Lecture notes: Economics of Development
Introduction
What is Development Economics ?
For people all around the world living in poverty it is
important that countries in South East Asia such as South Korea, Taiwan and
China, as well as Brazil in South America recently have been able to get out of
the poverty trap. They are not so many, but there is a group of countries that
have essentially completed the transformation to become developed. I think, for
countries in Africa such as the Gambia, it is relevant to raise questions about
the extent to which they can learn from experience of the newly industrialized
countries and if they are potential
models for other countries to follow.
Another question arising is if economics can help us to better understand the process of development,
which is extremely complex, and if economics also can become an efficient tool for shaping adequate development
policies. Sometimes economists are criticized for being too narrow primarily focusing on the task to increase economic growth, even if it is empirical evidence that economic growth often increase
inequality and, therefore, does not provide a sustainable solution for the
poor. Furthermore, traditional neoclassical economics have been developed to
deal with developed economies emphasizing
market efficiency, while developing
countries usually are lacking market
institutions. Neoclassical economics concerns the determination of equilibrium, while transformation from a developing to a developed economy is
characterized by disequilibrium
processes and transactions out of (traditional) equilibrium.
In addition, with regard to understanding poverty and
economic growth in Africa, it is extremely important to understand the
influence of geography; the intersection
of climate, ecology and economic activity is crucial. For example, since
long, and in the Gambia, there has been a negative development of productivity
in agriculture which has depreciated the situation of the poor both in the
rural and urban areas. A policy breaking this trend must be based on analyses
that can explain relations between poverty and environmental destruction, for
instance, deforestationdestructing the quality of the soil. It links up with
the green revolution by including measures to increase the rate of technology diffusion that relies on
scientific discoveries of hybrid seed varieties.
In order to take account of the fact that poor countries
differ from developed countries, development economics also draws on other
sciences than economics. When looking at the contribution by economic science,
we should admit that before the neoclassical school became mainstream, the classical economistsused the notion political economy instead of economics.
This distinction is important when it comes to development economics, which stresses the role of institutions.
Accordingly, contemporary theory in the field of development economics has
sometimes pointed at poor governance
as main cause of stagnation in developing countries. It should be an important
task to examine this explanation of why poverty persists which cannot be done
unless economic activity is viewed in its political context taking account of
political institutions.
Moreover, recently emphasis has been put on the importance
of women for bringing about economic change in Africa, which suggests that
economic development should be seen in view of another important institution: the extended family.
All in all, economists should recognize that mainstream,
neoclassical economics is too narrow to address issues on economic development.
But also T/S view of political economy as concerned with the relationships
between politics and economics does not fully admit the importance of social and cultural institutions, which
were included in the classical economists’ understanding of political economy.
For example female genital cutting,
which has a tremendous influence on the life of the women and their ability to
contribute to the development of the rural economy. A more complete
understanding of development economics recognizes that this field of study is
rapidly evolving its own distinctive analytical and methodological identity.
T/S are arguing that the ultimate purpose of development economics is to help us understand developing economies in order to
help improve the material lives of the majority of the global population.
More specifically, it is the study of how economies are transformed from
stagnation to growth and from low-income status to high-income status and to
overcome problems of absolute poverty.
What do we mean by development
Not long ago, it was referred to poor countries, not as
developing countries or economies, but as underdeveloped. This was the
ethnocentric perspective of the colonizers, who used the European culture,
which was considered as enlightened and as based on true knowledge, as a model
for a developed Africa. The colonizing states believed that they had a responsibility
to transfer this culture, which was seen as favorable to economic development.
Inherent in this view was an idea that Africa had to pass the same type of
industrialization as Europe had done before. This kind of intellectual
orientation is very interestingly
described by the Palestinian
author Edward Said in a book called “Orientalism”.
Even if the way of referring to poor countries was changed,
and they were now called developing countries, the view of the development
process was only slightly changed in the field of development economics. Thus,
proposed development policies have often focused on rapid industrialization,
where manufacturing and service industries increase at the expense of
agriculture and rural development. Accordingly, development has been synonymous to sustained growth in per capita income, i.e. output is growing faster than the
population. This measure brings
increases in gross domestic product (GDI) into the fore, but for the
most part the well-being of the population has been in focus, which should be
associated with monetary growth of real per capita gross national income (GNI)
(monetary growth of GNI per capita minus the growth of inflation).
During the 1970s it became more and more obvious to those
working in the field that even if the economies were growing, a majority of the
populations continued to be poor in combination with growing inequality.
Development was redefined instead emphasizing reduction or elimination of poverty, inequality and unemployment within the context
of a growing economy.
Furthermore, poverty is not just an assessment of income,
but it is a fact of life that influence your self-understanding as a person
living a life that is not human as you are unable to control your hunger,
diseases and you know that you are unable to change this situation. This raises two questions about a how to
formulate a more inclusive definition of
development. Firstly, if it is possible to link up with the notion of utility in economics and define a
measure that takes account of how people
think about their lives as more or less satisfactory. Secondly, if we can
define a measure that is concerned with /and here we use the wording of AmartyaSen/ “enhancing the lives we lead
and the freedoms we enjoy”.
Sen refers to the
capability to functionas a status of a person that matters for whether he
or she is poor or non-poor. Functionings, then, is what a person does or can do with commodities of given characteristics
that he or she comes to possess or control. At the same time, individuals
value functionings, for instance, to be
nourished, being free from diseases or being able to read.
Individuals also value a high per capita income but there
are important disparities between these two measures of development. For
example, a person can have a high income and, thus, being able to buy food or
books. However, when looking at his or her functionings, we may find that he or
she has low or no capability to function, i.e. has a parasitic disease implying
that he or she cannot extract nourishment from
foodor is illiterate, and therefore has a low or no well-being in spite
of high income.
With regard to finding a method for measuring development, some economists have linked up
with the notion of utility in the sense
of happiness and defined national happiness which they have identified with
family relationships, financial situation, work community, health etc.. It has
been found that the average level of happiness increases with a country’s average income, but evidence also shows that people are happier when they are not unemployed, not divorced,
have high trust of others (social capital) in the society and enjoy democratic freedoms and have
religious faith.
It should be mentioned, however, that increased well-being
in Sen’s understanding as increased
functioning is not the same as increased utility or happiness. This is
obvious if we think about a person who
is hungry and cannot afford nutritious food, but reduce his hunger withrice
(cheap way to satisfy one’s hunger). This person increase his or her utility or
happiness. However, as the person reduces his or her hunger with food that has
a low nutritional content his or her well-being in the sense of health or
capability to function has not increased. Capability
to function, then, is freedom that a
person has in terms of the choice of functionings (being able to read a book, have the health to go to work)
given his personal features and command over commodities. From this
perspective, well-being as utility or happiness is just a part of the ability
to function.
The most authoritative measure of development -the Human Development Index produced by UN (the United Nations
Development Program UNDP) - is inspired by Sen’s ideas. Thus, standard of
living measured as real per capita gross
domestic product is only one outcome of development included in the measure.
