favorable economic situation attracts more innovators. They merely
follow the economic leaders. This means there is more business expansion employment and
production.
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Evidently, in the theory of Schumpeter, the key factor in economic development 1s the
innovator or the entrepreneur. He is the planner, organizer, coordinator and implementor of
economic activities. 1t has been observed, however, that the role of the innovator in the less
developed countries 1s hardly felt. In general, people are conservative in their investments. Many
business enterprises are owned by families, and these are managed by their own members. Their
financial resources are usually invested in safe business like real estates.
Some Growth Models
Economic models can be simple or sophisticated. It all depends on the architect or the
situation which the model tries to improve. Such models show the relationships of inputs and out
puts. However, their key inputs vary from model to model. For instance, one economic model
places capital as the key variable. Another economic model stresses technology. Their
effectiveness, however, depends on several factors. Local conditions like climate, natural
resources, manpower, money, social structure, culture, values and institutions have to be
considered.
Most economic models were made by the United States and Western Europe. Naturally,
these were based on their own local conditions. Not a few developing countries have been
inclined to copy such models. Even Western economic advisers apply these models in the
economies of the less developed countries. The results have been failures. This was experienced
by Japan during its formative years. But the country was quick to modify Western technology to
fit its local conditions. Here are some of the more popular growth models:
The Ricardian growth model. This was derived from the law of diminishing returns of
David Ricardo. He stressed the limits of economic growth brought about by the scarcity of land,
its being a fixed input, and its diminishing productivity. To reduce the constraints of economic
growth, Ricardo proposed the discover of more land for cultivation or more food at lower prices
should be imported.
The key factor in the growth model of Ricardo is land. 'This means the agricultural sector
assumes a very vital role in economic development. To the poor countries which are mainly
agricultural economies, this model appears to be relevant. Many agricultural countries have been
able to increase their farm production through the cultivation of more farm lands not through
efficiency. In the case of the highly developed countries, their agricultural productivity has
greatly increased through the use of technology and machinery. For instance, the problem of
scarcity of farm land in Japan has been reduced by producing more crops in its limited available
farm. It has the highest rice productivity in the whole world.
The Harod-Domar model. This model was developed by Sir Harrod of England and
Professor Domar of America. The key factor is physical capital like machinery, buildings,
equipment, etc.
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The model shows the relationship between the input and the output. 1he input is capital,
and its efficiency is reflected in its output. For example, a certain amount of capital stock or
physical capital has been invested. f the results or outputs have been substantial in terms of
employment, production and income, then the capital has been used efficiently. The rate of
growth in the economy can be measured through the GNP or real per capita income.
Evaluating the Harrod-Domar model, the efficiency of capital in relation to economic

growth depends on several factors. For instance, values of the workers, their skills, technology,
government policies, and the like determine whether capital could be productive or not. Poor
nations are deficient in capital. But this is not the key factor in their economic growth; it is more
on human and institutional developments.
The Kaldor model. The author of this economic growth model is Nicholas Kaldor. The
key factor is technology. He pointed out that technology is embodied in physical capital. He
further stated that technical progress comes from investment. Examples are modern machineries,
tools, and equipment. These are symbols of technical progress, and they are the products of
investments. Moreover, Kaldor claimed that it technical progress grows faster than capital stock,
the additional productivity of capital increases. And this leads to more investments.
A very good example of economic growth due to technical progress is Japan. It has
invested a big slice of its national budget for research and technology. As a result, It has become
very progressive as a nation. Technology has greatly improved its industries. It is now number
one n the use or robots in factories. In fact, such machines are even used in hospitals as
attendants, and in offices as secretaries. For the less developed countries of Asia, Japan can serve
as a good economic model. It also started from a feudal economy.
Self-Check
Como es ta? Hope everything is going well with you. So are you ready now with your
second self check? If you are, then kindly consider the following questions to guide your
understanding.
1. Explain some economic ideas during the ancient times. Which idea do you like best?
Justify your answer
2. Briefly discuss the concepts of justice of Aquinas. Do we have this kind of justice at
present in the Philippines? Explain your answer.
3. In your own opinion, how do you improve foreign trade?
4. State the ideas of Marx. Do you agree with him? Why?
5. Explain the ideas of Sismondi and List. Are these good for our own economic
development? Why?
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6. Explain the ideas of George on rent. Give specific examples of problems on rent in
the Philippines.
Self-Reflect
Express using illustration/drawing three important life lessons that you have gathered
from the previous topic.
Topic III: DETERMINANTS OF ECONOMIC DEVELOPMENT
Targets
1. Discuss the different economic and non-economic factors of development.

2. Share insights and opinions on how economic development can be easily achieved.
3. Reflect on Filipino cultural values that are not supportive of development.
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Take Off
Interview persons, could be relatives or friends, about the Filipino cultural values that
they think hamper economic development. List them.
Content
Economic development is not determined by economic factors alone. There are non-
economic factors that affect economic development, and they have greater influence than the
economic ones. Examples of economic factors are capital, technology, and market. While the
non-economic factors are government, religion, education, social structure, values, culture, etc.
Clearly, solving economic problems with economic solutions only is inadequate. More often than
not, the problems remain unsolved. For instance, the planning and implementation of an
irrigation system does not only involve money and method but also the attitudes of those who
will implement the project.
This part discusses the various factors of economic development. Their effects on the
development of nations, especially the less developed ones are explained.
Capital
In economics, capital refers to finished goods which are being used to produce other
goods. These are the machines, buildings, tools, equipment, etc. These are also specifically
called physical capital. In the case of money, it is financial capital. People are classified as
human capital.
Obviously, machines accelerate the production and distribution of goods. Work can be
done in lesser time and effort. This also reduces the unit cost. During the ancient times, people
relied on men and animals for their production and construction. For example, their temples and
pyramids were built by thousands of workers, mostly slaves. It took them years to finish their
projects. Unfortunately, there are still many parts of the world which are using primitive methods
of production and construction. And these contribute to their slow pace of development.
The rich countries, like the United States, Japan, and those in Western Europe, have been
using modern machines in agriculture, industry, and service organizations. As a result, they have
become efficient in their economic activities. They produce better goods at lower cost. In the
world markets, their products are more preferred.
On the other hand, the less developed countries do not even have enough fur for road
construction, electrification, communication, irrigation, and other vital projects for economic
development. Their incomes from selling raw materials and crops to the industrial nations,
together with taxes, are not sufficient. In most cases, the less developed countries depend on
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foreign loans and investments to develop their economies. In Latin America, most of the
imposing buildings and impressive machines are owned and managed by foreign corporations –
the multinational corporations. Most of these giant enterprises belong to the United States.
However, despite the presence of these profitable businesses, the countries and peoples in the
region are very poor. For example, Sao Paulo in Brazil is the largest and fastest growing urban
community in the Western Hemisphere. In spite of its glittering affluence, most of its people live
in poverty and squalor.
Technology
Technology generally refers to better techniques or methods of production. However, it

