Department of Geography

(Delhi School of Economics)

University of Delhi
MA in Geography
Paper 204
Spatial Economic System
MA in Geography
Part I (Semester 2)
Dr. Anjan Sen, AITP
Assistant Professor
E-mail:
dr.anjansen@gmail.com
Mobile:
+91-9899919701
Unit 8:
Theories of Economic
Development
Topic 40:
Survey of Theories of
Economic Development
1860s 1960s
Time
Period
Development
Approach
Development
Understanding
Key Thinkers &
Influences
1800s Classical
Political
Economy
Catching Up,
Industrialization,
(still not linked to
development)
Ricardo,
Smith,
Marx
1850s Colonial
Economics
Resource Management,
Trusteeship
1930s &
1940s
Development
Economics
Economic Growth,
Industrialization
Keynes,
Hirschman
1950s &
1960s
Modernization
Theory
Linear Progress,
Economic Growth,
Social and Cultural
Modernization
Rostow,
Lewis,
Myrdal
1960s 1980s
Time
Period
Development
Approach
Development
Understanding
Key Thinkers &
Influences
1960s &
1970s
Dependency
Theory
National-centered
Development,
Development of Under-
development
Frank,
Prebisch,
Cardoso,
Rodney,
Wallerstein
1970s &
1980s
Basic Needs,
Grassroots,
Alternative
Development,
Women in
Development
(WID)
Human flourishing,
Basic needs to poorest,
Local Level Community
Development,
Role of Women in
Development
McNamara,
Boserup,
Streeten
1980s
Time
Period
Development
Approach
Development
Understanding
Key Thinkers &
Influences
1980s
onwards
Neo-Liberalism Market-led Economic
Growth advocating
Deregulation,
Liberalization,
Privatization
Lal,
Balassa,
Friedmann,
World Bank,
IMF
Human
Development,
Gender &
Development
(GAD),
Sustainable
Development
Human Capacities &
Entitlements, Participation
& Empowerment,
Role of Gender Relations
& Societal Expectations,
Role of Natural
Environment
Sen, Chambers,
UNDP, Cooke &
Kothari, Edwards &
Hulme, Moser,
Brundtland, Kabeer,
Elson, Momsen,
Shiva, Blaikie

1990s 2000s
Time
Period
Development
Approach
Development
Understanding
Key Thinkers &
Influences
1990s Post-
developmentalism
Challenges idea of
development as a form
of continued Colonialism
& Eurocentrism
Escobar,
Sachs,
Esteva
2000s Millennium
Development
Goals
Specific Goals to
Alleviate Poverty, Specific
Indicators to be achieved
by 2015
United Nations
Diverse Inter-
disciplinary Views,
Optimistic post-
development
Well-being, Sustainable
Development, Localism &
Decentralization
Kabeer, Momsen,
ORiordan,
Redclift,
McGregor, Gough

Global Hegemony & Development
Theories (1/2)
Historical
Context
Hegemony Explanation Development
Thinking
19
th
Century British Empire Colonial
Anthropology,
Social Darwinism
Progress,
Evolutionism
1890 1930s Colonialism Classical Political
Economy
Catching-up
Post-war Boom US Hegemony Growth Theory,
Structural
Functionalism
Modernization

Global Hegemony & Development
Theories (2/2)
Historical
Context
Hegemony Explanation Development
Thinking
De-colonization Third World
Nationalism,
NAM,
G77
Neo-marxism Dependency
1980s Globalization,
Finance &
Corporate Capital
Neo-liberalism,
Monetarism
Structural
Adjustment
1990s Rise of Asia,
Big Emerging
Economies,
BRICS
Capabilities,
Developmental
State
Human
Development

Major Periods
Pre-Classical Economics or Mercantilism (16th late
18th century)
Classical Economics (~1776-1870s)
Neo-classical Economics (1870s-1930s)
Keynesian Economics (1930s-1970s)
Marxian Economics (1950s-1990s)
Development Economics (1940s-1990s)
Neo-Liberal Economics (1990s onwards)
Topic 41:
Pre-Classical Economics
(Mercantilism)
Pre-Classical or Mercantilism (1/2)
Feudal society, at the mercy of Industrial Revolution
(18
th
century onwards)
European origins, achieving national power through
economic growth:
Colonization to gain control over resources.
Based on trade (mercans is trade in Latin)
Trade monopolies (e.g. East India Co.) due to
colonization [trading in opium, spices, etc].