The others are longevity as measured by life
expectancy at birth, reflecting health and access to nutrition, and
knowledgemeasured as weighted average of adult
literacy and school enrollment. This index is used to rank all countries on
a scale of 0 to 1.
In our next lecture, we will return to and look more in
detail into how to measure poverty, inequality and development and the way the
different measures are calculated.
Measuring poverty, inequality and development
/by Sering/
Explanations of development and classical theory of how it is attained
Explanations of relative development
Time has come to make you acquainted with the evolution of
scholarly theories about why development has not taken place and how it is
brought about. However, in order to
judge the appropriateness of the various theories we need a context that can explain why some countries are developed and other are poor.
Figure 2.11 is extremely informative but, nevertheless, the
factors and their interrelationships included in the figure, is a selection
made by the authors. However, they argue that the figure is based on the most
influential recent research literature.
By placing physical geography and climate at the top, the
authors emphasize the importance of a recent scholarly discussion about the
importance of geography for differences in development between countries. There
are scholars who reduce the role of arrow 1 and instead emphasize the role of
institutions which they associate with type of colonial regime (see figure). By
institutions, then, we mean formal
rules like constitutions and laws,
and with regard to laws, development economists have been concerned about property rights; private or public property.
It should be mentioned that institutions also include customs associated with local cultures and social structures
but these institutions are rather constraints on the colonial regime.
There is empirical evidence showing that after accounting for institutional
differences, geographic variables such as distance
from the equator and whether countries
are landlocked (like Mali) have little influence on their incomes today.
For instance, if geography is crucial, then those regions that were prosperous
before colonialization should continue to be prosperous also today. Thus there
is empirical evidence showing that past population density and past
urbanization, which is positively correlated with income, is negatively
correlated with high income today.
The explanation
provided is that the European colonizers, in order to extract significant
surplus from colonized peoples, set up extractive institutions in prosperous
areas and these institutions have often persisted to the contemporary
period. In Africa, I think extraction of
minerals and oil in countries such as Congo and Nigeria are examples and, as we
will find later on, after independence the post-colonial regimes have retained
the same institutions and used export of primary commodities as a strategy for
development.
However, geography has
an indirect effect on contemporary
per capita incomes as it influence the mortality rate of the settlers, which
has an impact on type of colonial regime (arrow 2). In climate zones with high
health-risks the colonizers established administrations using local people who
were loyal to the colonizers, who did not have to be physically present.
Moreover, there where climate was
favorable for plantation agriculture, slavery and other types of
mass-exploitation of indigenous labor were introduced (arrows 6 and 7).
According to the figure, investments in human capital is an
important factor explaining a country’s relative development (arrow 14). But amount of human capital in its turndepends critically onthe degree of inequality generated in the context of a
particular colonial regime. The institutions tend to be more democratic,
with more constraints on the elite, in countries with a higher level of
education. But there are cases where dictators have implemented good education
programs leading to growth in per capita incomes, which, in a second step has
led to changes in the institutions.
It is interesting to note that there are no arrows that
could indicate an influence by indigenous
cultural institutions. With regard to Africa, for instance, customs, gender relationships between
men and women as well as traditions of
giving elderly a say with regard to use of land and other natural resources
often replace laws that regulate the use
of property and property rights.
Social and cultural institutions such as tribe, religious affiliations and
familyinfluence social learningthat
affects adaptations of new technology and the diffusion of
innovations influencing per capita income. There is a growing amount of
scholarly research on how social and cultural institutions influence
development, but the reason for not including these factors in the figure is
that in relation to economic factors, there are few established results.
You may also lack arrows indicating influence of
international integration and tradethat explains why some countries are
developed and other are poor. However, in fact evidence shows that after it has
been accounted for the impact of institutions on countries’ contemporary
incomes, trade itself explains very
little. This is not contrary to another fact that many post-colonial
regimes have used trade policies successfully as an integrated part of their
development strategy, which the new-industrialized countries in South East Asia
such as South Korea and Taiwan are examples of.
With regard to lectures in the following that answer the
question of how development is brought about , the first section of the
lectures concerns theories that disregard international trade and foreign
direct investments, while the second section concerns theories that links
strategies for development to changes in the international economy.
It may be surprising that explanations of why some countries
are poor based on trade are so meager as trade
gives access to new technology. Technological change is one of those causes
of development that will be emphasized in the following. The reason is that
there is empirical evidence from developed countries showing that this factor
should be considered as a production
factor of importance likecapital and
labor.
The fact that international trade has not been a bridge for
transferring technology from the rich countries to the developing countries
maybe that the ability to absorb and
adapt the new technology in the developing countries has been poor. There is empirical evidence
showing that the absorptive capability depends on the amount of human capital,
and as education depends on qualities of the indigenous institutions, also the
transfer of technology depends on national institutions.
In an article about tropical underdevelopment, Sachs argues
that geography has an influence on the adoption of new technology. He finds
that there is empirical evidence showing that the tropical zone has lagged
behind the temperate zone with regard to technology in the two critical areas
of health and agriculture. Contrary to what we found before, he argues that
geography has an influence on underdevelopment
as the low diffusion rate for technology in the tropics has “opened a
significant income gap between climate zones”.
Factors such as geography and trade can have a moderate
power to explain differences in development between countries. Nevertheless, they
can be important factors in a development strategy designed to bring about
development, which will be discussed in the followingthat concerns theories of
development. In emphasizing geography,
we admit that almost all developing countries are situated in tropical or
sub-tropical zones. Further, climate in combination with global warming and
poverty create environmental degradation in the shape of deforestation and poor
soil quality, which has a negative impact on productivity in agriculture and
thus works back on per capita income and poverty. Two lectures will be devoted
to a discussion about sustainable development that could bring this
self-perpetuating process to an end.
Classical theory of how development is attained
It is important to note that the first steps in establishing
development economics as a branch of economic science was taken by scholars in
the colonizing countries after the second world war and, thus, reflect the scholarly thinking in Europe and the US
during 1950s and 60s. The dominating perspective was the linear-stages approach to development according to which all countries have to pass the same stages as the rich countries in
Europe. These were made explicit in
Rostow’s stages-of-growth model, where all societies starts as traditional agrarian economiesthat find
a development strategy for a
“takeoff”into self-sustaining growth.
In these theories increased domestic saving in combination with transfers of capital from the rich countries either privately or as
foreign aidto accelerate investments was considered as an important
condition for “takeoff” and regular growth. Thus, today many governments in
developing countries base their development policies on an aggregate growth
model inspired by the Harrod-Domar growth model.
/Math I here/
The logic behind using this model is that capital formation
is the main obstacle to development. Labor is excluded as this factor has been
considered as abundant in developing countries. It is a difference with regard
to innovation and technological change which is a scarce factor in most poor
countries in Africa. This factor can be incorporated into the Harrod-Domar
model as a reduction in k over time. That is, as time passes, less savings and
investments are needed to produce a given income.
/Math II here/
The weakness of this way of dealing with technological
change is that innovation and technological change is exogenous, i.e. we are
lacking a theory of innovation, to which we will return later in this course.
When using the Harrod-Domar model, some governments apply the two-gap modelcomparing savings gap and
foreign- exchange gap to determine which is the binding gap.