can also be applied in other fields like public administration, education or social work. For
instance, social technology is concerned with the improvement of attitudes and values of the
people. Public administration technology deals with the improvement of social goods in order to
maximize the satisfaction of social wants.
Research has contributed much to the development of technology. The discovery of a

new technique is invention, according to Schumpeter. He pointed out that the practical
application of an invention to production for the market is innovation. However, not all
innovations are for the markets. For example, political or social innovations are intended for
improving conditions in the government or society.
Research and development require big funds. Through these better ways of doing things
or producing goods are discovered. The rich countries can afford to undertake necessary and
expensive research and development projects. They give high priority to such undertakings
because their future economy greatly depends on them. Among the rich countries, both the
government and the business sector are actively engaged in research and development.
On the other hand, the less developed countries merely copy or imitate Western
technology. Apparently, such practice is cheaper. They are spared from spending millions of
money for researchers, scientists, laboratories, buildings, and equipment.
Technology for the less developed countries
Actually, there is nothing wrong with the importation of technology. It saves both money
and time. However, the imported 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.
Many years ago, Japan was a notorious imitator of Western technology. Immediately
after eliminating its feudal economy, Japan completely copied the agricultural technology of the
United States and England and applied this in its farms. The result was a dismal failure. The
individual farm units of Japan are small, and the imported machineries are not appropriate. These
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are only pro per for large farms like those in Europe and the United States. Another case, a poor
country bought a giant machine from Russia. This was used in constructing a huge dam in the
countryside. While the giant machine was in the process of excavation, thousands of unemployed
people were watching with admiration the wonderful job of the machine. Evidently, a poor
country with a very large population of unemployed should give first priority to labor-intensive
technology. The jobless people should work in the construction of the dam not the expensive
imported machine.
Likewise, Professor Gunnar Myrdal, author of Asian Drama, noted that Western
technology has been adopted in Southeast Asia without proper consideration of the local climate
and soil conditions. Naturally, this has an adverse effect on production, Being poor countries,
their scarce resources should not have been wasted by the improper application of technology.
In the case of the industrial countries, they use machines or capital-intensive technology,
because labor is scarce and therefore expensive. So, it is more economical for them to use
machines rather than employ workers. For the poor countries, they have an oversupply of
unemployed and underemployed individuals. They should therefore use labor-intensive
technology. This means more labor and less machines.
In a meeting with farmers and fishermen in a fishing village in Cavite, former Prime
Minister Cesar Virata discussed the local economic problems. In the process, one farmer stood
up and complained about the bad condition of his crop. He proposed a technique to remedy his
problem. However, Virata told the farmer that his approach is a "cadillac technology" which is
expensive and imported. He then suggested that a local technology be develop which is more
suitable and less expensive. In the same manner, Schumacher, author of Small is Beautiful,
suggested an intermediate technology for the less developed countries. This type of technology is
between a primitive technology and modern technology. It is more efficient than a primitive
technology and less expensive than a modern technology. Such technology is labor intensive.
Market
The growth of markets reflects an expanding economic development. For as long as the
various sectors of the economy are equitably benefited, economic growth is real and enduring. A
flourishing market which enriches only the foreigners and the very few local elite only
aggravates the problems emanating from the maldistribution of wealth and income. Such
condition is wide spread in the less developed countries.
Transportation, communication, and electricity are greatly helping the growth of markets.
Such external economies of scale reduce cost for both producers and traders. In addition, contact
between sellers and buyers is easier and more convenient. In this connection, capital and
technology are directly involved. Machines and other physical facilities are needed to accelerate
production, processing, and distribution. Likewise, technology improves production, processing,
and distribution. This is not only favorable to the sellers but also to the buyers. A more modern
Page 29 of 50
production and marketing system saves cost and improves the quality of the pro ducts. Goods
with lower cost of production and distribution have generally lower prices. This increases the
purchasing power of the buyers, and so demand for the products also increases.
A market becomes bigger when more people buy more goods. This stimulates
investments and production. It is only expected that businessmen are willing to produce more if
there is a good demand for their products. The same situation applies to farmers. They are
encouraged to raise crops that have favorable markets. Thus, a practical and rational way of
convincing people to produce more goods is the presence of a favorable market.
Obviously, it is unfair for any government agency to tell farmers to improve their
production methods if there are no profitable markets for their products. Worst, if there are not
even feeder roads connecting their farms to the markets. In reality, there are still many far-flung
villages in Latin America, Africa, and Asia which have been isolated from civilization for
centuries. Such condition greatly contributed to their poverty and ignorance.
Needless to say, the industrial countries have considerable advantages in both local and
foreign markets. Their products are of better quality. Their prices are lower, if there are no taxes
or tariffs imposed on them. The less developed countries are excellent markets for their products.
The colonial mentality of the people further bolsters the lucrative business of the multi-national
corporations.
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. Members of society
are induced to pursue their own individual interests, be it economic, social, cultural or political.
And this is good for economic development. Being an open society, even the humblest citizen
can aspire to be rich or be the leader of his country. Opportunities for improvement are open to
all members of society. Hence, a man in the lower class can move upward.
On the other hand, a society whose wealth and income be long to very few families does
not encourage economic development. Since the fruits of development do not go to the people,
they have no enthusiasm to participate in any government development program. It is even
worst, if it is a close society. People who belong to the lowest social class cannot move to higher
social structure because it is the written law. Such situation only breeds poverty and ignorance.
The poor have no more desire to work hard and study. Their social classes are already pegged,
and there for they have no better future and that of their children.
In the case of the caste system of India, it was abolished by the constitution. However,
such evil has not been erased from the abusive nature of the more privileged members of the
Indian society. They still consider the poorest people as untouchables. These are the slaves of
India. They perform all the dirty work, such as water carriers, street cleaners, hospital helpers,
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laborers, and servants. They are the social outcasts of India, and they are exploited. In the case of
the Apartheid policy of South Africa, the Blacks are considered the lowest in the social ladder. In
terms of population, they are the majority. And yet, they cannot vote in the elections. They have
practically no political, economic, and social freedoms. The inhuman laws have been made by
the Whites who only constitute a minority group. No less than Mohandas Gandhi, then a young
lawyer and a new graduate from a university in England, was kicked out from a first-class train.
He had not known earlier that the locomotive was exclusively for Whites. It has been, indeed, a
paradoxical situation. South Africa is a land of the Blacks but the few Whites who claimed to be
educated and therefore civilized rule the country with injustice.
The Family System
Family members in Western societies like the United States are more individualistic and
self-reliant. Adult children are financially independent from their parents. They are free to pursue
their economic inclinations anywhere. Considering the security of the parents, their family
obligations are minimized. Unlike in the less developed countries, especially among Asians, the
children have to take personal care of their poor old parents.
An extended family system, which is common in the Philip pines and other developing
countries, is good in the sense that there is unity, and the welfare of the old and the young
members are protected by the stronger adult members, usually the eldest sons. However, it has
dominant features which are not favorable to economic development. For example, many
married children live with their parents. In case their parents can afford to support them, the
children are likely to lose their self-reliance. They do not work hard and just depend on their
parents. In fact, not a few young men have the courage to marry even if they are jobless because
they know their parents will take care of them in the meantime - or even for many years.
Another, close family ties hamper labor mobility, and the choice of better economic
opportunities. Their grandparents or parents do not like their children to work in far places,
especially if they are women. As obedient children, they follow the wishes of their old folks.
However, there are exceptions in the case of Ilocanos and Visayans. They are courageous
adventurers. They are willing to work in any part of the world. In the remotest barrios in the
Philippines, almost always you can find an Ilocano public schoolteacher. Likewise, the family
obligations of the older children to their parents and younger brothers and sisters have been a
part of culture. The unmarried older children especially have an obligation to support their old
parents, and the younger siblings. Such responsibilities restrict the economic opportunities of the
older children. If the family is engaged in farming, then the unmarried older son has to help his
father. In the Philippines, many poor marriageable children postpone their marriages in order to
fulfill first their obligations to their parents and other immediate relatives.
In the highly developed countries, the governments take care of the aged and the jobless.
So children of poor families are relieved of the burden of supporting their close relatives. They
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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. They retard the
growth of the economy. For example, in the Philippines, cultural values such as bahalana,
mañana habit, ningas cogon, and other similar values are not conducive to economic
development.
According to Professor Myrdal, industrialization requires efficiency, mobility, discipline,