Trade based on shipping.
Bullion (i.e. gold and silver) exchange.
Pre-Classical or Mercantilism (2/2)
Economic prosperity based on favourable balance of
trade:
Net exports [over imports].
Protectionism Elites influence on protection of
domestic economy through tariffs and other
preferential laws (e.g. Corn laws protecting British
landlords).
Topic 42:
Classical Economics
Introduction (1/2)
Based on critique of Mercantilism.
General belief on economic development through
Free market (i.e. trade without barriers).
Natural order determines price, rent, & economic
affairs.
Competitive economy promotes public interest.
Freedom from government restriction.
Institutions supply money.
Capital accumulation (savings) output wages.
Introduction (2/2)
Division of labor related to market size.
Free trade.
Diminishing returns.
Iron law of wages.
Formulated amid scientific discoveries & technical
change.
Major flaws population theory & lack of
technological change.
Adam Smith
Adam Smiths Wealth of Nations (1776): the start
Self-interest as an economic drive. Limited
government intervention free trade; and self-
regulating markets [contrast with mercantile
protectionism].
Market prices limited by competition.
Invisible hand of self-regulating markets transform
self-interest into public virtue.
Division of labour (i.e. specialization) enhances
production [distinctively industrial orientation].
However, division of labour is limited by the extent
of market.
Malthus
Malthuss Essay on Population (1798):
Human progress limited by human passion
population outgrows food production.
While population increases in geometric
progression (2,4,8,16,32,64,), food increases in
arithmetic progression (2,4,6,8,10,12,).
David Ricardo
David Ricardos Principles of Political Economy and
Taxation (1817):
Economic development through Comparative
Advantage Countries gain when they trade
products in which they have greatest comparative
advantage.
Topic 43:
Neo-Classical Economics
Neo-Classical Economics (1/2)
Beginning in 1871:
William Stanley Jevonss Theory of Political
Economy.
Carl Mengers Principles of Economics.
Leon Walrass Elements of Pure Economics.
Alfred Marshall's Principles of Economics (1890).
Free competitive markets as means of efficient
allocation of resources.
Neo-Classical Economics (2/2)
Assumption: Rational and self-interested individuals
maximize their utility.
Significance of marginal utility:
Marginal utility proportional to price (supply/
demand).
Long run equilibrium.
Minimal state intervention:
Laissez-faire.
Topic 44:
Keynesian Economics
Keynesian Economics (1/3)
Critique of Classical economics.
Gained credence after the 1929 Depression.
Keynes The General Theory of Employment,
Interest, and Money (1936):
Markets not self-adjusting.
Long-run equilibrium untenable [In the long run,
we are all dead].
Economic uncertainty.
Keynesian Economics (2/3)
Savings leads to investment, which matters for
economic growth.
Capital formation is determined by savings and
investment:
o Domestic savings are channeled to productive
investments such as manufacturing, which
results in high productivity.
o Growth is market driven. As income levels rise,
savings rises, and frees capital for alternative
investment.
Keynesian Economics (3/3)
Macro-level behaviour:
Aggregate demand (country level) as driver of
economic growth.
Active fiscal policy to control markets (planned
economies).
Economic growth can be accelerated by changing
the saving rate.
Government regulation of interest rates.
Topic 45:
Marxian Economics
Beginnings
Historical dialectic examines where society was, is
going, and its change process.
Movement from slave society and feudalism, to
capitalism, socialism and communism change is
based on relationship between ruling and oppressed
classes.
Reserve army of unemployed.
Can socialism be introduced through parliamentary
democracy?
Marxian View of Development
Originated in 1950s to counter capitalism:
Capitalist or market economy:
o Production depends upon wage labor.
o Labors efforts produces a surplus.
o The surplus is accumulated and appropriated by the
employer.
o This often results in class conflicts.
Socialist or command/planned economy:
o Mode of Production elements and activities
necessary to produce real and material life.
o Ownership of Production community.
Critiques & Success of Marxism
Critiques of Marxism:
Discussion of socialism not well developed.
Worker revolt is weakest link.
Overlooked possibility that workers & capitalists
interests dont conflict.
Success of Marxism:
Yet Marxism remains rallying point for
discontented people.
Class antagonism threat to rulers of any
economic system.
Failure of Marxism in West
Marxian explanation
Divide & rule.
Exploitation of LDC workers.
Media, education & religion supporting capitalist
ideology.
Powerful legal, police, military, & administrative
machinery.