Let us assume that it turns out that the savings gap
dominates, which means that the foreign exchange gap is binding for capital
formation. This could be a situation where the national elite uses foreign
exchange, including foreign-aid, for luxury consumption abroad. As the
government wish to increase the per capita incomes by increasing the growth
rate, it is reasonable that it tries to encourage the elite to reallocate their
incomes from consumption to investments. Alternatively, they try to increase
foreign exchange by means of foreign aid and foreign direct investments. You
can read more about the two-gap model on pp 702 – 703
Implicit in the linear stages approach to development ,
where all countries pass the same stages of development, is the idea that
regular growth after “takeoff” is
synonymous to industrialization and
the development of a modern sector
replacing traditional agriculture. However, targets for the growth of the
modern sector should be judged in view of the amount of surplus labor in agriculture, which was considered as overpopulated with a marginal productivity of labor equal to
zero. Thus, it was believed that
labor could be withdrawn from traditional agriculture without any loss of output. At the same time, marginal productivity in the modern economy
was larger than zero implying that wages were higher than in agriculture.
As people were assumed to move from regions with lower wages to regions with
higher wages, rural-urban migration
was expected to grow fuelled by a modern sector characterized by full
employment.
Development strategies in this situation was analyzed within
the context of Lewis two-sector model
that dominated the field of development economics during 1960s and the
beginning of 1970s. Lewis assumed that the capitalists operating the modern
sector reinvest all their profits. If we also assume that the workers in the
sector use all their incomefor consumption, then this model takes for given
that investments are equal to savings
which means that it predictions made
by this model can easily be coordinated with predictions made by the
Harrod-Domar model of aggregate growth.
/presentation of the
model 116 – 120/
Self-sustaining growth continues until all surplus labor has
been transferred to the modern sector. This is Lewis turning point, where the slope
of the labor supply curve becomes positive and further labor cannot be
removed without costs in terms of reduction in the food produced in subsistence
farming.
One weakness of this model is that it does not take into
consideration the possibility that the capitalists invest in laborsaving capital equipment.
/figure 3.2 p 119/
One implication is that the wage-share of total value
produced in the modern sector declines (and the capital share increases) and
economic growth does not create any new jobs. This may be called “antidevelopment” economic growth.
When seen in view of the contemporary discussions about
development strategies, onedifficulty with Lewis’s model is that it neglects the importance of agriculture, which is reduced to a
secondary sector. With the new understanding of development emphasizing
reduction of poverty and inequality, development of agriculture comes into the fore as most of the poor people are
living in rural areas.
These two linear
stages approaches to development is based on the idea that all countries in principle are alike in the sense that they pass
the same development stages. This is a completely different paradigm for
development as compared with the Neocolonial
Dependence Modelthat become popular among development economists from the
1980s. According to this model developing countriesare considered as belonging
to the periphery and the developed
countriesconstitute the center
connected to the periphery (developing countries) through power relationships.
Thus, the development of the developing
countries is not the same as for the developed countries as, according to these
relationships, their development
complies with dependent capitalism, where the economy of the countries
in the periphery is conditionedby
the development and expansion of the countries in the center.
Unlike the linear stages approaches that stresses the
importance of internal constraints to development such as insufficient savings
and investments, the Neocolonial Dependence Model defines the development
strategies in relation to external constraints and the need of restructuring the world capitalistic system.
This agrees with figure 2.11, where the main explanation of differences in
development between poor and rich countries is institutional characteristics associated
with the type of colonial regime.
When looking at possible development strategies, it is also
important to note changes in the international system from anarchy and
conflicts between national states to increased collaboration and the
establishment of international organizations.
Thus, the Neocolonial Dependence Model recognize an elite ruling class in the developing countries, which is rewarded by and serve international
organizations such as the World Bank, IMF and various organizations of the UN.
They share the ideology and interest of the ruling elite in the center.
For example, there are rules in the international system
defined by the governments in the developed countries, saying that the
foremanship of the World Bank always is
allocated to an American (the US) and the foremanship of the IMF is always
allocated to an European. Being a collaboration between national states in
Europe, the EU is another international organization. Through its Structural
Funds, and by using tariffs the EU protects agriculture in Europe from trade in
agricultural products, which is very harmful for the African farmers.
From this perspective, an efficient development strategy, could be one that changes the rules for allocating foremanships in international
organization, transferring power of these organizations to developing
countries and to form alliances with
those forces in Europe that are working for changes in the European agricultural policy. Furthermore, it was mentioned before that
international trade has not been a bridge for transferring technology from the
rich countries to the developing countries, and we explained that by the ability of developing countries to absorb
and adapt the new technology. However, now we are in a position to discover a
second factor of importance. It is referred to neoclassical economics that
consider knowledge (technology is
knowledge about how to produce services and commodities) as a public good free for use. However, in
practice a lot of technologies that
could be useful for developing countries are owned and controlled through patents by companies with domicile in the
developed countries. Another example of a development strategy in the
spirit of the Neocolonial Dependence Modelcould be to make efforts to change the international patent laws.
The neoclassical counterrevolution
In the 1980a and 1990s, it became common that international
organizations such as UNDP and UNCTAD took on board the market ideology
propagated by the World Bank and IMF controlled by the developed countries. In
many countries, for instance, in Africa it was called for privatization of
public companies and dismantling of
governmental regulation. These views were supported by economists at foremost well-known American universities, who argued
that the bad performance in the developed economies depended on inefficient
public regulations. Fields in
economics such as public choice became popular at the universities using
classical approaches in neoclassical economics to analyze different forms of
public failure and argued in favor of an increased
role of market allocation.
While scholars belonging to the dependency school in
development economics argued that the lack of development in poor countries
depends on their colonial heritage, advocates of the neoclassical
counterrevolution argued that underdevelopment results from poor resource
allocation due to incorrect pricing and too much state intervention by developing-
nation governments.
Because of their association with the World Bank, IMF and
key US government agencies, it is sometimes referred to these ideas as the Washington Consensus. DaniRodrik
characterizes the Washington consensus in ten points (Table 11.1 p. 530) and
there is not anything in these points that indicates the importance of
eliminating absolute poverty. Obviously,
the basic idea is that a high economic growth rate will take care of poverty.
He also compare the ten points with the development strategy applied by the
most successful Asian countries such as South Korea and Taiwan and find that
the state has had a broader role in these countries than encapsulated by the
Washington Consensus.
I think T/S conclusion that in an environment with widespread
institutional rigidity and severe socioeconomic inequality, both markets and
governments will typically fail. It is a matter of assessing each country on a case-by-case-basis.
Contemporary explanations of how to attain development
Development
strategies and reduction of poverty and inequality
According to modern perspectives on development,
contemporary theory of development should emphasize the problem how a society escape fromabsolute
povertyand how inequality is
reduced. It is obvious that bringing people out of poverty should be crucial,
but why is inequality important.
