Economic Development in Less Developed Countries - Essay Example

Economy and Society Name: Name: Course: Tutor: Date: Economic development in less Developed Countries Traditionally, economic development was being defined to mean the same thing as economic growth. In fact, it was regarded as the capacity of the economy to generate and maintain a growth rate in GDP of between 5% and 7%. This definition was invalidated by the LDC’s experience in the 1950’s and 1960’s where despite the impressive growth in GDP, the living conditions of people in these countries remained more or less the same whereas in some of these countries the living conditions worsened and poverty levels rose in the midst of high growth rates. In Uganda for example, poverty level rose by 4% in 2003 despite an economic growth rate of 3% in the same period, Oversees Development Institute (2004). It is in this regard that the modern economists provided a distinction between the two concepts. Economic development can therefore be defined as establishment of conditions necessary for realization of human personality, bringing about social equality, poverty reduction and improving access to amenities like health, education and employment opportunities. Unlike economic growth, economic development is not purely an economic phenomenon but a multi-dimension one incorporating both social and economic aspects of life6 Furthermore development can also be said to be an increase in people’s freedom of choice2. JUSTIFICATION OF THE STUDY The study purposes to analyze economic development in LDCs because of the many concerns raised in these countries. This is also in line with the fact that ¾ of the world’s population live in these nations. Even then, such huge population only shares less than 20% of the global income whereas the wealthy nations shares more than 80% of the worlds income despite their low total population. As such, the planet earth may be viewed as having two worlds; one for the poor (who live in LDCs) and the other one for the rich. Moreover, food security is an important yardstick of measuring economic development2. Despite the LDC’s capacity to produce surplus food, such capacity remains unutilized. Paradoxically, food imports accounts for more than 25% of the total imports by LDCs. In summary, all conditions precedent to economic development has not been fulfilled in these countries. It is therefore essential to understand the development condition in these countries so as to come up with amicable solutions. DIFFERENT PERSPECTIVES OF ECONOMIC DEVELOPMENT NEO-CLASSICAL APPROACH Neoclassical theorists like Robert Solow, the Nobel Prize winner in 1987 emphasizes on the importance of savings and formation of capital in bringing about economic development. In his famous model, ‘Solow Model’, Solow suggested that the reason why some countries flourish while others remain poor is the difference in their capital formation rate. In fact, the Solow equation provides an answer as to why LDCs continue to lag behind economically. According to him, the reason behind LDC’s underdevelopment is lack of the incentive to save. This can be validated by empirical evidence which shows that developed countries save more than 20% of their national income in capital formation whereas LDC’s only manage to save 5% of their income. Even then, the 5% is used for necessities thereby leaving only amount for capital formation. This in turn leads to low level of development. According to Solow therefore, capital formation is an important tool for economic development. Furthermore, Solow believed that population explosion reduced the labor productivity of a country. He argued that high population growth rate reduced the capital accumulation per head and therefore reduced the overall labor productivity. He therefore proposed that LDC’s should implement policies to control population growth rate to allow more capital accumulation and therefore promote development. Another assertion of Solow through his model was that technological backwardness was also a reason behind underdevelopment and he therefore proposed that the less developed nations should embrace technological progress so as to increase the per capita output, trigger and sustain development. However, critics of Solow model argue that some of the assumptions that the model stems from do not hold. An example is the assumption that technological progress is homogenous in all countries in the world. It would make little sense if any to say for instance, that the technology level of a G8 country was the same as that in LDCs. Another attack on the model was directed to the assumption that markets were perfectly competitive. Such an assumption was only possible in a perfect world and not in the today’s world. HARROD-DOMAR MODEL This is a neo-classical model and was independently formulated by Sir Roy Harrod from England Professor Evesey Domar of the US. The model is indeed named after these two prominent economists. The basic assumptions of this model are that all savings are channeled towards investment and that capital stocks do not depreciate. It also assumes a closed economy without foreign trade. The Harrod-Domar model affirms the Solow’s proposition by concluding that development was merely a matter of saving and investing. As such, the model implies that the reason behind underdevelopment was low savings and investments and promises economic growth and development through savings and investments. In the event of deficiency in savings, the model proposed that LDCs should lobby for foreign aid to close the financing gap. Basically, all aid advocates