and punctuality. In his ten years field research in Asia, he observed that many Asians do not have
these. In our country we have the familiar Filipino time. If the time of the meeting is 8:00 A. M.,
it means 9:00 A. M. or even 9:30 A.M. Another characteristic of the Asians is to say yes when
they really do not mean it.The idea is to please or not to embarass the other person who makes
the request or invitation. For instance, you ask them to attend a meeting, and they say yes. But
they do not attend and they have a good excuse.
It is really very different in Western culture. They are efficient, punctual, and responsible.
These can be observed in the Philippines among the American offices. For instance, at the
United States Embassy the American officers work hard, and they are extremely punctual. The
Filipino employees at the embassy have to work hard also. However, many of them cannot yet
equal the consistent punctuality of the Americans.
In contrast, Filipino officers, especially those in the government are not as efficient.
Many government offices are doing very little between 8:00 A.M. and 9:00 A.M. In fact, even
during office hours some employees are selling all sorts of consumer goods. Somehow, they
could not be blamed for making sidelines because of their low salaries. And sometimes, they
have nothing to do.
The desire to imitate
Many peoples in the less developed countries admire the consumption habits of the
Americans and the Europeans. So, they take extreme pride in eating their foods, wearing their
clothes, and using their appliances and tools. This is colonial mentality, pure and simple. They
love the products of their former colonial masters.
The local elite in the Caribbean islands display their European goods in order to enhance
their social status. Their houses were built in Western architectural style. They wear Western
clothes. Their cars are cadillacs. Even the unschooled who are wealthy display their Parker pens.
The Philippines is no exception. Imported goods are very attractive to the Filipinos. In fact, a few
Filipinos imitate the diction of the Americans, and other American mannerisms.
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Another example is Argentina. Its people fervently emulate the Europeans. Based on a
Newsweek article, the Argentinians were described as a bunch of Italians who speak Spanish. But
they wish they were British and act like they were French. Buenos Aires is proud of the five-star
hotel, Claridge, Harrod Department Store, and a temporary reproduction of Big Ben. The
children of the Argentine elite study in English language schools and play polo. The laborers of
Argentina patronize soccer teams with English names like River Plate and Newell's Old Boys.
Such misplaced cultural values do not encourage at all the production of local goods.
They do not help the development of local industries. People do not take pride and appreciation
in their own products and industries. In the case of Japan, despite its adoption of Western
technology in the beginning of its economic development, it has never lost its own culture and
tradition. The Japanese people love their own country, its products and its institutions.
Whenever an underdeveloped country attains rapid industrial growth through foreign

investments or through its own resources, some of its cultural values which are not favorable for
economic development do not change. Such cultural lags form barriers to real and meaningful
economic development. Most of these problems of development take place in some societies in
Africa and the Middle East due to foreign investment and their petro-dollar resources. With
these, they can easily build beautiful houses, modern buildings, and other external symbols of
apparent economic progress. However, in spite of their physical development, some so cities
practice cannibalism, and others still consider the big rivers, violent volcanoes, the moon and the
sun as their gods. They appeal to these for the success of their crops, and their own personal
welfare. Definitely, such practices do not contribute to real economic development.
Political Conditions
Political conditions have considerable impact on economic development. Political

stability and fair economic policies stimulate economic development. These attract local as well
as foreign investments.
The major role of the government is to provide a high standard of living for its people.
This can be attained through higher levels of investments which generate employment and
production, and through the equitable distribution of wealth and income. Plans, policies and
programs are tools of economic development. These can only operate efficiently under a regime
of good and honest public administration.
But if governments keep on changing very often, economic programs and projects are
likely to suffer. This is a waste of scarce resources. Not a few countries in Africa and Latin
America have very unstable governments. Coup d'etat has become a common spectacle. There
were cases that only a sergeant in the army, together with his followers, toppled an existing
government. Such frequent political disorders and changes do not inspire economic
development. And this is one major cause why the countries in such regions are generally poor.
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Singapore is a tiny state. In terms of natural resources, it is very poor. And yet it is very
affluent and progressive, compared with most Asian countries. The principal keys to its
economic growth are foreign investments and tourism. These have been very successful in
Singapore because there is an excellent political stability and a very efficient and honest public
administration.
In fact, Singapore has put up a modern infrastructure for computer technology. It intends
to transform its place into a computer center of the world. This would attract more international
institutions to invest in Singapore. And this would be favorable to the economy. More
investments mean more employment, production, and income. Singapore is one of the very few
countries which can handle foreign investments effectively without sacrificing the interests of its
people and society.
Corruption in Public Administration
According to an economics professor in Singapore, government corruption is the number

one obstacle to economic development in Southeast Asia. He pointed out that very precious
scarce resources, like money, are not properly utilized for development due to graft and
corruption.
Government corruption is present in any society. However,based on observations, such