Marxian Framework
Factors of production
Existing rationality, science & technology.
Mode of organization of production.
Degree of development of people.
Relations of production
Appropriation of human labor product.
Social contradictions under which production
takes place.
Principles of distribution.
Modes of thought and ideology.
Topic 46:
Development Economics
Introduction
What development economists agree on?
Development economics deals with the
economic, social, political, and institutional
mechanisms, both public and private, necessary
to bring about improvements in well-being.
Structural change is an essential part of this
process
But, does this mean a shift away from agriculture, or
increases in productivity throughout the economy?
Context
Post World War II developing countries gained
independence & in-country concerns dominated:
Harrod-Domar Model (1946)
Trickle-down Theory (Myrdal-Hirschman, 1957-8)
Dependency Theory (Prebisch, 1959-60)
Stages of Growth (Rostow, 1960)
Neo-Marxist Model (Baran, 1960)
Neo-Colonial Dependence Model (Santos, 1969)
Urban Bias (Lipton, 1977)
Basic Needs Approach (Streeten, 1979)
Harrod-Domar Model
Harrod-Domar Model (1946):
Inspired by Keynesian economics.
GDP growth rate (g) depends directly on the
national saving ratio (s) and inversely on the
national capital/output ratio (k) (adjusted for
depreciation (d)) [g = (s/k)-d].
Need for capital formation (i.e. investment) for
economic growth.
National savings as a source for capital.
International aid as supplement (financing gap)
for savings for economic growth.
Trickle-down Economics (1/2)
Gunnar Myrdal (1957) and Albert O. Hirschman
(1958):
No specific economist associated with this; yet,
many governments have implicitly or explicitly
subscribed to this.
Overall economic growth benefits the poor, since
benefits will ultimately trickle down the economic
ladder.
- continued -
Trickle-down Economics (2/2)
Tax benefits to businesses will benefit the poor,
since businesses will then expand, and absorb
more labour (thus creating jobs).
Critique: Overall economic growth does not imply
that benefits are shared by all in the economy
(there could be dualistic economy). Redistribution
is not automatic.
Despite it being criticized and rejected, it
manages to survive in many circles.
Dependency Theory
Raul Prebisch (1959-60):
Contrary to classical and neo-classical position
that trade is necessarily beneficial.
Countries in the centre (Europe/ N America) gain
over weaker peripheral countries in trade.
While Centre trades in industrial goods,
peripheral countries trade in primary goods.
Import substitution policies to stimulate domestic
industries.
Stages of Growth (1/8)
Walter W. Rostow (1960):
Stage 1 Traditional society.
Stage 2 Pre-conditions for Take-off.
Stage 3 Take-off.
Stage 4 Drive to maturity.
Stage 5 Age of High-mass Consumption.
Stage 6 Beyond Consumption.
Stages of Growth (2/8)
Stage 1 Traditional Society:
Pre-Newtonian or 18
th
century subsistence
agriculture, barter economy, hierarchical
structure, low social mobility.
Lumps past economies, Developed Countries 19
th

century, and Less Developed Countries today
together.
Neglects dualism of many low-income countries
today.
Stages of Growth (3/8)
Stage 2 Pre-conditions for Take-off:
Agricultural modernization.
Transition to industrial economy.
Infrastructure growth and centralization.
Increased transport investment enlarge market
& specialization.
Agricultural revolution to feed urban population.
Expansion of imports (especially capital), perhaps
financed by exporting natural resources.
Stages of Growth (4/8)
Stage 3 Take-off:
Increase in industrialization, high investment, and
steady economic growth
Decisive expansion in 2-3 decades.
Radically transforms economy and society.
Barriers to steady growth overcome.
- Continued -
Stages of Growth (5/8)
Late 18th-century Britain, pre-civil war US, late-
19th-century Germany, post-Meiji (1868) Japan,
pre-1917 Russia, post-1947 India, and post-1949
China.
I/NNP increases sharply, say 5 to 10%.
Leading manufacturing sector stimulates growth
through linkages.
Political, social, & institutional framework to
exploit modern expansion: entrepreneurship,
retained earnings, banks & capital markets,
foreign investment.
Stages of Growth (6/8)
Stage 4 Drive to Maturity:
Economic and technical progress; diversification.
Growth regular, expected and self-sustained.
Urban, skilled, less individualistic, more
bureaucratic labor force.
State provides more economic security.
