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- What are the main theories and policies of economic growth? How does an integral economic approach to economic development defer from these traditional approaches and what gap does it fill in economic development implementation and policy design?
The Classical theory of economic growth calls for little or no government intervention. The Wealth of Nations,’ a book written by Adam Smith and published in 1776, is considered to be one of the earliest works, which delineates the principles of classical economics. Smith stresses that the economic wellbeing and development of a nation depends on hard work and unrestricted competition. Classical theory perceives human beings to be rational observers, whose decisions are based on perfect information and logical foresight.
Malthusian theory, proposed by Malthus in 1798 through An Essay on the Principle of Population, considers the growing population to be a major deterrent for economic growth, given the limited resources of the earth. Classical economists believe that the economy is always capable of attaining the natural level of output, when all its resources are fully used.
The Keynesian theory proposed by John Maynard Keynes is one of the most influential works of the past century. This theory known as Keynesianism or The General Theory of Employment, Interest and Money has views opposed to that of the classical theory. Keynes does not consider observers to be rational, and he also disagrees with the assumption that they have perfect information and foresight.
He argued that the economic output was heavily influenced by aggregate demand, and he called for increased government intervention during depression periods to stimulate demand. Keynes believed “The postulates of the classical theory are applicable to a special case only and not no general case, the situation which it assumes being a limiting point of the possible positions of equilibrium.”Keynes argued that the vital aspect of aggregate demand is consumption, however, government spending and investment also influences it to a large extent. He elucidates that economic fluctuations are caused by investments, and government expenditure is the way to negate these fluctuations.
The Neo-classical Theory elucidates that investment, being connected to the capital, is the most important element of an economy. The proponent of this model is Robert Solow, who borrows the tenets of Harrod-Domar model, however, with fixed scope. The model argues that an increase in the capital and the labor force will affect the economy positively. The Human Capital Theory argues that the capital factor is not just limited to physical capital but also includes human capital. This theory explains that the combination of technological expertise and quality labor force can spur the economic growth of a nation. The Neo-Malthusian Theory contributed significantly to the preservationist debate about the balance between the natural resources and population growth. Neo-Malthusianism advocates the need for conscious birth control among the poor, and resistance to people being forced to emigrate because of non-economic or environmental reasons.
The above discussed theories of economy give a clear picture of how individuals of a country form an integral part of the economic growth because of aspects, such as their consumption pattern, their role as labor, education and training etc. However, as Keynes explained, these theories are to be seen in perspective of a particular country/situation, and should not be generalized. Maria Sophia Aguirre argues that “to accomplish sustainable development it is not enough to evaluate the way economic development has been researched and conducted thus far. Rather, a new approach to understanding its process is needed.”
The essence of her argument is that many such popular economic theories have, in the past, failed to address issues such as poverty. According to her, to solve the economic problem of a country/region the specific aspects of the problem at hand should be considered rather than relying on theories of the past. Failure to address poverty or solve economic problems is a result of not considering the social nature of the economic factors. Failure to take into account the uniqueness of every community, their decision-making processes and comparative advantages will lead to ineffective policy making.
Reducing poverty requires a mechanism that takes into account the economic behavior of the particular country. A good poverty reduction program would enable the people of the country to make informed decisions and make better choices for the wellbeing of their family and community. Aguire argues “Several alternatives have been put forward in the past to fill the gaps founded in the field, especially in the area of understanding microeconomic mechanisms and in the role that institutions play in the economic process”.Economists suggest an approach of experimentation, which involves testing and sorting out various methods, and finding out which methods work and which do not. This method requires an approach that combines the theoretical framework and empirical evidence on institutions and useful statistics.
Theory would help in generalizing variables while ground data will enable fine-tuning theory to suit the locale under study. Theory helps in understanding concepts, and empirical work helps in implementation. In short, reducing poverty is a process that requires a close study of the local population and finding out what sort of solutions will be suitable for making them achieve economic growth. It needs a bottom-up approach, whereby we should work from the people and communities to the top, which is the institutions and government, and not the other way around.
4 Following your response in question 3, do you think that the personalistic approach of Donati (2009) presentation of subsidiarity can be helpful for the discussion? Why or why not? In your view, is Sen (1999) approach relevant for this discussion? Explain.