corruptions are more rampant in the less developed countries like those in Asia. Professor
Myrdal stated that corruption has reached even the higher levels of government officials and
politicians. He cited the various government offices which have been corrupt, such as the public
works departments, government purchasing agencies, and those involved in the collection of
taxes, customs duties, and export and import licenses. Myrdal mentioned that corruption has not
spared even the courts of justice and the universities.
In dealing with government offices, bribery has been a common practice. There has been
a need to bribe government personnel to expedite applications or approvals. Myrdal further
observed that through the use of middlemen, businessmen have bribed high government officials.
Of course it has been difficult to prove that such middlemen really gave the money to said
officials. The policemen and government clerks have gained the reputation of ac accepting bribes
in full view of the public. It has become an ordinarypractice. Their low pay encourage them to
commit petty corruption.
Nevertheless, Asian government have taken measures and actions to weed out inefficient
and corrupt employees and officials. In the Philippines, the present political leadership has
restructured some government institutions, and removed the corrupt ones. However, the task of
cleaning the government is a long and difficult process, considering our Oriental values and
depressed economic conditions. Besides, corruption has become an institution. It cannot be
eradicated overnight. Laws and punishments are not enough to remove corruption. It is more
important that economic conditions of minor employees be improved, and the moral values of
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government officials be changed. Moreover, the honesty and integrity of top government
officials can serve as a good example for their subordinates.
Religion
During the Biblical times, materialism and the pursuit of wealth were despised and
discouraged. Similar attitudes were shown during the time of the ancient Greek philosophers and
the Scholastics led by Aquinas. In fact, the Bible contains many statements against wealth or
materialism. For instance, it says that the poor are blessed for they shall inherit the kingdom of
heaven. Moreover, it is harder for a rich man to enter the gate of heaven than for a camel to pass
through the eye of a needle.
Such religious concepts and teachings against materialism are not favorable to economic
development. When people shy away from the pursuit of wealth, economic growth tends to be
slow and primitive. There is no need for them to work harder and to search for innovations. They
are just contended with their simple living. Of course, it depends on the values of people. Many
hate economic progress because of its bad effects, such as pollution, traffic congestion, and the
destruction of the natural beauty of the environment.
Max Weber, author of the Protestant Ethics and the Spirit of Capitalism, claimed that the
Protestant countries are more progressive. He proved his theory by pointing out the presence of
dominant values like thrift, industry, and entrepreneurial spirit among Protestant nations. He
pinpointed the rise of Protestantism as the cause of the growth of the capitalist order in Europe.
As an example, China with an older civilization and richer natural resources was not the
birthplace of the Industrial Revolution.
Former colonies of Spain are Catholics. They inherited their religion from their former
colonial master. Most of these coin tries belong to the less developed countries. Many of the
countries in South and Central America were former territories of Spain. Myrdal classified the
cultural and religious values of the Philippines as similar to Latin America. The more than three
hundred years of Spanish rule in the Philippines has tremendous effects on our pervading
attitudes and values.
There are several Catholic practices which are not consistent with the principles of
economic development. For instance, barrio and town fiestas are celebrated to honor their
respective patron saints. Usually, these are expensive celebrations. Most people, especially in the
rural areas, spend all their savings. In fact, many people even borrow money to feed their
hundreds of guests from neighboring barrios and towns. Such expenditures are wasteful and
misplaced, especially for the poor. There are also other celebrations which are religious in
nature, like marriages, baptisms, etc. In most cases, these are also conducted in expensive style.
They always say it is once in a lifetime. However, for the rich to splurge, there is nothing wrong.
They can afford lavish celebrations. But for the poor, it is different. They become poorer and
incur more debts in trying very hard to comply with religious traditions.
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Nevertheless, religion is only one of the factors of economic development. It cannot

totally influence economic growth. The claim of Weber that Protestantism was responsible for
the growth of capitalism is not exactly correct. In later years, countries like Spain, Japan, Israel,
Singapore, and Taiwan have shown great strides in economic development. These countries are
not Protestants.
Population
Population is both an advantage and a disadvantage in economic development. It is an

advantage if people are productive and creative. They can support themselves by harnessing the
resources of their environment and by manufacturing their raw materials for commerce. Some
development economists are not in favor of birth control. To them, people are the most important
resources in economic development. Instead, they have suggested the improvement of the
methods of production, especially food production. Developed countries that have insufficient
number of people encourage immigration of aliens. These are needed to help them accelerate
their economic development. Other countries recruit specialists, technicians, and skilled workers
from other countries. For example, in the case of the Middle East countries, it takes time for
them to develop their economies if they rely only on their sparse population.
On the other hand, population is a great burden if the rate of population growth is higher
than the rate of production growth. Such situation is more serious if the resources of the
economy are not equitably distributed. And these are exactly the problems of the less developed
countries. For example, Black Africa with a population of about 400 million has one of the
highest birthrates, and the shortest life expectancy – which is only 47 years. Its population
explosion growth exceeds its growth in local production. Indeed, they have been experiencing
the curse of the Malthusian theory.
Poor countries with high birth rates are advised to adopt family planning programs.
However, in general such programs are not really successful due to religious, cultural, and
economic reasons. On the other hand, there are many countries with abundant natural resources
and with few people, but they are poor. Brazil is a good example. So the problem is not
population but production. Even if a country is overpopulated, if it has a very high productivity,
there is progress. Example is Hongkong or Singapore. Actually, there are many rich countries
which are overpopulated but they are prosperous.
Geography
Geography refers to climate, soil, natural resources, topography, and structure of the land.
These have considerable influence on economic development. Countries which are endowed
with abundant natural resources have greater potentials for economic development. Nevertheless,
there are some countries with barren land but they are rich in oil resources such as the Middle
East countries. Such resources are good sources of income for funding various programs of the
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government. For example, the massive construction projects in that region are financed by petro
dollars. These are the export earnings from oil.
In the case of Africa, it is a giant continent, but only 7 per cent of its land is arable. And
only 50 percent of the arable land is used for food production. Such very limited agriculture land
is further compounded by floods and droughts. Rains are too much, too little or none at all. Many
times rains fall at the wrong time. Such natural hazards greatly impoverish the peoples of Africa.
Many die of hunger and disease. During prolonged drought, crops die as well as their work
animals. And of course, the agonies of the millions of Africans are also man-made disasters like
tribal slaughters, civil wars, banditry, and graft.
On the other hand, there are countries with poor natural resources but they were able to
achieve remarkable economic growth. Good examples of these are Japan and Israel. In Japan,
only about 16 percent of its total land area is arable or can be farmed. During winter, one-half of
said farm area is covered with snow. Because of its meager natural resources, Japan imports
about 90 percent of raw materials for its industries. Despite its geographical limitations, Japan
has become the fastest growing industrial society in the world. Through capital and technology,
it has achieved phenomenal economic growth. The same is true with Israel. Formerly, it was a
barren land. In the beginning, it had a pastoral economy. Today, Israel has a developed economy.
Through modern agricultural technology, its arid land became fertile and verdant. It is now an
exporter of farm crops, aside from industrial goods.
Transportation and communication are likewise affected by geographical structure. The

presence of excellent harbors favors both local and international trade. Great rivers help
accelerate economic development. In fact, the first civilizations emerged in great river valleys
like Tigris, Euphrates, and the Nile. Mountainous countries pose obstacles to both transportation
and communication systems. In the case of the Philippines, it has more than 7,000 islands. Such
geographical layout does not provide good network of transportation and communication. And
this adversely affects the process of economic growth.
Geographical disadvantages can be eliminated or reduced through the proper use of

technology and capital. However, to the poor nations, such task of conquering natural
shortcomings is almost impossible. They are deficient in both capital and technology. In fact,
they cannot even feed their hungry peoples and pay their foreign debts.
Self-Check
For your self-check on this part, here are the questions. Please remember that these
questions lead you to the important parts of lesson.
1. Define capital. How does it affect economic development? How do the poor countries
acquire capital?
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2. Define technology. How does it help economic development? Differentiate invention

and innovation. Is imported technology good? What should be the proper technology for the less
developed countries?
3. How does a local market stimulate production? Describe the market conditions in less
developed countries.
4. What is an open and close society? How can a close society affect economic
development? Give examples.
5. Differentiate the family system in the Philippines from that of the United States. How
does close family ties affect economic development?
Self-Reflect
I guess that after reading this part, you had a lot of realizations. Can you share it with me?
Please complete the statements below.
• I REALIZED THAT
• I HAVE TO AVOID
• I HAVE TO IMPROVE IN
• I HAVE TO MAINTAIN
Topic IV. Monetary and Fiscal Policies
Targets
1. Characterize a good economic policy.