Stages of Growth (7/8)
Stage 5 Age of High Mass Consumption:
Social prosperity; mass consumption, and
dominance of service sector.
Alternative: welfare state, military power.
US 1920s, Western Europe 1950s.
Autos, suburbs, innumerable durable consumer
goods and gadgets.
Stages of Growth (8/8)
Critiques of Rostows Model:
Difficult to test and Lack of empirical evidence.
No historical evidence of abruptness.
Stages define, not explain; and are not unique.
Dualism (not just pre-science and technology).
How does an economy move to next stage?
Does self-sustained growth imply effortlessness?
Are obstacles to growth removed?
Is this Western (or US) model in disguise?
Modernization Theory
This theory suggests that economic dimension alone
is insufficient, and incorporates theories on
institutional and social change:
Incorporates non-economic elements such as
social practices, beliefs, values and customs.
Diffusion and speed of change is critical as it
removes various cultural and social barriers.
Backward internal structures, rather than external
factors cause underdevelopment.
Neo-Marxist Model (1/4)
Paul A. Baran (1960) Outgrowth of Marxist
thinking, applicable in Asia, Africa and Latin
America:
Western economic and political domination
unfavorable.
Western monopolistic business transferred to
LDCs.
Bourgeoisie in LDCs too weak to accumulate
capital and provide institutional change.
Bourgeoisie ally with moderate leaders of workers
and peasants.
Neo-Marxist Model (2/4)
Form New Deal coalition democratic, anti-
feudal, anti-imperialist, supportive of indigenous
capitalists.
Indigenous middle and capitalist classes unwilling
or unable to reduce poverty and provide
economic development for masses.
Bourgeoisie frightened and forced into alliance
with landed interests and foreign capitalists.
Government supported by foreign economic and
military assistance.
Neo-Marxist Model (3/4)
Progressive coalition breaks down.
Overriding interest in preventing socialism.
Needed: progressive income tax; landlords invest
productively, public investment where private
capital does not venture or where monopolies or
where infrastructure required.
Impossible populist forces further polarization,
radicalism and revolt.
Impasse broken by expropriation and ethos of
collective effort.
Neo-Marxist Model (4/4)
Critique:
Potential conflict of interest between local and
foreign capital.
Nationalism and decline of colonial economic ties.
Couldnt revolution just transfer from one elite to
another, e.g. USSR?
USSR is Barans model collectivism not market
socialism.
Is transition of squalor, workers poverty & other
human costs inevitable?
Class interests under socialism.
Neo-colonial Dependence Model (1/2)
Dos Santos (1969) Outgrowth of Marxist thinking,
in Latin America:
Underdevelopment due to historical evolution of
an international capitalist system:
o Unequal production relations.
o rich country-poor country relations.
o Sets up center versus periphery contrast.
o Attempts to become self-reliant and
progressive are suppressed by this
relationship.
- Continued -
Neo-colonial Dependence Model (2/2)
Elites in the developing world (e.g. landlords,
money-lenders, priests, merchants, etc) enjoy
high incomes, social status and political power.
o They promote conformity and inequality, and
are rewarded.
o They facilitate international power groups like
multi-national companies (MNC), financial
assistance agencies (WB and IMF), and other
agents.
Urban Bias
Michael Lipton (1977):
Bias in putting more investment in urban areas.
Urban populations are more organized and
politically powerful compared to rural people.
Trade protectionist policies and low food prices
adversely affect rural areas, as farmers do not
benefit.
Urban bias induces rural-urban migration [better
job opportunities, but increased crowding and
informal sector employment].
Basic Needs Approach
Paul Streeten (1979):
Critique of macro-level economic growth theories.
Reduce mass deprivation; give everyone an
opportunity to live a full life.
Development is a function of meeting human
beings basic needs.
Most country policies translated basic needs as
food, shelter, and clothing.
Topic 47:
Neo-Liberal Economics
(Neo-Liberalism)
Introduction (1/3)
Context:
1980s economically conservative governments,
Reagan-Thatcher era,
Fall of Berlin Wall,
Demise of socialist economies,
Globalization,
Information & Communication Technology (ICT),
View dominant in World Bank and IMF.
Introduction (2/3)
Designed to counteract impact of Keynesianism:
New emphasis on supply side factors in
development private initiatives and market led
growth.
Moves away from demand stimulation (interest
rate manipulation), import substitution, state
intervention and centralized planning.
Gradual industrialization with trickle down of
benefits to all social classes.
