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Economic Development: From Low of the To Rich

With strong mention of empirical facts, analyse critically whether this statement is right: 'Economic Development might not be a continuous procedure for convergence by all countries and countries will move sequentially from several poor countries to the band of rich countries'

Introduction

Economic development is among the most recent emphasis of attention for governments across the world. Todaro and Smith (2003) declare that in strict economics conditions economic development identifies the capacity of any national market, whose original condition has been more or less static for a long time, to create and maintain an annual upsurge in its Gross Country wide Product (GNP) at rates of 5%-7% or more. As well as the above, it is also a well planned alteration of the composition of creation and career in a manner where there is a transfer from agricultural dependence to industrialisation, as well as, it will indicate a noticable difference in certain sociable indicators like, increases in literacy, schooling, health issues and services, were also seen as principal measure of development.

The definition of economical development has developed over time. However, empirical research indicated that while economic expansion levels were achieved by the developing countries, but it failed to improve the standard of living of the individuals. As a result economic development was redefined to include reduction or eradication of poverty, inequality and unemployment within the growing context of a growing economy.

The following newspaper will analyse whether economic development is a sequential process or a progressive process of convergence. The arguments will be backed by empirical studies conducted in the area.

It must be highlighted that in 1950s and 60s development was regarded as a group of successive phases of economic progress. It was regarded as an economical theory of development where the right variety and combination of personal savings, investment, and overseas help were the vital components, essential to enable developing countries to move along an economical growth path that historically have been followed by the greater developed countries. Development got become synonymous with swift economic growth. This approach was often called the linear periods approach (Lewis and Harrod-Domar model), which was replaced in the 70s by two contending economic ideological schools of thought. The first, which centered on theories and habits of structural change; modern economic theory and statistical analysis were used to portray the inner procedure for structural change that a typical 'growing' country would undertake to succeed in generating and sustaining an activity of rapid economical growth. The next, the international dependence revolution, was more radical and politics in orientation. It viewed underdevelopment in terms of international and local power connections, institutional and structural financial rigidities.

Amongst the other ideas that explain economic expansion, structural change theory targets the mechanism by which underdeveloped economies transform their domestic monetary structures from a heavy emphasis on traditional subsistence agriculture to a far more modern, more urbanized and much more industrially diverse processing and service overall economy. It employs the various tools of neoclassical price and resource allocation theory and modern econometrics to spell it out how this change occurs.

In the Lewis model the underdeveloped current economic climate involves two areas characterised by a normal overpopulated rural subsistence sector and zero marginal labour production. Thus according to the Lewis model, the primary focus of the model was on the process of labour transfer and the growth of end result and job in the present day sector.

Although the Lewis two-sector development model is simple and roughly shows the historical experience of economic development in the western, however, it has been argued that its key assumptions do not fit the institutional and economical realities of contemporary developing countries. The assumption that the rate of labour transfer and work creation in the modern sector is proportional to the pace of modern sector capital accumulation; the faster the speed of capital deposition, the bigger the development rates of the modern sector and faster the speed of new job creation is not always true. Secondly, the idea that surplus labour is present in rural areas since there is full occupation in the urban areas in addition has been questioned. Most modern research indicates that there is little general surplus labour in rural locations. Finally, the idea of a competitive modern-sector labour market that ensures the continued lifetime of continuous real metropolitan wages up to the point where the way to obtain rural surplus labour is worn out has also been criticised due to being unrealistic.

Patterns of development analysis like the earlier Lewis model is the main one, focused on the sequential process through which the economic, professional, and institutional composition associated with an underdeveloped market was transformed as time passes allowing new industries to replace traditional as the engine motor of economic development.

Studies conducted by Chenery during post conflict period resulted in identification of several characteristic features of the development process. These included the transfer from agricultural to professional production, the deposition of physical and human capital, the change in consumer needs from emphasis on food basic necessities to made goods and services, the progress of locations and urban market sectors as people migrate from farms and small cities, then decreasing in the process of development.

Empirical studies conducted on the process of structural change conclude that the pace and pattern of development varies according to home and international factors, which lie beyond the control of a person developing nation. Despite this deviation, structural change economists dispute, that habits can be discovered by observing the choice of development guidelines and international trade and foreign assistance procedures pursued by Less Developed Countries' (LDC) government authorities and developed nations, respectively.

Kuznet isolated six quality features manifested in the growth process of nearly every developed nation:

  • High rates of progress per capita result and population
  • High rates of upsurge in total factor productivity
  • High rates of structural transformation of the economy
  • High rates of communal ideological transformation.
  • The propensity of economically developed countries to attain out to all of those other world for market segments and recycleables.
  • The limited pass on of this monetary progress to only one third of the world's people.

Kuznet shows that high rates of per capita results from the growing degrees of factor productivity. High per capita incomes in turn generate high levels of per capita consumption, thus providing the bonuses for changes in the structure of creation. Furthermore, advanced technology had a need to achieve end result and structural changes triggers the scale of development and the characteristics of economical enterprise units to change in both organisation and location. Therefore necessitates immediate changes in the location and framework of the labour push and in position relationships among occupation groups.