2. Differentiate monetary policy from fiscal policy
3. Discuss the weaknesses/limitations of monetary and fiscal policies
4. Analyze the economic policies of the Philippines as compared with the economic policies
of other countries.
Take Off
Do you have relatives abroad? If yes, will you please interview them about the economic
policies of the country where they are in? Categorize their responses based on the policies they
like and they do not like.
Content
Countries at one time or another have suffered economic dislocations, like

unemployment, inflation or more serious problems such as depressions. Even the United States
experienced depressions in the early 1900’s. However, the problems of inflation and
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unemployment have become permanent characteristics of the less developed countries.

Evidently, their low level of investments has been greatly responsible for their economic
problems. An analysis of such conditions shows that the basic causes are capital deficiency on
one side and little effective demand on the other side.
The ability of businessmen to invest, like putting up a textile factory, depends on their
available financial resources. But this is only one factor. The other one is the demand for the
products by the people. Businessmen are only willing to invest if there is a good market for their
products. This is only understandable. They are naturally after the profitability of their
investments.
It is noted that in the less developed countries, the rate of unemployment is high. And
even those who are employed received low salaries or wages. This means the purchasing power
of people is very low. Thus, their ability to purchase goods and services is very limited. In fact,
they cannot even buy their most basic needs like food, clothing, shelter, medicare, and education.
Clearly, from the point of investment, market is small. This does not stimulate further
investments. Thus, low levels of employment, production, income and consumption become a
vicious circle. In short, poverty and all its miserable implications remain.
A low purchasing power becomes even lower during inflation. High prices reduce the
value of money or purchasing power. The poor and the fixed-income groups suffer most during
inflation. Inflation is created by several factors. For instance, if there is an oversupply of money
in the economy in proportion to the production of goods. Whenever a government prints money,
there is going to be inflation. When foreign loans are used for consumption and not for
production, this is inflationary. Other causes of inflation are high cost of production, like price of
oil, and the great demand for goods. When demand is greater than supply, prices go up. This is a
basic economic law.
To reduce the problems- or eliminate in some countries- of unemployment and inflation,

appropriate economic policies must be vigorously pursued by the government. The most
important of such policies are monetary and fiscal policies and their respective tools, and their
limitations. In addition, the role of such policies in economic development is discussed.
The Nature of Economic Policies
An economic policy is based on economic theory of principle. It is the application of a

theory or principle. Economic policies are formulated to attain specific objectives or solve
certain problems.
An economic theory is derived from facts. Data are gathered and presented for analysis.
Out of this process, a theory is produced. However, in the case of economic policies, it is no
longer possible to depend only on facts. Policy makers are people with various values,
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orientations and interests. Many policy makers are politicians or top government officials who
have been elected by the people. In most cases, they are inclined to make policies which ensure
their re-election or matters of political expediency rather than economic interests. Thus, value
judgments interact with facts. Obviously, the values of the policy makers greatly influence the
policies that they make.
In cases where the policy makers are not politicians, the effects are just the same.
Technocrats are appointed by top government officials who are politicians. Naturally, such
elected officials influence the decisions of their technocrats. Of course those who have principles
and conscience can resign, if there are conflicts of interests or values.
Therefore, economic policies are as good as their makers. If the policy-makers are only
after their own personal interests and that of their friends and relatives, then their policies have
little effects or adverse effects on the other sectors of the economy. In some cases, there are good
policies but these have not been implemented or poorly implemented.
What is a Good Economic Policy?
• It must be stated in broad terms.

• It must be long range, but flexible to a certain degree.
• It must be in writing and easy to understand.
• It must be widely acceptable.
• It must be reasonable.
• It must be consistent with the objectives and goal to be attained.
• It must be communicated to all concerned.
• It must be implementable.
• It must cover all important relevant aspects.
• It must be in accordance with the law.
Nevertheless, the most important element of a good economic policy is its deep concern
for the welfare of the people, especially the poorest of the poor. Precisely, it is this group- which
is the largest group in the less developed countries- that needs most the benefits of a good policy.
For one reason or another, some good economic policies remain unimplemented. The interest of
a few but powerful groups appears to dominate other more important considerations.
People-oriented policy
A good economic policy should be people-oriented. The welfare of the people is always
the primary consideration. Some former poor nations became progressive because their policies
have been focused on the improvement of the quality of life of the masses. Japan is one good
example. Even the business corporations of said country fashion their policies towards human
resource development. To them their employees are the most important assets. They take good
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care of their employees. Such paternalistic attitude of corporate institutions has made employees
happy and efficient.
In the Philippines, it has been proclaimed that the main program of the government is to
improve the quality of life of the people. In fact, the Six Year Development Plan (1987-1992) is
a multi-pronged human development approach. Dr. Placido Mapa, Jr., former Minister of
Economic Planning said:
Man has always been the focus of all development efforts; hence, the ultimate goal of all
development efforts; hence, the ultimate goal of all development activities is to improve the
people’s quality of life. This brings us to a point: that of sharing the fruits of development. And
this goal can only be achieved by pursuing national development policies for various regions,
through which the government hopes to redress income disparities caused by growth imbalances.
Objectives of Economic Policies
Economic policies are broad rules or guides for actions. They are made for the
administration of a project, program or the whole economy. The most important economic
objectives of any democratic society are:
• Economic growth
• Full employment
• Economic freedom
• Equitable distribution of wealth and income
• Economic security
• Economic stability
To attain such economic objectives, appropriate policies are needed. However, this is
easier said than done. Policy makers are human beings with various orientations and values.
Whether they like it or not, these influence the substance and form of the policies that they
formulate. For instance, the concept of equitable distribution of wealth and income has varied
interpretations. The same is true with the economic objectives, especially economic freedom.
How far and how wide should economic freedom be? This is debatable and it all depends on the
values and orientations of the policy makers. Policy makers have their own vested interest to
protect- including those of their relatives and friends. All these come into play with their
competence. However, competence and intelligence are not enough qualities of good policy
makers. Above all, they must have integrity and honesty.
Another problem in policy making is that some economic objectives are interdependent
while others are conflicting. For interdependent objectives, focus of policies should be on the key
objective. The linkage effects help the attainment of the other objectives. This is wise use of
scarce resources. In the case of conflicting ones, compromises have to be made. For instance, in
achieving a certain rate of economic growth, inflation is likely to crop up. This means
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disturbance of economic stability. Since inflation cannot be totally removed during the process of
economic growth, there is a need to strike a happy balance between economic growth and
economic stability. Clearly, this is not an easy task for policy makers.
Monetary Policy
Professor James Boughton of Indiana University defined monetary policy as the process
whereby the monetary authority attempts to achieve a desired set of economic goals by
controlling either the money supply, the cost and availability of credit or the allocation of credit
to its various uses. Monetary policy-making body of the government is the Monetary Board
headed by the Central Bank governor. The Bangko Sentral ng Pilipinas is responsible for
implementing the monetary policies formulated by the members of the Monetary Board. The
primary monetary goals of the Bangko Sentral ng Pilipinas are:
To maintain internal and external monetary stability in the Philippines and to preserve the
international value of the peso and its convertibility into other freely convertible currencies; and
To foster monetary, credit and exchange conditions favorable to a balanced and