There are at least three reasons:
1) Inequality is
inefficient as it reduces saving (the middle class has the highest
propensity for saving). The saving of the small group of very rich is
proportionally small as the use money for luxury consumption, travels abroad
and capital flight. Furthermore, investments are also hampered as a majority of
the people cannot provide the collateral necessary for getting loans. With
regard to investments in human capital, inequality creates a bias towards
higher education, while development often is better served by increased
investments in higher quality of primary and intermediate education.
2) Inequality destroy
social capital such as trust relationships and solidarity by promoting rent
seeking by a small elite using bribes and corruption leading to cronyism.
Yet, there are economists arguing that some inequality is
necessary for development as equality tends to reduce the incentive for working
hard. If you know that there is a possibility for increasing your income, to
get a position with higher salary, then you are prepared to increase your
productivity. The counter argument is that there is a wealth effect involved in
social engineering directed to the determination of the optimal inequality with
regard to working incentives. Inequality implies for the majority of the
population with the lowest incomes that they cannot afford to buy food with the
nourishments, and have the housing
conditions, necessary for a healthy life. Due to poor health, they will not
work more but less than in a situation with a more equal distribution of
wealth.
3) The third
reason for considering inequality in
a development strategy is that it is not
fair. At this point, Rawl’s notion of the “veil of ignorance” should be
mentioned. He outline a laboratory
experiment, where a group of people is told to imagine that they do not know
their future income and wealth. Thus, all have the same probability to belong
to those with the lowest incomes or to those with high incomes. Under these
conditions, they are asked if they would prefer an income distribution that was
more equal or one that is less equal than those they see around
themselves. If the degree of inequality had no influence on the incomes, than
most of the people would probably choose a distribution that is almost
equal.
Obviously, it seems reasonable to rank developing countries
with regard degree of development using properties of the Lorentz curves. How
can this be done? (highly unequal countries have a large Gini coefficient and vise-versa). Modern explanations of how development is
attained are more concerned about
difficulties to reduce inequality and escape poverty traps than the classical
explanations.
There are empirical evidence of how efficient the two linear stages approaches to development
discussed before are to promote development.
1) Modern sector
enlargement in a two sector economy like in Lewis’ model, where the modern
sector is growing constantly butwages in both the traditional and the modern
sector are constant. This development strategy has been practiced in East Asia
by countries such as China, South Korea and Taiwan.
2) Modern sector
enrichment growth, where the growth is limited to a fixed number of people
in the modern sector when, at the same time, the number of workers in the
traditional sector and their wages have been constant. This is the type of
development has been practiced in many African and Latin American countries.
3) The traditional
sector enrichment, where growth has benefited workers in traditional
sectors with little growth in the modern
sector. This is typical for countries that have given priority to fighting
poverty at a low growth rate and low per capita income (Sri Lanka and Kerala in
India).
In 1), absolute
incomes are increased and absolute poverty is reduced, but as the Lorenz
curves are crossing (figure 5.9) there is no clear evidence of changes in
inequality. In 2), inequality is
increased and no change in poverty.3) The growth (relatively lower)results
in higher incomes with a more equal
distribution of income (figure 5.7)
It is sometimes held that rapid growth is bad for the poor,
as they will be bypassed by structural change. This argument is supported by
2), which has no effect on poverty, while 3) with lower growth rate improves
the situation of the poor. Furthermore, advocates of the inverted U Kuznets curveare arguing that in early stages of
economic growth when the per capita income still is low, the distribution of
incomes will be worsen; only at later stages it will be improved(figure 5.10). With Lewis model in
mind, increased inequality at early stages, probably, depends on few jobs with
relatively high productivity and wages in the modern sector. If we look more
specifically at investments in human capital and supply and demand of skilled
labor in the modern sector, we also have an explanation of why equality
increases at later stages of the development process. At the early stages,
skilled labor demanded by the modern sector is short in supply pushing wages in
this sector upwards, while at later stages the supply of skilled workers
reducing the number of unskilled.
However, few development economists would argue that the Kuznets curve is inevitable, but depends on type of development strategy
chosen. This is evident from the differences between 2) and 3) above.
It is sometimes argued that redistribution from the rich to the poor will reduce economic growth
as the poor save less. However, figure
5.13 does not support this conclusion. It reflects the fact that the low
inequality East Asia is growing faster than the high-inequality Latin America
and Sub-Saharan Africa and changes in the Gini-coefficient was small within the
groups between 1960 – 1990. With regard to savings, there is empirical evidence
that the middle-class has the highest saving rate, and reduction of poverty is
synonymous to social mobility increasing this class. Moreover, when poor
increase their incomes they save and invest in education of their children and
in improved health. Altogether has a positive effect on economic growth.
Recent economic perspectives on how development is attained
Contemporary models have been enriched by discussions among
development economists about the suitability of market fundamentalism as
expressed by the Washington Consensus.
These discussions have led to the development of new tools to better understand problems related to market failures. They have provided
significant insights into why markets fail to coordinate various actors. The
new models are better to handle problems related tothe notion of economies of scale and its connection with learning by
doing and the neglect by the Washington Consensus of poverty has led to
strong focus on why communities get stuck in poverty traps. The latter has intensified studies of economic
processes with multiple equilibriums.
Big Push models
T/S askwhy it is so difficult to start modern growth,
where traditional methods of production are replaced by new methods. According
to market fundamentalists it is a matter of transferring new technology from
the developed countries and establish efficient institutions for securing free
markets in the developing countries.
An example from the traditional rural economy may
illustrate. In the Gambia, bee keepers remove bees from trees by smoke and,
therefore, have sometimes been made scapegoats for bushfires. When this mode of
producing honey actually leads to bushfires, beekeeping becomes extremely
harmful to women, who by tradition use the forest for collecting firewood,
which afterwards is sold at the market.
This is an example of negative externalities in the traditional rural
economy. Pecuniary externalities are positive
or negative spillover effects on an agent’s costs or revenues.
Instead of using wild beehives in trees in the forests,
beekeepers can buy separate beehives , which they place close to their villages.
This is a new technology without
negative pecuniary externalities.
Contrary, bees are pollinators,
and if the women have gardens
with fruit trees, activities by the beekeepers may increase the incomes of the women. Opposite, the orchards the women keep
constitute a positive pecuniary externality for the beekeepers as they help the bees to produce more honey.
However, the yields from the beehives depend on how many
orchards the women will establish. This brings us back to the original question
about why it is difficult to start modern growth. In order to answer this
question we notice, firstly, that in this illustration there are
complementarities involved, which indicate that there may be an equilibrium
that is better than the traditional. Complementarities,
then, are present when an action taken by
one economic agent increases the incentives for other economic agents to take
similar actions. Secondly, even if both the women and the beekeepers would
prefer the equilibrium with modern growth, there may be a coordination failure that leads
the agents to an equilibrium, whereall are worse off than in an alternative
equilibrium. They cannot get to the alternative “better” equilibrium
because of difficulties to coordinate their actions even if they have full
information and therefore know that the modern-growth equilibrium is better for
all than the traditional one.