Kuznet suggested that rapid economic growth makes possible scientific research, which in turn leads to technical inventions and innovations, which propel financial growth even further.

Puga and Venables (1998) firmly believe that financial development may well not be a progressive procedure for convergence by all countries. They dispute that both transfer substitution and unilateral trade liberalisation may be successful in attracting industry, however, they draw in different sectors and they assume that welfare levels are higher under trade liberalisation. Based on the paper made by Puga and Venables (1998) the logic of spatial agglomeration means that development cannot continue simultaneously in every countries. Instead there's a group of rich countries and a group of poor ones, and development calls for the proper execution of countries being drawn in come out of the indegent groups, and used through a process of raid development in to the wealthy group.

It must be highlighted that the positioning of growing countries today is significantly different from that of the presently developed countries when they embarked on the modern economic expansion. Todaro and Smith have discovered eight significant variations in original conditions that require special analysis of the expansion potential clients and requirements of modern economical development:

- Physical and individual resource endowments

- Per capita incomes and degrees of GNP in relation to the rest of the world

- Climate

- Society size, circulation and growth

- Historic role of international migration

- International trade benefits

- Basic scientific and scientific research and development capabilities

- Steadiness and flexibility of politics and social companies.

Contemporary expanding countries tend to be less well endowed with natural resources than the currently developed countries were at the time when the last mentioned nations commenced their modern economic growth. A couple of developing countries have abundant resources of natural resources like petroleum, other minerals, and recycleables that world demand keeps growing; most less developed countries especially Asia are improperly endowed with natural resources. Another important element is a country's potential to exploit its natural resources and maintain long lasting. The ingenuity of managerial and technical skills of its people is an important factor which economic growth is dependant.

Amongst many proponents of sequential improvement the empirical studies provided by Murphy, Shleifer and Vishny (1998) in their 'big thrust' model also features, that increasing modern sector employment leads to a rise in the aggregate demand, in doing so increasing success of modern sector businesses. The one major assumption in their model was that the current economic climate was a sealed economy. This is seen as a criticism for the model because in the real world finished economies do not exist. Puga and Venables argue that a completely homogeneous procedure for economic growth for each country in the same percentage will not have any spatial effects. However, if demand for manufacturers goes up faster than demand for agriculture, the relative price changes would occur which will activate professional relocation.

Several criticisms have been presented for the theories related to convergence. Ron Martin (1999) offered criticism of the predictions of long-run regional growth and convergence made by economists associated with physical economics by utilizing a reformulation of the neo-classical expansion model. The typical neo-classical (Swan-Solow) development model assumes diminishing profits to capital and labour, and keeps a relatively poor country with less stock of capital per staff member has a higher marginal efficiency of capital and a higher rate of go back to capital. Thus, it predicts that poorer countries will grow faster than, and eventually meet up with, richer countries. However, while request of a new variant of the model at cross-regional level, where total convergence is much more likely to occur because of relative homogeneity in structural, scientific, institutional and cultural characteristics, has disclosed that the speed of regional convergence is similar across the USA, the European Union, Canada, Japan, China and Australia, the speed (12 % per annum) is much lower than that which the neo-classical development model predicts. The implications are, as Martin deduces, either that returns to labour and capital are non-diminishing, or diminish very little by little, or that interregional spillovers of capital, labour and technology are much less than expected, and therefore that there are endogenous results in regional development (Martin, 1999).

Conclusion

Empirical studies conducted have provided various explanations for monetary development. Some regard it as a sequential process, come regard it as a convergence process. However, none of the theories are without its flaws. A mixture of all the factors would be essential for development. Measures are being used the path to record data and statistics however, like everything every growing and less developed economy would have to follow the road of development. Thus from the preceding paragraphs it can be concluded that economical development may not be a gradual process of convergence by all countries and countries will move sequentially from a group of poor countries to the group of wealthy countries.

Bibliography
    • Gwartney, Wayne D. , Stroup, Richard L. , and Sobel, Russell S. , Economics Private and People Choice, (2000), Ninth Edition, The Dryden Press.
    • Meier, G. M. and Rauch, J. E. , Leading Issues In Economic Development, (2000), Seventh Release Oxford University Press
    • Perkins, Radelet, Snodgrass, Gillis and Roemer, Economics of Development, (2001), Fifth Edition, Oxford University or college Press.
    • Sheffrin. , Steven M. , and O'Sullivan, Arthur, Microeconomics: Principles and Tools, (2001), Second Model, Prentice Hall
    • Taylor, John B. , Rules of Economics, (1998), Second Model, Houghton Mifflin Company
    • Todaro, M. C. and Smith S. C. , Economic Development, (2003), Eighth Edition, Pearson Addison-Wiley

Journal and Articles

  • Puga, D. and Venables, A. J. , Agglomeration and monetary development: Transfer substitution vs. trade liberalisation, (1998), Centre for Economic Performance, Discussion Newspaper No. 377

Other Sources

Todaro, M. P. and Smith, S. C. , Economic Development, Eight Edition, Pearson Addison-Wiley (2003), pp8-17

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