sustainable growth of the economy.
Major Monetary Tools
Legal reserve requirements - increase or decrease of the percentage of reserve deposits of banks
as required by the Central Bank.
Open-market operations - purchases and sales of government securities by the Central Bank.
Moral suasion – appeal of the Central Bank to the banks to expand or contract their credit or to
suspend types of bank credit.
The aforementioned monetary tools can either expand or contract money supply to suit
the needs or conditions of the economy. For instance, if there is inflation, the policy is to contract
money to supply by increasing the reserve requirements, selling government securities and by
appealing to the banks to control their loans. This is tight money policy. On the other hand, if the
economy needs expansion of the money supply, a reverse monetary policy is adopted.
Ideas on Monetary Policy
The Keynesians, led by Samuelson, Tobin, and Heller, believe that a free enterprise
economy has several inherent limitations. For example, it does not provide social goods, it does
not properly allocate resources, and it leads to the unfair distribution of income. Furthermore, a
free enterprise economy or capitalism cannot balance investments and savings. Thus, business
fluctuations are created and this is not good to the economy.
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The followers of John Meynard Keynes consider the active role of the government in
stabilizing economic activities. This is fiscal policy which refers to government expenditures,
taxation, and borrowings. They believe such government activities or fiscal tools are better than
monetary tools in achieving economic stability, resource allocation, and income distribution.
Professor Paul Wonnacott of the University of Maryland stated that Keynesian economics
underestimates the role of monetary policy in stimulating aggregate demand and that the
Keynesian theory stresses the instability of private markets.
Free market system is better
On the other hand, the monetarists, headed by Milton Friedman challenged the Keynesian
concepts. They believe a free enterprise economy or laissez faire is better for the whole
economy. This is also what the classical economists under the Adam Smith developed during the
later part of 1700’s. They stresses that free competition automatically distributes resources
efficiently. Through free market mechanism, goods and services are better allocated than trough
government agencies or interference in the market system.
The Monetarists claim that the government decision-making process is bureaucratic,

inefficient, and harmful to individual incentives – not to mention the frequent blunders of
government policies. Likewise, the centralized decisions of the government destroy individual
freedoms. To the monetarists, monetary policy is the key determinant of aggregate demand.
Through the role of money and price, level of economic activities can be determined. And these
thrive better in an environment of free enterprise economy or free market economy. Believers of
free enterprise emphasize the importance of natural liberty in the economy. If individuals are free
to seek their own interests through competition, they believe this will promote the interests of the
whole society.
Role of money supply
Another area of conflict between the Keynesians and Monetarists is the role of money
supply in producing changes in the level of national income. The Keynesian economists believe
that monetary policy has an indirect effect on national income by causing changes in the interest
rate which in turn changes consumption and investments. On the other hand, the Monetarists
argue that changes in the money supply have direct effects on the national income. In addition,
they claim that stable prices and a steady growth rate of real GNP can only be achieved by
allowing the money supply to increase at approximately the anticipated real growth rate of the
GNP. In contrast, the Keynesians believed that monetary policy can successfully keep the
economy on steady growth with low unemployment only when it is combined with appropriate
fiscal policies.
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Shortcomings of Monetary Policy
When a monetary or financial problem or need emerges, monetary authorities have to

confirm it by gathering facts. These have to be presented and analyzed in order to be able to
formulate sound and appropriate monetary policies. The whole process takes time, and even
longer for the less developed countries with inefficient public administration. Another delay is
the impact lag which is the time between the implementation of the monetary policy and the time
the effects of the policy becomes evident on the various sectors of the economy. In view of the
conflicting interests of the different groups in the economy, it is not easy to evaluate the effects
of monetary policies.
Furthermore, a monetary policy is very weak during deep depression. Even if banks offer
the lowest possible interest rate to investors, still there are no takers because the expected returns
of investment are even lower than the interest rate. As a good example, during the Great
Depression in the United States in 1930’s, monetary policies miserably failed to accomplish their
missions.
Other limitations
Professor Michael Todaro criticized the ability of the Third World countries to regulate
money supply and interest rates. He observed that the developed countries like the United States
and those in Western Europe have well-organized and efficient money and credit markets. It is
therefore possible for such countries to regulate their money supply and interest rates to suit the
needs of their economies. This is not the case in most less developed countries. Their money
markets and credit institutions are unorganized and fragmented. This makes the administration of
monetary policies less effective.
Prof. Todaro further noted that many commercial banks in the developing countries are
branches of big banking institutions in highly developed countries like the United States, Great
Britain, France and Canada. Naturally, such branches of foreign banks are more interested in the
monetary policies of their own countries than the local policies.
The ability of the Third World governments is further limited by their dependence on
foreign exchange earnings like dollars. As a source of local financial resources, such earnings
are unpredictable and uncontrollable. For instance, a considerable decline in demand for our
decrease in the prices of our agricultural products in the world market has major adverse effects
on our monetary condition. This decreases national income and foreign exchange earnings.
Dollars are very important because we need these to buy our oil and raw materials for our
factories and industries. We need also dollars to purchase machines for economic development.
Moreover, Todaro gave his negative impressions on the dual monetary system of most
less developed countries. That is one for the rich and another for the poor. However, the system
tends to serve more the needs of the wealthy groups who are considered safe burrowers. These
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are the foreigners and the well-known local elite. Thus, the poor – which is the biggest group -
are neglected. As a result, they seek loans from unlicensed moneylenders who usually demand
very high interest. The more they become miserable.
Fiscal Policy
Fiscal Policy is another major economic policy. It refers to the revenue and expenditure
measures of the public budget. Fiscal policy-making involves the voters, the president and his
cabinet, and the legislative body. In a democratic society, the needs and wishes of the people are
reflected in the budget. These are prioritized based on available resources. For example, the felt
need for a public elementary school in a barrio in Palawan or an irrigation system in Tayug,
Pangasinan is included in the budget. This is not only social or economic reason but also for
political reason. In most cases, political interests appear more dominant. Usually, such projects
are given to the people when elections are near.
Preparation of the budget is done by the president and his cabinet. The budget proposal is
submitted to the legislative body for discussion and decision. The task of administering the
budget belongs to the President and his cabinet.
As stated earlier, the monetarists and the classical economists believe that the free market
system is the best way to allocate the resources of society. Such idea is not completely correct.
There are market imperfections such as the inadequate market knowledge of both sellers and
buyers, obstacles to a free entry in the market and the unfair business practices. Because of these
the interests of the consumers should not be left to the invisible hand of the free market forces of
demand and supply. Otherwise, buyers would experience several forms of exploitations like over
pricing, adulterated products, tampered weights and measurement, etc.
Provision of Social Goods
The free market mechanism cannot perform effectively all economic functions. A
government policy is needed to guide, correct, and supplement it. Actually, there is one area in
which the free market mechanism hesitates to engage in. This is the provision of social goods
like anti-pollution projects, roads and bridges that are not heavily used and other social
infrastructures which do not yield good profits.
Social goods generally incur huge investment of funds, and yet many of them are not
profitable. Thus, the private business sector does not want to undertake such activities. This is
only understandable. Businessmen do business or put up factories for profit. For instance,
constructing a long road in a mountain village is not a sound business project. However, there are
exceptions like the North Diversion Road and the South Superhighway. It appears that these two
projects are good investments for CDCP.
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Since the government is for service and not for profit, it can construct roads, bridges, and
other projects like communication facilities, electrification and huge Irrigation dams. Anyway
funds come from the people in the form of taxes. Such socio-economic infrastructures are set up
not only to serve the the people but also to help the private business sector. When transportation
and communication facilities are adequate and efficient, trade and commerce grow faster.
It is clear therefore that a pure market economy is not powerful enough to attain the
major economic objectives like employment, price stability, and a satisfactory rate of economic
growth. The role of the government is to accelerate economic development and to distribute
equitably the fruits of development among the various groups of society. This role is more
dynamic and more aggressive in developing countries.
Fiscal Policy Objectives
- Provision for social goods