Coordination failures appear; either because they have
different expectations about one another’s behavior or because of free riding
where everyone is better off waiting for another to be the first mover. Figure
4.1 illustrates the situation with coordination failure in case of
multiple-equilibria. The S-shape of the
individual decision curve is explained by the fact that investments in new
technology is associated with a critical
mass of investments, i.e. the
benefits of an individual’s action depends on how many other agents take the
same action or on the extent of their actions.
We associate the traditional equilibrium with origo. Some
agents invest individually in the new technology (Y1 in figure 4.1) expecting
that no one else will make any investments. Since the average is higher than
expected, the agents adjust their expectations to the average and increase
their investments. Since the individual investments are based on expectations about
the average investment level,it is only when the individual investment levelsare equal to the average investments that the process is in equilibrium. There are three
equilibriums out of which D1 and D3 are
stable equilibriums. These are stable as a small increase in the
expectations would lead to individual investment levels below the expected
average, which would lead to a return to the original equilibrium /similar
reasoning for reduction in expectations and for showing that D2 is unstable/
The utility of D1 and D2 is not the same. For instance, D2
with the high average level of investments
may be associated with farms, where the women have set up life fences of
cashew-nut trees (a practice found in the Gambia) to protect theorchards from
wind and animals. This increase the soil quality and the amount of fruit
produced and due to the complementarities it will also increase incentives in
investing in bee hives. All in all moving from D1 to D2 represents a Pareto
improvement. However, since D1 is stable, and a small change in expectations
and investments will bring the village economy back to D1, the move from D1 to
D2 cannot usually be brought about by individual decisions and market
mechanisms.
To solve the problem
of coordination failure, there is usually a need of an external agent – a governmental body or an NGO – to
bring about Pareto improvements . A more
detailed analysis of this agent is provided in my next lecture.
In the literature, Issues on how to start modern development
have often been discussed under the heading of the “big push”. Here I will discuss a model used for analyzing
these issues which have been proposed by P Krugman, and is discussed on p 165
in T/S. In this model, like in most of the recent discussions about the problem
how to start development, the barrier
preventing free markets to bring about Pareto improvements by moving the economiesfrom the traditional equilibrium to a
modern one has been associated with high
wages in the modern sector.
This model is based on a few crucial assumptions:
1) Technology:
Contemporary models usually associate the
modern sector with Increasing Returns to Scale (IRTS). For developing
countries, one interesting interpretation is that the technology is new, and
therefore, has to be “learned by doing”, there is a learning effect involved in
the sense that every time the production process is repeated the efficiency will be increased.
There are N products in the economy.
2)Labor is the
only production factor. In the
traditional sector, and for each product, one worker is used for the production
of one unit of output. In the modern sector, IRTS is taken into
account in terms of a fixed cost expressing that the product cannot be produced
without a minimum of F workers. We may think about the F workers as instructors
needed for training the workers to increase the learning effect. Producing a
product within the modern sector requires the following number of workers: L = F + cQ, where c < 1.
3) Factor payments:
In the traditional sector workers
receive a wage equal to 1 and in the
modern sector w > 1. Remember; high wages in the modern sector have often
been used as an explanation of underdevelopment traps.
4) Competition.
Models by Krugman I am acquainted with are usually based on the assumptions of perfect
competition in the traditional sector and monopolistic competition in the
modern sector. The latter is logical, with regard to the assumption about IRTS in the sector. However, when a firm producing in the modern sector enter
a product market, the assumption about perfect competition in traditional
production implies, if it sets a price higher than 1 (MC = 1 = p)
it will lose all its customers to traditional producers.
5) Demand. To
make things simple, it is assumed that the economy
is closed and each domestic product
market receives the same share of
the total national income Y: Y/N
/present the model
analysis on the board pp 168 -169/
Growth diagnostic
It is not easy to define an appropriate strategy to attain
development in, for instance, the Gambia. We have focused on possibilities for exploiting
complementarities and on difficulties to avoid coordination failures. Even if
these issues have been an important concern for many development economists, we
shall not make the mistake and belief that we have found the final solution.
To many interested in this field, it is evident that each country is unique and probably need
its specific strategy. Among those sharing this knowledge it is popular to
apply a model called “the growth
diagnostic framework”. Like a medical doctor apply an hierarchical
procedure for testing different diagnoses and exclude illnesses, the economist
apply a diagnostic tree to identify different possible limitations to growth
and afterwards suggest treatments for the expected disease.
The model sets out from a postulate with a broad acceptance
(many people would agree): A high level
of private investments and entrepreneurship are good and should be promoted
by a development strategy. One advantage of the diagnostic tree is that it
shows that it shows how the various analytic tools discussed in different parts
of this course is related to different limitations to development. For
instance, “coordination failure” makes “low private appropriability”severe
limitation to growth, while “low domestic savings” (discussed in a previous
lecture) makes “high costs of finance” a limitation on growth.
/eventually discuss
figure 4.3 more in detail/
Be careful, do not think that the practice of a medical
doctor can be directly transferred into the field of development economics.
When targeting a specific limitation to growth, remember that the diagnosis is
based on a probability, and assume that the probability of your diagnosis is
significantly lower than in the case of a medical doctor. The most important
contribution of “growth diagnostic”, probably, is that it tells us that there
is no medicine that can be used for all countries.
Sustainable agricultural transformation
Since poverty should be a concern of development economics
(cf. pp 219 – 221), and the core problems of poverty originate in the economic
stagnation in rural areas, the rural economy must play an indispensable role in
any strategy of economic progress. This
perspective on development differs from Lewis’ two-sector model, where
agriculture plays a passive role to provide food and manpower to the “leading”
industrial sector.
The agrarian system in Africa
One lesson to be learned from studies of development is that
developing countries are different
and therefore have to be dealt with
differently. In Latin America and in parts of Asia the trend is toward
concentration of large land areas in the hands of a small class of landowners,
while in Africa a relative availability of unused land has led to other types
of farming. At the same time, due to
subdivision of land, there is a trend both in Asia and Africa that the size of
individual farms are becoming smaller. In order to better understand the
importance of these differences, we need a tool by means of which we can
classify countries with regard the agricultural activity.
T/S introduce the notion of agricultural system and tries to identify an African agrarian
system as well as one in Latin America
and another one in Asia. We have already mentioned empirical evidence of
ownership (ownership to land) and patterns of land distribution. These
two variables are included in the characterization of an agrarian system. Even
if farm-sizes tend to decrease over time
in all three systems, table 9.3 in
T/S, which shows the variation in farm sizes for individual countries, does not show a clear differences between the systems
with regard to average farm size.For those countries included, the average size is larger in Latin America
than in the other two systems. But Bangladesh and India in Asia have about the
same small size as many countries in Africa. On the other hand, an African
country such as Botswana has an average larger than Thailand and Pakistan in
Asia.
The size of farms are an indicator of the type of management; if the farms are
mainly directed towards subsistence
farming or cash crops; if they are managed as a firm employing workers or as a family farm. In Africa, the
family farm owned and operated by a single family is common, while in Latin
America Latifundio owned by a small number of landlords employing more than 12
(sometimes 1.000) workers is the most common way of organizing agrarian
activities.
