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Economic Development Theories Ing.Bohuslava Boučková Department of Economics CEMS II/277 Phone: 22438 2300 e-mail: [email protected] A short explanation to my (for you rather unusual) name Many Czech Christian names include the part –slava or –slav (for men), which means GLORY (or celebrating in glory) And Boh (or Bůh in modern Czech) is GOD Therefore, my Christian name means “Glory to God“ Therefore, my Christian name means “Glory to God“ And my surname BOUČKOVÁ is a female form of the name Bouček, which is my husbands surname and it means “a little beech tree“ Structure of the lecture Some information Main concepts Sectors of national economy: different concepts Economic equations Business cycles Economic development theories Growth indicator controversy A little economic fairy-tale Before we start… During your stay in Prague, we will tackle together 9 different topics: • Theory of economic development • Agriculture in economic development • Command driven and market economy: Czech experience • Transformation, restitution, privatisation in agriculture • Economic integration in Europe and • Czech accession to the EU • Food consumption and nutrition policy • Agricultural policy comparison • Position of women in Czech economy and society • Churches and religions in the CR As you already know, You are obliged to submit an economic essay before the final exam of the course. The topic might be also connected to any of these 9 topics of lectures (or rather 8, as the situation of churches is not an economic topic). If you chose to do so, you can either chose from the more specific topics I will offer to you next time or we can agree on a more detailed topic of your own connected to the main topics In any case, the demands for an essay submitted to me are as follows Demands Scope of the essay (minimum): 2,000 words (without front page, content and resources) Obligatory structure: Front page (title, name of author, year) Content Introduction, definition of the problem Discussion SWOT analysis Conclusion Resources SWOT analysis I hope that all of you know the meaning of SWOT analysis, but just in case: Internal Weaknesses Opportunities Threats External Negative Positive Strengths Course evaluation Total points possible In that: Oral examination Essay In that: Scope, form Topic relevance, resources SWOT analysis Conclusion Level complex 80 30 50 10 10 10 10 10 Resulting marks (according to points) 0 – 20…………..D 21 - 40…………..C 41 - 60………….B 61 - 80………….A Essay topics In the following slides, you will see the offered topics from which you can chose, which will be supplied also as a printed list at the end of the lecture. The principle is that each topic will be chosen by only 1 student. If you want to propose another topic, please discuss it with me first. Essay topics Theory of economic development Comparison of the CR and US with regard to economic development level Economic level indicators (GDP, workforce in different sectors, shares of sectors in foreign trade) development in the CR Economic flows among sectors of the national economy in the CR (or US) History and methods of computation of the aggregate economic indicators (GDP, GNP) Alternative indicators to GDP and their utilization in economic practice Essay topics Agriculture in economic development Position of agriculture in developing and developed countries: selected example Position of Czech agriculture in national economy: main indicators and their development Position of agriculture in the economy of the CR and USA: comparison Command driven and market economy: Czech experience Strong and weak points of economic transformation Coupon (voucher) privatisation in the CR: Was it successful or not? Essay topics Restitution process: Was it really the process of past wrongs mitigation? Population decrease problem in the CR and the social security system: How to solve it? Tax reforms in the post-communist countries: Flat tax yes or no? Transformation, restitution, privatisation in agriculture Transformation of Czech agriculture: Strong and weak points Restitutions in agriculture of the CR: What is still missing? The role of agricultural cooperatives in the CR: Why is their public image low? Essay topics Structural changes in Czech agriculture Position of „New“ member countries in the frame of the Common Agricultural Policy EU Development of economic integration in Europe Czech accession to the EU, its impacts: Why are Czech farmers not satisfied? Food consumption and nutrition policy Development of food consumption: Comparison of the CR and US New phenomena in the CR: Farmers Markets, internet sale of farm products, “milkmats“ Organic farming in the CR Fair Trade with food products in the CR and US Essay topics Agricultural policy comparison Development of the EU CAP and its perspectives Agricultural market: Protection or liberal trade? Multifunctional agriculture in the EU: Strong and weak points Comparison of agricultural policy of the EU and US Position of women in Czech economy and society Economic position of Czech women compared to U.S. Position of woman in labour market: reasons and possible solutions Harmonisation of family and job: How it can be reached so that women had a real choice? Tools of positive discrimination for women: Yes or no? Main concepts What does the word economics mean ? In its original meaning, it comes from Greek words oikos = house nomos = order, rule, management