- Equitable distribution of wealth and income
- Maintain high employment
- Ensure price stability
- Sustain a satisfactory rate of economic growth
In the Philippines, the Six-year Development Plan intends to use a large portion of the
national resources for social services like public education, health, nutrition, housing, national
social security, and the administration of justice, mostly for benefits of the lower-income groups.
Progressive taxation and construction of rural infrastructures, among other things, are to be
pursued to widen the sharing of the fruits of development.
Fiscal Effects on the Economy
Fiscal policy through its fiscal tools like taxation and government expenditures envisions
to perform its functions of allocation distribution and stabilization in the economy. Proper
measures on taxation and government expenditures can stimulate savings, investments,
employment, production, and income. These can also help redistribute wealth and income and
achieve price stability.
Individuals can save more, for instance, if prices are lower, if incomes are higher or if
taxes are lower. Higher taxes do not only decrease the disposable income of people but also
increase the cost of production. As a result, producers and sellers increase the prices of their
goods. When prices are higher and incomes are lower because of the increase in taxes, the
purchasing power of the people decreases. This affects adversely their consumption and savings.
They have less consumption and less savings. When there is a decrease in consumption,
investment and production also decrease. And when savings decrease, funds that can be used for
Page 46 of 50
investments also decrease. Clearly, all these negative economic implications are disastrous to the
well-being of the poor people and the whole economy. These bad conditions of the economy
started only from one source — the increase of taxes. Hence, the indiscriminate use of tax
measures should be avoided.
Encourage investments
The government can encourage investments by giving tax exemptions or reasonable

taxes, and by extending the necessary external economies of scale like transportation,
communication, electrification, and peace and order. All these benefits reduce the cost of
production of businessmen, and therefore, they have a greater chance |of | getting better returns
or profits of their investments.
More investments mean more employments, production, incomes, consumption, and