apply Harrod-Domar model in policy making. In this regard, the western nations advanced an aid equivalent to 1trillion US dollars to LDCs between 1950 and 1995. N.B. the amount was quantified using the 1985’s US dollar value. Like the Solow model, the Harrod- Domar model did not escape criticism especially because it did not work in the period between 1960 and 1990. The contention that economic growth and development was determined by savings further weakened the model. For instance, countries like Thailand have recorded impressive economic growth rates notwithstanding the lack of savings in the country. Some critics also argue that the major problem facing LDCs is lack of food and it was therefore irrational for Harrod-Domar model to ask people to save while in reality, they are struggling for bare survival. Additionally, the model only focused on physical capital as a determinant of development and ignored human capital (labor) which is as well important in determining the national output. In fact the model was formulated in the aftermath of the great depression where labor was in excess. However, this is not always the case as the model would assume. KEYNESIAN VIEW In formulation of his hypothesis, John Maynard Keynes held some assumptions: a closed economy without the foreign sector, excess supply of labor and complementary factors and cyclical unemployment which was caused by demand deficiency4 p.9. Keynes therefore proposed that both consumption and investment expenditures should be increased to solve the rampant unemployment in LDCs which is a major contributory factor to the underdevelopment. However, Keynesian economists reject the classical economists’ proposition that savings would translate to economic development. In what they call paradox of thrift, Keynesian economists regard savings as a social vice in that it leads to a decline in demand5 p.237. In this argument, a country’s attempt to save more out of a given national income will lower the overall productivity thereby compelling such country to actually save less4 p.560. This school of thought therefore argues that a small propensity to save is good for economic development. Keynesian economists advocate for investments as the solution to the LDCs condition. A high propensity to consume is therefore regarded healthy for development as it leads to increased consumer demand, more output and high employment all of which are conditions precedent to development. As such, LDCs governments are encouraged to step up consumption and non-consumption spending. Unfortunately, LDCs seem to ignore the role that investment might play. For instance, investment in infrastructure is widely ignored e.g. in Africa, only 16% of roads are paved, Africa South of Sahara 20041. However, Keynesian economists are criticized for the assumptions they hold. The assumption of a closed economy for example, cannot hold in the contemporary world. LDCs are open economies since they export agricultural products and import capital goods. Keynes model also assumed cyclical unemployment but in reality, unemployment in LDCs is mainly chronic and disguised of which the model paid no attention to. The model is also considered to be a short-run analysis in that it holds technology, consumers’ tastes and preferences and level of skills of workforce to be constant. This is only possible in the short-run while development is a long-term affair. CONCLUSION As demonstrated above, both the neoclassical and Keynesian approaches towards economic development have their pros and cons. The idea of capital formation by the neoclassical is very essential since for a country to realize economic progress, it must have to invest in infrastructure, capital industries and other social overheads. Keynesians are however more realistic as pertains savings; it is not good for economic development since by saving, a country foregoes interests that such funds would have earned if they were invested. Also, savings does not in any way improve a country’s productivity. The best path left is therefore that of investment of which both the neoclassical and Keynesians unanimously agree on. The move by the neoclassical to encourage foreign aid is neither a necessary nor a sufficient move. LDCs remain highly indebted because of such aids and this partly contributed to their condition6 p.485.In 2000 for instance, UNDP projected that an annual amount of 80 billion US dollars for ten years was sufficient to ensure that the entire world’s population had access to necessities. Ironically, LDCs spent more than 380 billion US dollars in 2001 alone to meet their debt obligations. Further reports shows that for every 1 US dollar advanced to LDCs in 1980’s, these countries have since then repaid with more than 6 US dollars while more than 4 US dollars still accrued3 p. 187. Keynesian view is also not free of problems and as such a combination of policies proposed by neoclassical and Keynesian schools of thought would be favorable in alleviation of underdevelopment. However, these policies should be implemented to the extent they are compatible with the needs of citizens. Works cited 1 Europa Publications, Regional Surveys of the World, Africa; South of Sahara, 2004. 2Amartya S., Development as Freedom, Oxford University press, London, 1999. 3World Bank, ‘Global Development Finance Report’, 2004, p. 187). 4Lekachman R. A history of economic ideas, Harper Publishers, New York. 1959. 5Samuelson P. Foundation of Economic Analysis, Harvard University press, Cambridge, 1983. 6Todaro M & Smith C., Economic Development Michigan Pearson Addison Wesley, 2009. Read More