Main Concepts So it depends on what we mean by the “house“. It can be : household enterprise industry/sector country, state the Earth the Universe… Development level What does the concept of "development" mean in the context of economy and its sectors? Development implies structural transformation. Structural change occurs when the relative share of GDP and employment accounted for by the primary, secondary and tertiary sectors change. Structural change results in a change in GDP and employment figures for a given sector or industry. The process of development requires structural change. Typically economies develop by shifting resources from agricultural & mining to manufacturing and eventually into the tertiary (services) sector. Development level According to that, originally the following types of sectors of the economy were recognised: (1) Primary Sector This contain activities directly related to natural resources eg agriculture, forestry, fishing, mining, quarrying, and mining. Primary industry tends to dominate the economies of developing nations, but as secondary and tertiary industries are developed, its share of the economic output tends to decrease. (2) Secondary Sector Secondary activities relate to goods production in the economy, including the processing of materials produced by the primary sector eg energy production and construction. (3) Tertiary Sector Tertiary activities relate to services such as banking, finance, insurance, retail, and education, transport, information, and communications services. Development level With regard to the further development, these were further extended to: primary sector secondary sector tertiary sector quaternary sector and some authors even define quinary sector Development level According to Matt Rosenberg : Primary Sector The primary sector of the economy extracts or harvests products from the earth. The primary sector includes the production of raw material and basic foods. Activities associated with the primary sector include agriculture (both subsistence and commercial), mining, forestry, farming, grazing, hunting and gathering, fishing, and quarrying. The packaging and processing of the raw material associated with this sector is also considered to be part of this sector. In developed and developing countries, a decreasing proportion of workers are involved in the primary sector. About 3% of the U.S. labor force is engaged in primary sector activity today, while more than two-thirds of the labor force were primary sector workers in the midnineteenth century. Development level Secondary Sector The secondary sector of the economy manufactures finished goods. All of manufacturing, processing, and construction lies within the secondary sector. Activities associated with the secondary sector include metal working and smelting, automobile production, textile production, chemical and engineering industries, aerospace manufacturing, energy utilities, engineering, breweries and bottlers, construction, and shipbuilding. Tertiary Sector The tertiary sector of the economy is the service industry. This sector provides services to the general population and to businesses. Activities associated with this sector include retail and wholesale sales, transportation and distribution, entertainment (movies, television, radio, music, theater, etc.), restaurants, clerical services, media, tourism, insurance, banking, healthcare, and law. In most developed and developing countries, a growing proportion of workers are devoted to the tertiary sector. In the U.S., more than 80% of the labor force are tertiary workers. Development level Quaternary Sector The quaternary sector of the economy consists of intellectual activities. Activities associated with this sector include government, culture, libraries, scientific research, education, and information technology. Quinary Sector Some consider there to be a branch of the quaternary sector called the quinary sector, which includes the highest levels of decision making in a society or economy. This sector would include the top executives or officials in such fields as government, science, universities, nonprofit, healthcare, culture, and the media. Some authors (e.g. Australian) relate that the quinary sector refers to domestic activities such as those performed by stay-at-home parents or homemakers. These activities are typically not measured by monetary amounts but it is important to recognize these activities in contribution to the economy. Traditional & Modern Sectors The Traditional sector refers to established age-old procedures e.g. agriculture methods and common land ownership. The Modern sector refers to a system based on specialisation, commuting, use of latest technologies Many urban areas in developing countries are dualistic: modern formal activity exists side by side with large informal sector: Traditional manufacturing may exist next door to modern manufacturing; Commercial farms may exist alongside subsistence family holdings. Formal & Informal Sectors Economic activities declared to the government make up the formal sector of the economy. Undeclared economic activity makes up the informal (shadow) sector of the economy. The characteristics of the informal sector include • self-employment • small scale enterprise • labour intensive production using simple technology • monopolistic competition • complete absence of official regulation Classical production function Q = f (C, L) Q ….. product C ….. capital L ….. labour Used, among other, also by Karl Marx, who (of course) stressed the equality of labour to capital or even primary importance of labour over capital . As a matter of fact Marx stressed labour for the reason we could understand, if we remember the definition of value added (or surplusvalue, as Marx called it). As it is created both by the inputs of capital and labour, Marx’s basic idea was that profit should be distributed evenly among the owners of both these production factors Intermediate consumption Labour Fixed capital consumption Profit Qualitatively new elements new generation information technologies feedback growing yields bring innovation growth globalisation growing role of net industries accelerated production factors mobility effective production factors utilisation Aggregate production function ( Solow, R.M., 1956 ) Q = f (C, L, e) Q C L e ….. product ….. capital ….. labour ….. technological development NEW ECONOMY The notion emerging since the end of the 90ies, used for example to explain the longterm success of the U.S. economy ( low inflation rate, low unemployment and high productivity growth rate up to the recent time ) Impact of information and communication technologies (ITC) on the results of economic activities Different opinions and approaches to the problem Problem of sectors based on biological processes Q = f (C, L, B, e) Q C L B ….. product ….. capital ….. labour ….. biological factors (land, animals..) e ….. technological development Some economists also stress the role of human capital Q = f (C, L, HC, B, e) Q ….. product C ….. capital L ….. labour HC …. human capital (education, promotion, flexibility..) B ….. biological factors (land, plants, animals..) e ….. technological development What is Human Capital The term ‘Human Capital’ (HC) was first circulated in the 50s and is now generally used as an all-encompassing term for “the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances.” As the father of the idea, the economist Jacob Mincer is usually regarded Jacob Mincer (1922-2006) was an outstanding U.S. economist of Polish origin (born in Polish Tomaszow). He was most notable for his ideas of the role of human capital in economics. His papers on labour economics use so-called Mincerian Equations, which utilise human capital as a variable to explain the determination of wages in a statistical estimation. He spent most his life as a professor of economics at the Columbia University (from which he received his Ph.D.) Human capital can be summed up in a formula devised by Thomas Davenport: (ability, knowledge, skill, talent + behaviour) x effort x time = quality of labour, i.e. human capital Social capital Social capital describes the pattern and intensity of networks among people and the shared values which arise from those networks. While definitions of social capital vary, the main aspects are citizenship, neighbourliness, trust and shared values, community involvement, volunteering, social networks and civic participation. Definition of Social Capital "….the rules, norms, obligations, reciprocity and trust embedded in social relations, social structures and society’s institutional arrangements which enable members to achieve their individual and community objectives.“ Narayan (1997) Voices of the Poor: Poverty and Social Capital in Tanzania, World Bank, Washington D.C., USA. However, most economic theories regard as the main drive of development just economic development, measured by the economic performance. This is usually understood as the level of the created value added, i.e. GDP According to the historical experience, economic theories speak of business (economic development cycles) Types of economic/business cycles The main types of business cycles enumerated by Joseph Schumpeter and others in this field have been named after their discoverers or proposers: the Kitchin inventory cycle (3–5 years, Joseph Kitchin), the Juglar fixed investment cycle (7–11 years, Clement Juglar) the Kuznets infrastructural investment cycle (15–25 years, Simon Kuznets, Nobel Prize Laureate) the Kondratiev wave (45–60 years, Nikolai Kondratiev) the Forrester cycles (200 years, Jay Wright Forrester). the Toffler civilisation cycles (1000-2000 years, Alvin Toffler) Even longer cycles are occasionally proposed, often as multiples of the Kondratiev cycle. Most cycle theorists agree, however, with the "Schumpeter-Freeman-Perez" paradigm of five waves so far since the industrial revolution, and the sixth one to come. These five cycles, so-called Kondratiev Waves, are 1. The Industrial Revolution--1771 2. The Age of Steam and Railways--1829 3. The Age of Steel, Electricity and Heavy Engineering--1875 4. The Age of Oil, the Automobile and Mass Production--1908 5. The Age of Information and Telecommunications-1971 According to this theory, we are currently at the turningpoint of the 5th Kondratiev. Theories of Development Economics The origins of modern development economics are often traced to the need for, and likely problems with the industrialization of eastern Europe in the aftermath of World War II . The most well-known are: Linear-stages-of-growth model Structural-change theory International dependence theory Linear-stages-of-growth model An early theory of development economics, the linear-stages-ofgrowth model was first formulated in the 1950s by W.W.Rostow The linear-stages-of-growth model states that there are a series of five consecutive stages of