Economic Development Theories PDF

ECOPE05 Economic Development Module Prepared by: Dina Campos CBA Faculty CHAPTER 5 THEORIES OF ECONOMIC DEVELOPMENT This chapter discusses a few of the major theories of economic development, reserving for subsequent chapters less comprehensive theorie...

ECOPE05 Economic Development Module Prepared by: Dina Campos CBA Faculty CHAPTER 5 THEORIES OF ECONOMIC DEVELOPMENT This chapter discusses a few of the major theories of economic development, reserving for subsequent chapters less comprehensive theories dealing with specifi c economic questions. As they did in the 1950s and 1960s, economists recently have stressed all- encompassing theories of development, including neoclassicism and rival theories. The fi rst two models with some application to LDCs today – those of the English classical economists, and of their foremost critic, Karl Marx – were developed in the 19th century during the early capitalist development in Western Europe and the United States. The next theories include Walter Rostow’s model – written as an alternative to Marx’s theory of modern history – which sets forth fi ve stages of economic growth for LDCs, based on DC experience; the vicious circle theory, focus- ing on LDC low saving rates; and the debate on preventing coordination failures, including balanced versus unbalanced growth, which clarifi es issues concerning the “big push,” economies of scale, complementarities, and differential productivity. Economic Development Theories Economic development theories provide frameworks for understanding the factors that drive economic growth and poverty reduction. Here are some of the most influential theories: Classical Theories Adam Smith's Theory of Absolute Advantage: This theory suggests that countries should specialize in producing goods and services in which they have an absolute advantage, meaning they can produce more efficiently than other countries. David Ricardo's Theory of Comparative Advantage: This theory argues that countries should specialize in producing goods and services in which they have a comparative advantage, meaning they can produce them at a lower opportunity cost than other countries. Keynesian Economics Government Intervention: Keynesian economics emphasizes the role of government intervention in stimulating economic growth, particularly during recessions. Fiscal Policy: Government spending and taxation policies can be used to influence aggregate demand and economic activity. Monetary Policy: Central banks can adjust interest rates and the money supply to control inflation and stimulate economic growth. Neoclassical Economics Market Efficiency: Neoclassical economics emphasizes the efficiency of markets in allocating resources. Role of Incentives: Individuals and firms respond to incentives, such as prices and profits, to  make decisions. Economic Growth: Long-term economic growth is driven by factors such as technological progress, capital accumulation, and human capital development. Structural Change Theories Lewis Two-Sector Model: This model explains the process of economic development as a shift of labor from the traditional agricultural sector to the modern industrial sector. Structural Transformation: Economic development involves a shift in the structure of the economy, from agriculture to industry and services. Dependency Theory Core and Periphery: This theory argues that the global economy is divided into core and periphery countries. Unequal Exchange: Core countries exploit peripheral countries through trade and investment, leading to underdevelopment. Endogenous Growth Theory Knowledge and Technology: This theory emphasizes the role of knowledge and technology in driving long-term economic growth. Human Capital: Investment in education and training can lead to increased productivity and innovation. Government Policy: Government policies can promote innovation and technological advancement. Modern Development Theories Sustainable Development: This approach emphasizes balancing economic growth with environmental protection and social equity. Inclusive Growth: This approach aims to ensure that the benefits of economic growth are shared by all segments of society.