Social and cultural institutionsare crucial characteristics of an
agrarian system. In the African systemthe
allocation of control of resources
depends on kinship both by descent and by marriage implying that husband and wife usually have their own separate economy and the oldest son takes over the
responsibility for the family after the father. Furthermore, in the Gambia, we
have the traditions associated with the village Alkali, who allocates land
to inhabitants of the village, which is a discrimination of those coming
from other villages, who are unable to get land in the village. I have heard
that this institution is changing when the price of land increases????
More
specifically, the African agrarian
system has three characteristics:
1) Subsistence farming is important (type of management):
The majority of farming families in Africa plan their output primarily for
their own subsistence. Only small areas can be planted and weeded as traditional tools (hoe,the axe and
panga) are used. Donkey, small horses and cows are used to make work more easy,
but most work is performed by labor.
Another
limitation is the access to fertilizer implying that farmers have to rely on shifting cultivation (slash and burn
with fallow). However, with a growing population, the fallow period have to be
made shorter or new farmland has to be created by clearing the forests.
I do not
think subsistence farming is sustainable in its present form. A continuation
will increase the harm of deforestation
and desertification. One alleviation mentioned in the literature is genetic
engineering creation new crop species. In my next lecture, I will point at soil
management as another possibility.
A third
factor that put limitation on the future growth of subsistence farming is the scarcity of labor during the rain, growing,
planting and weeding season.
2) The existence of some land in excess of the
immediate requirements. Institutions for private
ownership to land have been less
important than in parts of Asia and Latin America, with powerful classes of
landlords. Instead of relying on private
property, in Africa there are traditions
for common property and local customs for allocating land, for instance,
the Gambian alkali (ownership)
3) The right of each family in a village to
have access to land and water (social and cultural institution). This rule of the traditional system
is an insurance the villagers have. One drawback, can be that the rule impede
innovations. Newcomers in a village bring new ideas about how farming can be
done and as this institution is a barrier for emigrants that have land,
novelties are never brought to the village. There is evidence that villages
provide land to newcomers in the neighbourhood
to the village, and afterwards connections between the two villages have been
established, which have brought improvement into the original village.
Transition from subsistence to mixed and specialized farming
How do we think about a transformation of the subsistence
economy using the notion of capability to function as measure of development
(cf. A Sen)? Acommonly used way of
thinking about the evolution of agrarian
systemsis in three stages. 1)issubsistence farming widely used in Africa. 2)ismixed or diversified
farming partly devoted to production of food for the family, but also producing a significant share for
the market as cash crop. 3), finally, is high productivity specialized farming producing only for the market
as we find in developed economies.
Are there any strategies
for moving from the first stage to the second and the third stages that
increase the capability of the populationto function and, thus, can be
considered as development? Many economists in the field of development
economics point to export markets as lever for development. Thus, the vent-for-surplus theory of
international trade provides a strategy for moving from subsistence to
mixed family farming. However, this theory is based on the assumption that there are resources
in the subsistence farming system that are unemployed.
/figure 12.2 about
here/
In referring to the Gambia, we may think about “Export” as
rice, which is a staple food in this region. At the same time, the nourishment
of rice has a lower quality than that of vegetables and fruit. If “Import”
consists of fruit and vegetables, then moving from V to C increase the level of
development in the sense that the capability for function has increased. Yet,
as mentioned before, it is not clear that there
are any unemployed land and labor in the Gambia any longer, which makes
this strategy less adequate.
There are other difficulties with a move from the first to
the second stage, which become obvious when looking at the role women by tradition has played in African subsistence
farming. Gender- relations are crucial determinants of many social and cultural
institutions inAfrican farming. Thus, the provision of food security for the
family is, probably, one of the most important role of women. Therefore, it is
not surprising that in an agrarian system where subsistence farming dominates
as in Africa, 60 – 80% of agricultural labor is provided by women; to be
compared with 40% in Latin America. But when traditional subsistence farming is
transformed through commercialization and increased
role of cash crops (crops produced entirely for the market), then the role of women in agriculture tend to be
reduced. Instead, the amount of resources
controlled by men increases. Cash cropping increases at the expense of women’s vegetable gardens.
It should be noted that this transformation may reduce the well-being of the whole family.
The responsibility for the provision of the family’s food security still stay
with the women, who now have to buy a larger share of nourishments on the
market with less money than before. If
the increased incomes of the husbands do not compensate for reductions in
women-incomes, or the husbands refuse to reallocate income to the women, then
the well-being of the whole family decreases.
Of different reasons already mentioned subsistence farming
in its present form is not sustainable (shifting cultivation cause
deforestation and desertification).
Using “the growth diagnostic framework” (p 182)we may say that the environment is the most binding constraint
on economic growth. Attention is thus drawn to the need of innovations in the method of shifting cultivation.
Accordingly, many policy makers and researchers in the field have focused on
increasing agricultural productivity bydiffusion
of technologysuch as new seed varieties, use of fertilizers and irrigation.
However, we are asking for transformation of an agrarian system occupied by
small and usually poor farmers, who
usually are risk averse and
successful adoption of new technology is uncertain making innovations risky.
Instead of explaining failures of development strategies for
new technology adoptionsby farmers being irrational and backwards,economists
should recognize thatfarmers usually
are rational, given their informationand
ability to interpret this information.Economist studying new technology
adoption have applied frameworks for analyzing decisions at the farm level;
usually based on standard theory for profit maximization. For example,
maximization of expected profit subject to land and credit availability.
Technology is chosen from a mix of traditional and modern technology.
However, as T/S arearguing, the knowledge about various
technologies are limited and the transaction costs for obtaining information
are high. Another modification of the standard model of new technology
adoptions in subsistence farming
suggested by the authors take into consideration the facts that farmers are in a poverty trap, implying
thatmaximization of income is not
the main decision criterion, but the family’s
chances for survival.
Adoption of new technology, for the most part, means that
you only have some information about the new technology and the information is
complete only after the technology is fully adopted. To introduce new
technology, thus, is a learning process
where you step by step increase your knowledge about new fertilizers, new seed
or livestock varieties. This learning is costly and thecosts are often
excluded in the standard neoclassical model of economic decisions. This is a
severe weakness when the model is applied to increase our understanding of the
transition from subsistence to mixed and specialized farming as the transition
concerns peasants exposed to real danger of starvation and therefore cannot
afford these learning costs.
As many farmers are unable to read and training is limited,
learning by doing is common.
Cultivation depends on rainfall and the livestock is exposed to various
diseases. With regard to endemic breeds of livestock and native crops farmers
have learned by own experience and know quite well how the traditional crops
function in case of rainfall or draught and with regard to livestock they know
the threats of different diseases. If
adapting
new technology in the shape of new seed varieties and livestock breeds
they are less certain about how these
varieties and breeds function in the actual climate. For a subsistence farmer ,
producing close to the minimum consumption level, who make decisions that
assurethe family’s chances for survival, it is rational not to ad
apt the new technologies.