development which all countries must go through during the process of development. These stages are: traditional society pre-conditions for take-off take-off drive to maturity age of high mass-consumption Such theories have been criticized for not recognizing that, while necessary, capital accumulation is not a sufficient condition for development. That is to say that this early and simplistic theory failed to account for political, social and institutional obstacles to development Structural-change theory It deals with policies focused on changing the economic structures of developing countries from being primarily comprised of subsistence agricultural practices to being a “more modern, more urbanized, and more industrially diverse manufacturing and service economy. There are two major forms of structural-change theory: W. Lewis’ two-sector surplus model, which views agrarian societies as consisting of large amounts of surplus labor which can be utilized to spur the development of an urbanized industrial sector Hollis Chenery’s patterns of development approach, which is the empirical analysis of the sequential process through which the economic, industrial and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth. International dependence theory It gained prominence in the 1970s as a reaction to the failure of earlier theories to lead to widespread successes in international development . Unlike earlier theories, international dependence theories have their origins in developing countries and view obstacles to development as being primarily external in nature, rather than internal. These theories view developing countries as being economically and politically dependent on more powerful, developed countries which have an interest in maintaining their dominant position. There are three different, major formulations of international dependence theory: neocolonial dependence theory false-paradigm model dualistic-dependence model. Growth indicator controversy As the main indicator of economic growth, or even as the general national well-being, per capita Gross Domestic Product is used by most developmental economists . However, these measures are criticized as not measuring economic growth well enough, especially in countries where there is much economic activity that is not part of measured financial transactions, both in developed as well as developing countries Deriving of GDP Gross output Intermediate consumption Gross value added = GDP Depreciation Labour input Profit N D P GDP or GNP Example: In the developing country XY, a foreign company developed its activities and reaches a remarkable profit, namely because of cheap labour. However, GDP is calculated with regard to the area where value added has been created, therefore it increases GDP of the country XY. GDP If GDP is defined IC Labour as D Profit what share of the value added then really remains in the country XY ? GDP or GNP Of course Where ? in the CR ! Activities not included into GDP Environmental impacts and depletion of non-renewable resources Economic activities not entering the market: “shadow“ economy household activities unpaid labour voluntary social activities Free time and individual health care Let us imagine the following situation : Two women of 35, both secondary school graduates, mothers of 2 children. Mother A : is a housewife does the household activities by herself uses minimum of paid services is active in humanitarian NGO takes care of her children and their education her children are successful in school, active in hobbies, have no problems Mother B : works in erotic club household chores are done through paid services no voluntary public activities is a heavy smoker has not enough time for children, who have problems in school they are also game addicts and spend a lot of money on it eventually they employ social workers and institutions The question is: Which of the two mothers contributes more - directly or indirectly - to the GDP creation and therefore to the economic growth ? The right answer: Mother B Alternative solutions NEW - Net Economic Welfare GPI - Genuine Progress Indicator HDI – Human Development Index SEEA - System of Economic and Environmental Accounts GPI includes Economic value of civil activities and voluntary work Ecomic value of unpaid household activities and child care Costs of underemployment Value of free time Natural resources utilisation Environmental impacts both positive and negative Socio-economic impacts ( income re-distribution, life costs security index) Human and social capital (health, education, criminality) Example of GPI estimate in the USA: HDI – Human Development Index Is combined from three partial indicators: life expectancy – represents the average length of life and the health state of population ( connected also to education level – reflects the knowledge level of population, 2/3 weight is adult population literacy index and 1/3 combined has the combined indicator of basic , secondary and university education average real GDP per capita per year in USD PPP – expresses average life standard It can reach values between 0 -1 The main question then is: If GDP does not really express the full level of development, why are we not utilising the mentioned alternative indicators instead? The answer is simple: While GDP can be mofre or less precisely computed, other indicators are either incomplete (like HDI), or they can be only estimated (like GPI) Thank you for attention!