Personalistic approach about subsidiarity proposed by Donati (2009) is helpful for the said discussion. This is because, Donati emphasizes on the need for assisting a needy individual and at the same time promoting the self-sufficiency of that person. Donati explains this concept better by quoting President Lincoln’s words – “you cannot help men permanently by doing for them what they could do for themselves”. Foreign aid should try to close the gap between what a country needs and what it can procure for itself.
This approach also borrows the Catholic teaching of upholding a person’s dignity and imbibing qualities such as concern for common good and solidarity in times of needs. These concepts are relevant for our discussion as all these concepts focus on the needs and traits of the human being, who is center to every economic concept. Donati emphasizes that subsidiarity should be a mode to diverge capital to help the needy, but in a way that doesn’t make the person receiving the help passive.
The Perspective of Freedom by Sen (1999) is equally relevant to our discussion because the author explicates how development should be concerned with improving quality of life and ensuring the freedom of people. He states “empirical evidence very strongly suggests that economic growth is more a matter of a friendlier economic climate than of a harsher political system.” This is very much related to discussion on subsidiarity because it stresses on the need to ensure political liberty and civil freedom of an individual.
Sen considers individual liberty to be the building blocks of a strong economy. He adds that the success of a community would be judged by the freedoms each member of that community enjoys. Freedom, according to him, is the primary determinant of social effectiveness. The main point made by Sen that is relevant to our discussion is his argument that, replacement of forced work by unrestrained labor contracts is a must for a country’s development process.
5 -Trade and debt are closely related in all countries, but this is especially the case in underdeveloped and developing countries. Explain why this is the case. How does the concept of “debt intolerance” can help to avoid debt defaults? Among low income people, credit is connected to high levels of risk, what arrangements have proven effective to reduce this risk?
According to Reinhart et al. (2003), many underdeveloped and developing countries feel the strain of the external debt default. In extreme cases, these dead costs can inflict damage to the entire financial system. This is the main reason behind the close relationship that exist between debts and trade in these countries.
WTO (2003) advices debt-ridden countries to keep their markets open during financial crises. Keeping the markets open, would allow them to earn foreign exchange by way of exports, and aid in their economic growth. On the contrary, closing the market would deprive them the chance of earning foreign currency to pay off their debts because entry to foreign markets is restricted. The latter scenario will lead them to more borrowings and will start a vicious cycle.
However, Reinhart et al. (2003) are of the view that trade liberalization might lead to revenue losses for less developed nations because it causes a decline in the tax revenue. Also, according to them, trade liberalization increases the developing and underdeveloped countries’ reliance on debt financing. When these debt levels mount to intolerable levels, the country is viewed as one with an elevated risk of default by the markets. This will restrict their entry into capital markets unless their debt ratio is reduced. The authors call for policymakers to find out ways to manage high debt levels without experiencing debt intolerance.
Non-market institutions are an option available for low-income countries. These institutions borrow money from a cooperative or government institutions, and distribute it among their members. This informal credit is termed as ‘group- lending’ and the liability is shared by a group. The other options available include sharecropping arrangements, savings rotation and credit associations.
-6 Poverty is a reality in every country, but especially present in developing countries. Assume you need to design an impact evaluation where the population being impacted is mainly poor. What aspects of it do you think are important to consider in the design with regard to poverty? How would these aspects be modified if you were to consider a middle class population and therefore sample?
After considering the above factors, an evaluation can be carried out to find out whether these factors contribute to the social and economic development of the country studied. These aspects would remain the same, irrespective of the nature of the sample. This is because these factors would not change for different classes (middle-class/poor). They are basic human necessities and values and are equally important to all classes. Despite differences in class, gender or locality, human beings have homogeneous goals in life, and we all expect the same out of our lives.
Bibliography
Aguirre, Maria Sophia. "An Integral Approach to an Economic Perspective: The Case of Measuring Impact." Journal of Markets and Morality 16, no. 1 , Spring 2013: 53-67.
G. C. Harcourt, P. A. Riach. Second Edition of The General Theory Vol 2: Volume 2 Overview, Extensions, Method and New Developments. New York: Routledge, 2005.