T/S analyze the behavior by poor farmers assuming that they
are risk-averse
/figure 9.6 about
here/
The authors refer to crop yield, while I will illustrate by
yield of livestock. Endemic livestock in West Africa are well adapted and
productive in tsetse infested areas, they are tolerant to heat and
resistant/resilient to certain diseases flourishing in the region. However,
despite their multiple adaptive attributes, endemic breeds are often perceived
by farmers as inferior to new alien breeds in terms of productivity and
marketing. Consequently, their habitats degrade threating the survival of the
endemic livestock.
Endemic livestock with lower average yield is associated
with technique A and new alien breeds are associated with technique B. Since the
variance in yields is larger for B than A, the risk is also higher for B than A
and B therefore will be rejected by a poor risk-averse farmer. In doing this
choice, the poor pay a self-insurance equal to the difference in average yield.
It should be mentioned, however, to be able to draw the
probability distributions in figure 9.6, the farmers need more information than
they usually have.
Rural development and the environment
One lesson to be learned from the previous lecture is that
poverty is a crucial characteristic of subsistence farming as it prevents
development. When trying to attain a transition of the rural economy to a
system for mixed or specialized farming it is also important that a new
agrarian system is in accord with the conditions for sustainable development.
This notion will be defined later on, but for the time being we imaging as a
necessary condition for this kind of development that it ends the environmental
degradation associated with subsistence farming.
In real life, reducing poverty is intimately connected with
sustainable development, as poverty both causes environmental degradation and
is itself a result of environmental degradation. But usually definitions of
sustainable development concern how to
safeguard the natural environment in a
way that meets the need of the present generation without compromising the
needs of future generations. This requires that the stock of overall capital
assets remain constant or rises over time. Natural resources or the natural
capital is included, but as natural capital can be substituted for other forms
of capital only to a certain extent, it is important to incorporate some kind
of environmental accounting into any strategy for the growth of mixed farming.
Such an account is discussed in T/S, but will not be discussed here.
Two types of environmental degradation will be used to
illustrate how the environmental factor can be taken into consideration in a
policy for transforming subsistence farming into mixed farming. The first factor is deforestation understood
as clearing of forested land either through extension of farmland as shifting
cultivation is land demanding or for logging and collection of firewood. The second factor is soil erosion and other types
of reductions of the soil quality. When the forest cover decreases, for
instance through deforestation, topsoil will blow away or will be washed away
by rainfall. Furthermore, when there are no trees, there will be no litter for
nourishing the farmland and forests provide catchments for water that can
improve the quality of the farmland.
There are many interrelationships between poverty and
environmental degradation that produce downward spirals leading away from
sustainable development, and, therefore, should be considered in a strategy for
transforming subsistence farming into mixed farming. For example, poor people
use firewood as their main source of energy, and the collection of firewood is
sometimes made the scapegoat of deforestation. Furthermore, to keep the soil
quality when land is constantly used it must be maintained by fertilizers but
poor people cannot afford to add fertilizers. Consequently, to provide food for
a growing populationmarginal land has to be used. This creates a negative
spiral as the well-being of the poor is further reduced because they must live
on degraded land that is less expensive.
From this perspective, transforming subsistence farming to mixed farming becomes
a matter of identifying positive
spirals, where measures reducing environmental degradation increase the
well-being of the poor, which, in a second step, lead to further reductions in
environmental degradation and so on. T/S are arguing that the most important
factor preventing environmental degradation associated with the poor is to
provide institutional support for the poor.
Land tenure rights may be one example here. In the Gambia, for instance,
you are not permitted to plant trees on farmland you rent. Changing this
institution giving the landless the right to intercrop trees with other crops
(agroforestry) would improve the soil quality and probably also their
well-being.Another example is the Gambian government that tries to align the
protection of forest resources with the interests of local people by
transferring the responsibility for forest resources and legal ownership
(secured tenure both on the land and resources) to local populations
represented by Community Forest Committees. I will return to this later on.
Before that, I will use theory about the “energy ladder” to
illustrate how poor change in their consumption of energy when their income
increases, which suggests a positive spiral between reduction of poverty and
reduction of environmental degradation. When incomes increase people move up
the energy ladder from firewood to charcoal or kerosene and then to butane gas
(LPG), natural gas or electricity for cooking. A recent study conducted in
urban Ouagadougou confirms these findings (Ouedraogo 2006). Accordingly, the
World Bank report argues when population growth overrides increases in incomes
people move down the ladder and return to biomass fuel. It might well be that
this theory explain behavior of the urban population, But what about poor
farmers?
One question arising is if the positive spiral suggested by
the theory of the energy ladder can be generalized and applied to the whole
society. This brings us to the environmental Kuznets curve, which suggests that
at this level the situation is more complex. According to this curve,
environmental degradation increases when incomes increase and then decreases
like an inverted U-curve.Since this curve describes the development of the
whole society, it might well be that the non-poor increase the environmental
degradation while environmental degradation by the poor decreases when income
increases. The net effect may be negative.
Instead the environmental Kutznets curve is questionable
with regard to if there is a turning point, where aggregated environmental
degradation begins to decrease. When it comes to greenhouse gases containing
carbon, it is rather the reverse that environmental damages increase with
increases in incomes. Even if a strategy for transforming subsistence
agriculture in developing countries is targeted to increase the forest cover,
which will reduce the emission by enhancing the forest carbon stock, this is
probably not enough to balance the carbon emissions in the rich countries.
Example of institutional support
Usually, the poor
farmers cannot afford to introduce new technology such as using manufactured,
synthetic fertilizer to improve the soil quality in a way that bring them from
subsistence to mixed farming. Less costly methods for soil management, that can
replace slash-and-burn agriculture, has
to be found. The soil management system discussed in this example uses forests
cover, cashew trees and livestock to increase agricultural productivity (figure
1).
Figure 1: Soil management system considered in the
project
The arrows depict:
1) Food supply; 2) Manure; 3) Plant litter, reduced
erosion, forest catchment area for water; 4) Pollination; 5)
Firebreak protection (against bushfires), 6) Protection against illegal forest
degradation
In the spirit of T/S we argue that the soil management in
figure 1 cannot be implemented unless the poor is provided by institutional
support. Gambian institutions for
Community forests that transfer the
legal ownership to forests to local populations represented by Community Forest
Committees may be an example of this type of support. We may think about these
institutions as increasing the forest cover (see figure 1). At the same time, arrow 6)
is working back from agricultural productivity to forest cover. It is
associated with reduced costs of protecting the forest against illegal forest
degradation when farmers’ incomes increase. That is, the costs of counteracting
illegal logging are reduced having a positive influence on the growth of the
forest cover.
Private and common property
10.4 about
economic models of environmental issues
are discussed in other courses, for instance in Advanced Micro - and will
therefore be excluded. However, as there has been a debate recently about if
improved property rights for the poor could help them out of the poverty trap and
transform subsistence farming, I will say a few words about the sections on
private and common property.
A farmer
who do not own the land they use always face a hold-up problem. The landlord
can always increase the land rent to a level that the farmer cannot afford.
