Economic Development

Module 3

Prof. Irah Dianne Nicolas

Welcome to class!
Today's Agenda

• Development Success
• Development Traps
• Economic Fluctuations
• Crisis
• Linear Stages of Growth Model
• Harrod- Domar Growth Model
Development Success

By virtue of their success in growth and development a number of countries have reached the status of advance
country. As such, these countries may offer lesson for development to developing economies of today.

Market and public provision harmony; one of the most challenging issues in the process of development has been
and still is finding the optimal mix of public versus market provision of goods and services. The basic issue is how far
the government should go in correcting market failure without risking government failure. The current reigning
paradigm appears to be that the role of government should be limited to rendering private provisions relatively
efficient by facilitating the availability of complementary infrastructures.

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Economic Factors in Economic Development
▪ Capital Formation
▪ Natural Resources
▪ Market Surplus of Agriculture
▪ Foreign Trade
▪ Economic System

Non-economic Factors in Economic Development

▪ Human Resource
▪ Technical Know-How and General Education
▪ Political Freedom
▪ Social Organization
▪ Corruption
▪ Desire to Develop

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 Development Traps
❑ A barrier to further inclusive and sustainable growth.
❑ They are conflict, reliance on natural resources, being landlocked with bad
neighbors, and bad governance.

Development Crisis
❑ A situation in which the economy of a country experiences a sudden
downturn brought on by a financial crisis.

❑ An economy facing an economic crisis will most likely experience a

falling GDP, a drying up of liquidity and rising/falling prices due to
inflation/deflation.

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Economic Fluctuations
❑ Fluctuations in the level of the national income of a country representing growth or contraction.
❑ Are periodic lows and highs in measures of economic activity, such as unemployment and inflation.

Phases of Business Cycle

1. Expansion - In this stage of the business cycle, there will be a rise in employment, wages, GDP, and the economy.
2. Prosperity/Peak - The economy is at its best stage, but things will look weary. They are not really bad yet, but they might be.
The government will try to take corrective actions to keep the work flowing.
3. Recession - After reaching a peak, if things don’t come under control things take a turn to the worse side.
4. Depression - If the recession stage is not controlled via proper measures, more people will start losing jobs,
they will start paying their loans which is going to affect the economy more.
5. Recovery - This pushes the economy to a better stage and into the growth stage again.

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Components of Economic Fluctuations
❑ Seasonal Fluctuations - refer to short-term movements in economic indicators that generally follow a consistent pattern each
year.
❑ Cyclical Fluctuations - are alternating periods of contraction and expansion that can last 18 months or longer from the peak
to the through of the cycle.

❑ Irregular Fluctuations - result from unusual events, such as floods, strikes, civil strife, large bankruptcies and terrorist incidents.

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 LINEAR STAGES OF GROWTH MODEL
Walt Rostow took a historical approach in suggesting that developed countries have tended to pass through 5 stages to reach their

current degree of economic development.

These are:

Traditional society. This is an agricultural economy of mainly subsistence farming, little of which is traded. The size of the capital stock

is limited and of low quality resulting in very low labour productivity and little surplus output left to sell in domestic and overseas

markets.

Pre-conditions for take-off. Agriculture becomes more mechanized and more output is traded. Savings and investment grow

although they are still a small percentage of national income (GDP). Some external funding is required - for example in the form

of overseas aid or perhaps remittance incomes from migrant workers living overseas.

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 LINEAR STAGES OF GROWTH MODEL
Take-off. Manufacturing industry assumes greater importance, although the number of industries remains small. Political and social

institutions start to develop - external finance may still be required. Savings and investment grow, perhaps to 15% of GDP. Agriculture

assumes lesser importance in relative terms although the majority of people may remain employed in the farming sector.

Drive to maturity. Industry becomes more diverse. Growth should spread to different parts of the country as the state of technology

improves - the economy moves from being dependent on factor inputs for growth towards making better use of innovation to bring

about increases in real per capita incomes.

Age of mass consumption. Output levels grow, enabling increased consumer expenditure. There is a shift towards tertiary sector

activity and the growth is sustained by the expansion of a middle class of consumers.

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HARROD-DOMAR GROWTH MODEL
A functional economic relationship in which the growth rate of gross domestic product depends directly on the national net

savings rate (s) and inversely on the national capital-output ratio (c).

Capital-output ratio

A ratio that shows the units of capital required to produce a unit of output over a given period of time.

Net savings ratio

Savings expressed as a proportion of disposable income over some period of time

Based on the model therefore the rate of growth in an economy can be increased in one of two ways:

❑ Increased level of savings in the economy (i.e. gross national savings as a % of GDP)
❑ Reducing the capital output ratio (i.e. increasing the quality / productivity of capital inputs)

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Some Criticisms of the Stages Model
Unfortunately, the mechanisms of development embodied in the theory of stages of growth did not always work. And the
basic reason they didn’t work was not because more saving and investment isn’t a necessary condition for accelerated rates
of economic growth but rather because it is not a sufficient
condition.

Necessary Condition
A condition that must be present, although it need not be in itself sufficient, for an event to occur.
For example, capital formation may be a necessary condition for sustained economic growth (before growth in output can
occur, there must be tools to produce it). But for this growth to continue, social, institutional, and attitudinal changes may have
to occur.

Sufficient Condition
A condition that when present causes or guarantees that an event will or can occur; in economic models, a condition that
logically requires that a statement must be true (or a result must hold) given other assumptions.

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Thank you for
joining today's class.

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