Introduction (3/3)
Neo-liberals slow growth due to poor resource
allocation at non-market prices and excessive LDC
state intervention.
Promote free markets, privatize public firms, free
trade, liberalizing exchange, encourage foreign
direct investment (FDI), reward savings, reduce
government spending & monetary expansion,
remove price distortions & regulations.
Free markets Korea, Taiwan, Singapore, Hong
Kong, Malaysia, Thailand and Indonesia.
Washington Consensus (1/3)
Economically influential bits of Washington (US
government and international financial institutions).
Reduce government role (New Public Management
to emulate business practices); contractual
relationships and outsourcing.
IMF & World Bank lending policies:
o Stabilization policies pursue macro-economic stability by
controlling inflation and reducing fiscal deficits.
o Structural adjustment open economies to the world
through trade and currency liberalization; liberalize domestic
economy through privatization and deregulation.
Washington Consensus (2/3)
Emphasis on:
Price de-control
Fiscal discipline
Reduce public spending
Tax reform
Financial liberalization
Competitive exchange
rates
Trade liberalization
Domestic savings
Foreign direct
investment
Privatization
Deregulation
Property rights
Universal consensus
Big bang or shock
therapy

Washington Consensus (3/3)
Criticisms:
Neo-liberalism concerned with operation of
markets, not with how markets develop or with
policies to induce development.
Stiglitz Washington Consensus benefits few at
expense of many, rich relative to poor.
Income distribution and capital controls.
New Institutional Economics
New Institutional Economics (1990s):
Policies, laws, rules, and regulations & their
enforcement (i.e. institutions) hold incentives for
productive activities.
Effective legal system for securing property rights.
Institutions could reduce or increase transaction
costs.
Organizational effectiveness according to their
comparative advantage (public/ private/ non-
profits).
Topic 48:
Summary of Emerging Policy
Perspectives
Stages
The Policy perspective is historically spread over five
stages:
1945 to mid 1950s
Mid 1950s to Late 1960s
Late 1960s to 1980s
1980s and 1990s
Post 1990s
1945 to Mid 1950s Context
Political independence of several developing
countries.
Worldwide policies to boost aggregate demand
(Keynesian).
Setting up of the Bretton Woods institutions (World
Bank, IMF, WTO).
State intervention and planned/command economy
(Soviet Union).
1945 to Mid 1950s Ideas
Under-development or low-level equilibrium caused
by low savings.
High population growth.
Rosenstein-Rodan and Nurkse Market failures
due to scale economies and externalities.
Lewis Dual economy with traditional / backward
sector (rural-agriculture) and modern sector (urban-
industry).
Lewis and Hirschman Emphasis on inter-sector
linkages and discussions about the benefits of
balanced versus unbalanced economic growth.
Mid 1950s to Late 1960s Context
Myrdal Uneven international development and
import substitution policies to promote
industrialisation.
Mid 1950s to Late 1960s Ideas
Baran Marxist theorists gave importance to
political and social factors in development,
inefficiency and corruption of capitalist state.
Cardoso, Prebisch, and Chenery Structuralism
recognition of structural rigidities typical of
Developing Countries.
Singer and Prebisch supply rigidities in
agriculture and industry, terms of trade weighted
against developing countries.
Late 1960s to 1980s Context
Emergence of the Newly Industrialised Countries
(NICs) Taiwan, Singapore, South Korea, Hong
Kong.
Debt problem in Latin America and Sub-Saharan
Africa.
Late 1960s to 1980s Ideas
Revival of neo-classical economics.
Lal, Little, Scitovsky free market policies and
export orientation.
Emergence of basic needs agenda.
Emphasising neglect of the poor.
Dependency School criticism of structure of
international relations and trade (and TNCs), which
systematically hampers efforts of Import Substitution
& Industrialization (ISI) in countries.
1980s and 1990s Context
Debt crisis.
IMF and WB first structural adjustment wave
recession and poverty increases.
Revision of the NICs experiences show the scope
for state intervention and the synergies between
states and markets.
But continuing pressure to liberalise.
1980s and 1990s Ideas
New growth theory emphasize role of income
inequality, education and natural resources,
New structuralist theory studying problems of
determinants of growth, income distribution, inflation,
and fiscal and balance of payments.
New neo-classical approaches (industrial
organisation, game theory and information
economics) applied to development (agrarian
relations, income distribution, causes of poverty).
Post 1990s
Rediscovery of state intervention and regulation
(back to the 1940s???).