savings. For instance, when more businessmen put up more factories and supermarkets, workers
and employees are needed. More employment results to more production goods and services and
generates more incomes. When people have more money, they naturally buy more goods and
services. This further accelerates more investments, production and incomes. Eventually, these
lead to higher economic growth for the whole economy and higher standard of living for the
people. And these have been made possible by fiscal policy tools like tax incentives and
government expenditures on the external economies of scale.
Redistribution of wealth and income
Another function of fiscal policy is to redistribute wealth among the various groups of
society. The government can attain this through appropriate fiscal programs like agrarian reform
program, cooperatives development program, and health programs.
The aforementioned projects or programs provide social to the poor. For instance, tenants have
been given lands to cultivate on an easy-instalment basis. The low-income acquire housing units
at a very low price. Children of the poor can study in public elementary schools for free. The
poor who are sick can go to government clinics and hospitals whose services are free. In more
progressive countries, many of the very poor are given free by the government. These are also
pensions for the aged and salaries for the unemployed for the aged and salaries for the
unemployed.
Such social welfare programs are funded by taxes paid by the people. Based on the
principle of ability to pay, the more fortunate pays for higher taxes. Yet, they seldom or do not
patronize at hospitals, public schools, housing projects and programs. On the other hand, the
poor who or none at all are the main beneficiaries of the welfare programs. Thus, a part of the
resources other high-income groups are extended to the poor.
Page 47 of 50
Weaknesses of Fiscal policy
Fiscal-policy making is more of a political rather than a market process. Many and varied
interests do influence fiscal policy making. In general, some of the popular interests are those of
the voters, business group, farmers group, and other special groups. Needless, to say that a good
fiscal policy is more concerned about social justice and the equitable distribution of the social
and economic resources of society. It should benefit the greatest good of the greatest number of
the population.
It is the assemblyman (congressman and senator) who introduce and decide tax and
expenditure measures. Every assemblyman has his own project in his own political territory.
However, it is not possible to accommodate all the projects of assemblymen due to limited funds.
Hence, these are prioritized. But, in practice this is not always followed. The more powerful and
influential lawmakers get more projects. During the old society, congressmen and senators who
belonged to the minority party got the remnants of the budget. And so they could not put up
impressive or big projects to satisfy the people in their territories. Another bad political parties of
some congressmen and politicians was that they did not give the projects to the place where they
lost in the last election. On the other hand, groups who could donate substantial campaign money
or who can ensure the victory of politicians were favored more by fiscal policies. Such situations
also happen in the developed countries like the United States. nevertheless, the said bad political
practices are more rampant in the less developed countries where personal interests have the
upper hand, and where the corruption is more widespread.
Booms and lags
Another weakness of fiscal policy happens during the period of boom. Under such
condition, the proper fiscal measures should be to increase the taxes and/or decrease the
government expenditures. But in the reality these are difficult to implement. Naturally, people
will oppose the increase in the taxes. Also, those who are affected by the decrease in government
expenditures like in education, public health and social security benefits will complain. It is hard
for most of people to understand that such fiscal measures are needed to reduce economic
instability. They are more aware of the direct and short-run effects on their welfare. Thus, for
political expediency, such fiscal measures are not likely to be adopted. Also, like monetary
policy, fiscal policy suffers a lag. This involves the discussions of the problem, the
implementation of the appropriate fiscal policy, and its subsequent effects on the economy. The
usual process takes longer delays than that of monetary policy. It is possible that the nature of the
economic problem has already changed by the time fiscal policy is to be implemented. Thus, the
policy is no longer the right solution for the problem.
Other shortcomings
The ability of a country to finance its various programs and projects depends on its
available resources and borrowings. Such resources come mostly from taxes, and these are not
Page 48 of 50
enough to fund even the most essential projects. In less developed countries, government income
from taxes is low. Many are not employed and those who are employed have low wages. The
few who have the ability to pay higher taxes do not pay correctly. Such conditions contribute to
the poor revenue collections of the government. Clearly, these are not enough to support the
social economic needs of the people. The last option is to encourage foreign investments and
acquire more foreign loans.
Many economists have observed that the tax administration is not only inefficient in
many less developed countries but also corrupt. The big shots, both foreigners and local elite do
not pay the right taxes because of their tax collectors or the top tax years ago:
In many underdeveloped countries the low revenue yield of taxation can only be
attributed to the fact that the tax provisions are not properly enforced, either on account of the
inability of the administration to cope with them or on account of straightforward corruption …
an efficient administration consisting of persons of high integrity is usually the most important
revenue . . . (Todaro, 1977).
Dominance of indirect taxes
Another defect of taxation in the less developed countries is that most of the tax revenues
are indirect taxes. These are taxes on goods but businessmen pass them on to the buyers by
raising the prices of their goods. Examples are sales tax, specific taxes, specific taxes,
amusement taxes, and customs duties. So, it is actually the buyers who pay the taxes.
In less developed countries, most of the people are poor. They become poorer because of
indirect taxes. Every time they buy a basic commodity like notebooks, clothings or housing
materials, they pay taxes. Since most of the revenues of the government come from such taxes, it
is the poor who really finance the programs of the government like schools, hospitals, housing,
etc.
Some giant business corporations take pride in announcing to the public that they have
paid millions of pesos as tax payments to the government. But where did they get these? Such
big amount of taxa actually came from the. buyers of their goods. Whenever the government
increases the taxes of certain goods and services, their price also go up. Thus, the burden of
sacrifice is being carried by the buyers. Since most of the consumers are poor, it is this group
who suffers most.
Coordination between Monetary and Fiscal Policy
Both monetary and fiscal policies have the same objective — the attainment of greater
economic growth. Hence, there is a need for cooperation and coordination between the two. For
instance, in times of inflation the job of monetary policy is to contract money supply while that
of fiscal policy is to eliminate useless government expenditures. During a period of great
Page 49 of 50
depression, monetary policy is weak. On the other hand, fiscal policy is more effective in solving
the problem. To fight depression, the government undertakes massive government expenditures
on public works to generate employment and income. This means consumption of goods and
service will increase and so with production. However, fiscal policy is quite helpless in a period
of boom. Under such condition, the proper weapon to combat the problem is monetary policy. It
increases interest rates, reserve requirements and controls credit. Such policy instruments
regulate unnecessary consumption, and may stimulate savings.
In many less developed countries, a harmonious balance between monetary and fiscal
policy is a difficult task to achieve. Even if the economy requires a tight money policy and
austerity, the fiscal authorities do not cooperate in many cases for personal or political reasons.
For instance, it is not unusual for such countries to spend their scarce financial resources on
unproductive programs and projects. Billions of funds are spent on projects that have no direct
value to the poor masses. Such projects were constructed to impress the foreigners or to enhance
the political prestige and power of the incumbent rulers.
Self-Check
Congratulations, you have reached this far. This is your last self-check for this module. I
hope that you learned a lot from the previous topics because your understanding on those topics
will help you in the succeeding topics.
1. Explain the nature of economic policies. Comment on our own economic policies.
2. Give some features of a good economic policy; Explain one.
3. Man should be the focus of all development policies. Why?
4. What are the objectives of economic policies? In your own opinion what is economic
freedom?
5. Define monetary policy. What are the monetary goals of the BangkoSentral ng Pilipinas?
Explain the various monetary tools. How can these solve the problem of inflation?
6. Explain the nature of fiscal policy. What are its objectives? Explain one fiscal policy
objective.
Self-Reflect
For your final reflection on this module, answer this question.
1. Do you consider going abroad for work an option in the very near future?
2. If given the chance will you leave your beloved country?
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Comparative Economic Planning (SSED-314)

Intended Learning Outcomes (ILO)

1. Demonstrate factual knowledge on important concepts and terms in economic planning

Topic I: Real Concept of Development

1. Discuss the real concept of economic development.

To begin, let me stimulate your mind with these questions?

The Meaning of Economic Development

Development is a progressive process. It involves the interaction of different factors. For

Economic development is a progressive process of improving human conditions, such as

Countries which are backward, underdeveloped, agricultural, or less developed are

Highly developed countries

United States Russia

France West Germany

Cuba South Africa

Saudi Arabia Poland

Less developed countries

Development and Growth

Development is a progressive and dynamic process. Growth is the result of a process.

Growth without Development

Is it really possible to attain economic growth without economic development? It has

The Objectives of Development

Philippine Development Objectives

1. The attainment of economic stability;

2. The equitable distribution of the fruits of economic development; and

3. The achievement of total human development for every Filipino.

However, the greatest obstacle to economic development is man himself. Before

Stages of Economic Growth

The development of nations encompasses an evolutionary process from the primitive to

The doctrine of Rostow

2. Pre-conditions for take-off

5. Age of high mass consumption

How could a poor or underdeveloped country take-off? Considering the shortcomings of

Two Different Worlds

What Kind of a World Do We Want?

A Good Economic System

An economic system is responsible for improving economic conditions of the people.

- Security - Justice and equity

1. What is the difference between economic growth and economic development?

Please continue the statement based on you want to say.

If I will be consulted by our policy makers, I will suggest that

For me, a good economic system is one that is

Topic II: IDEAS AND THEORIES OF ECONOMIC DEVELOPMENT

Ancient Economic Ideas

Medieval Economic Thoughts

The Economic Doctrines of Mercantilism

To achieve the objectives of mercantilism, manufacturing was given top priority.

Physiocracy — Rule of Nature

Wealth came from the land

Laissez Faire Theory

The Classical Theories

Production is the real wealth

The theory of comparative advantage

Countries Rice Calculator

Japan 120 days 10 days

Philippines 90 days 15 days

The theory of comparative advantage is being practiced in international trade. Agricultural

Theory of Karl Marx