This risk increases if the farmer makes efforts to increase the soil quality
increasing the yield of land. Probably, it reduces the interests of the farmer
to adopt new technology, plant trees to intercrop with other crops or set up
buildings on the land. What about farmers’ rights to land as allocated through the Alkali
In the
literature the appearance of co-specialized assets are usually associated with
hold-up problems, and it is argued that they are avoided if these assets are
owned by the same owner. Property rights that can be given to farmers are
characterized by four conditions:
/see page 482/
However, as ElinorOstrom shows in her book “Governing the
Commons” there are resources- common-pool resources (CPR) – that can be
allocated efficiently in spite of common ownership. CPR is usually associated with natural
resources such as forests, grazing commons or fisheries to which many people
have access and thus usually are owned in common.
Forests are used as example to illustrate what in the
literature sometimes is called “the tragedy of the common”. If the farmers
individually decide how many cows they will send to the forest to have their
food inefficiencies will arise.
According to neoclassical economic theory this inefficiency is due to an
externality that is not taken into account when food supply from the forest is
allocated through common ownership. The individual farmer consider the average
value of the cows and continue to send cows to the forest as long as this value
is larger than the marginal cost, i.e. the cost of buying a cow. However, when
sending one cow it will cause a damage to the forest resources that reduces the
food supply and value of all cows.
/figure 10.3 page
483/
In the Gambia the tragedy of the common has primarily been
associated with state-owned forest which now are transferred into Community
Forests to which whole villages have the ownership. Alternatively, the state
owned forests could have been divided into smaller lots owned as private
property by individual farmers. In theory this solution would solve the problem
of inefficiency in figure 10.3. In addition, to increasing the agricultural
productivity in figure 1, private forests could also be collateral helping the
farmers to get bank loans.
However, in practice it is questionable if privatization
would help the poor. Firstly, if they are unable to repay their loans to the
bank, they will lose their ownership to the forest and, thus, be equipped with
less resources than before when the forest was state-owned. Secondly, it is doubt whether poor farmers
are able to protect their ownership as they cannot afford to set up a fence
that keep other farmers´ livestock out of the forest or protect the forest
against illegal logging. Furthermore, in case of a conflict about property
rights, they are probable unable to pay for a lawsuit.
As already mentioned ElinorOstrom shows that the social
optimum in figure 10.3 can be attained even in case of common ownership to the
forest (Community Forest) by villagers
negotiation binding contracts to commit themselves to a cooperative strategy. The
villagers have to negotiate an agreement about the number of cattle each
compound is allowed to send to the community forest when the total number is
equal to X’’, and they have to agree about an external actor who enforce the
agreement. The bargaining costs and the
costs of enforcement is paid from the surplus.
International trade and development
Inward- and outward-looking development policies
So far we have neglected the importance of international
trade and investments for development strategies. Historically, since long
there has been a divide in development economics between advocates of an
inward-looking development policy perspective emphasizing trade protection and
barriers to FDI. The most extreme example of self-reliance was found in
Cambodia after the independence in the 1970. One interesting African example is
Algeria after the independence. The government launched a national technology
policy to support new industries based on modern technology. The idea
behind this strategy for development was
to exploit forward and backward technological linkages.
This was an early version of the European Airbus programme.
A modern airplane use advanced technology within a lot of areas: IT, material,
aerodynamics etc. Through backward linkages the Airbus-program was expected to
reduce the technology-gap between Europe and the US and create a platforms for
growth within a lot of different areas. Another development strategy with an
inward looking perspective are various forms of catch ups like the early
Japanese industrial policy of copying
technology developed in other countries and at the same time protect the infant
industry through trade barriers.
The outward-looking development policy perspective stresses
the importance of international trade and FDI as lever for development.
Advocates of this perspective usually argue in favor of free trade. One example
of special importance for African farmers is EU’s Common Agricultural Policy
(CAP) where European farmers are subsidized and protected through trade
barriers making it difficult for farmers in developing countries to compete on
the European markets. A foreign policy by developing countries trying to remove
these subsidies and barriers is an example of outward-looking development
policy.
In my final lectures, we will discuss two types of
outward-looking development policies: Export
promotion and import substitution. The latter can be seen as development
through two stages. In the first stage, imported consumer goods are replaced by
domestic production. In a first step, a developing country begin replace
imported fish for its own consumption by establishing own fisheries. In a
second stage, the same country substitutes imported more advanced products, for
instance, facilities for cold houses, for
cold houses from domestic production. If the second stage of import
substitution turns out to be successful, the country can even develop into
becoming an exporter of fish.
Import-substitution will be discussed in my next lecture.
Export promotion strategies
Export promotion strategies includes the traditional
strategy for many African countries to promote export of primary commodities
deriving from mines and plantations (often owned by foreigners). Already
before, the “Vent-for-Surplus Theory of Trade” was mentioned /figure 12.2 p.
585/. This theory is based on the assumption that there are resources in the
subsistence farming system that are unemployed. But with growing farmer
populations and environmental degradation, it is doubtful whether there are any
unemployed resources left.
Another problem with primary commodity export (except for
oil and some rare minerals) is that they are growing more slowly than total
world trade. The reasons are low income and price elasticity for these
commodities as well as stagnating population growth. The latter is not through
for Africa, where the populations – unlike the development in in Asia and Latin
America - continue to grow.
Primary commodity exporting countries suffer from low
income- and price elasticity of demand (IED anPED). Therefore, difficulties for
developing countries that let their development strategy rely on this type of
export, has led to useful tools for analyzing this type of export promotion
strategy.
Low IED imply that
thegrowing incomes in the developed countries has not been enough to
absorb a growing export of primary commodities.
Low PED implies in case of shortages and surpluses on the international
markets, cause large and volatile price fluctuations. Erratic movements in
export prices cause Export Earning Instability in countries relying on this
development strategy.
Another tool for judging strategies for the promotion of
export of primary commodities is the Prebish-Singer hypothesis. In this case,
we look at the total export earnings (
TE =
) and total exchange expenses
associated with import (TI=
.A developing country that
wishes to increase its import of manufactured goods with high PED and IED, has
to reduce the prices of its export of primary commodities considerably,
andthereby increase the volumes of its
export - also this considerably - to be
able to pay for the import. This is due to low IED and PED of primary products.
In looking into this problem more in detail, we define commodity terms of trade as
/
. The Prebish-Singer
hypothesis is that there is a long-term decline in terms of trade of primary-
commodity exporters. This is due to low income and price elasticity of primary
commodities. To finance a growing import in manufactured goods, they have to
increase their export of primary commodities. This increase become larger
because of falling
.
The solution suggested to the problem decreasing terms of
trade of primary-commodity exporters has
been a development strategy called import substitution. By replacing part of
the import of manufactured goods with domestic production, the need of export
earnings to finance expenses for import will be reduced. To some extent this
strategy will reduce the Export Earning Instability, as well as the transfer of
values from poor to rich countries that follows this unfavorable terms of
trade. Another strategy chosen by primary-commodity exporters has been to
establish international commodity agreements that set overall output limits,
assign quotas to producing nations and stabilize prices.
UN Conference on Trade and Development (UNCTAD) have tried
to establish a common fund to finance “buffer stocks”. How can “buffer stocks”
serve the interests of primary commodity exporters? (p. 596)
