CHAPTER 1

DEVELOPMENT CONCEPTS AND PRINCIPLES

Learning Objectives:

1. Discuss meaning of economic development and economic growth;

2. Discuss the Philippine development objectives;
3. Explain the obstacles to development;
4. Explain the stages of economic growth.
5. Discuss the ideas and theories of economic development; and
6. Identify the determinants of economic development

Introduction

A better quality of life has been the objective of societies and nations. This has been pursued
since the ancient times to the present. For centuries, universal justice and virtue reigned in the island.
This chapter presents an overview of the conceptual framework of economic development.

REAL CONCEPT OF DEVELOPMENT

The Meaning of Economic Development

Development is a progressive process. It involves the interaction of different factors. For

example, in the case of increasing the harvest of palay per hectare, various inputs are combined like
fertilizers, insecticides, irrigation, and technology, among other things. Such progress is development.

Economic development is a progressive process of improving human conditions, such as the

reduction or elimination of poverty, unemployment , illiteracy, inequality, disease, and exploitations.
Evidently, economic development is not only an economic process. It involves both economic and non-
economic factors. Examples of economic factors are capital, technology, and market. Non-market factors
are culture, religion, government, education, among other things. The combination and interaction of
these factors determine the extent and nature of economic development. In fact, the non-economic
factors have stronger influence on the economic development of nations. Some countries are progressive
while others are not because of the aforementioned factors of development.

Development and Growth

Is economic development the same with economic growth? Which comes first, development or
growth?

Development is a progressive and dynamic process. Growth is the result of a process. Therefore,
growth is the product of development. For example, modern methods of planting tobacco involve a
process, and this is development itself. The result is more and better harvest, and this is growth. In the
case of students, their development is through education – formal and informal. Because of their proper
education, they get good jobs with good incomes. They spend their money for house and lot, and for
modern appliances. Such material possessions represent growth.

Economic growth is visible and measurable. Examples are roads, vehicles, houses, buildings,
hospitals, banks, schools, etc. These are the products of economic development. The total market value
of such products is the GNP of the country. However, economic development does not stop. It has to
create more and better goods and services. In the long run, economic development embraces a series of
economic growth. Thus, earlier economic growths help subsequently economic development.

Growth without Development

Is it really possible to attain economic growth without economic development? It has been said
that growth is the product of development.

Not a few less development countries apparently progressive. They have modern buildings and
well-developed fruit plantations. Their many corporations are very profitable. But all of these are owned
and managed by foreigners. Among the masses, poverty, ignorance, squalor, and disease have been
rampant. Only the foreigners and the few local elite have become prosperous.

Development means more than imposing buildings, beautiful houses, elegant cars, money, or
modern machines. It includes fundamental changes in society, ways of life, values and institutions. An
economic growth which belongs to foreigners or an economic development that has been imported is
meaningless as far as the masses are concerned, unless, they receive reasonable benefits and
compensations for their productive contributions to the economy. However, from the position of the
country, such growth or development is not real because it does not belong to the country and its people.

On the other hand, development without growth is inconceivable. Whenever there is real
development, there is always be growth because growth is a natural consequence of development.

The Objectives of Development

In the past, the traditional national objective of the less development countries was to increase
their gross national products. Emphasis was given to material or economic progress.

In many developing countries, despite the perceptible economic growth, social and economic
conditions are deteriorating. The reason for this has been obvious to the common people. The fruits of
development have not reached them. Only the few top government officials, big landlords, and business
tycoons have been benefited. Such situation happened because government programs are in the wrong
decisions, and the ownership of the factors of production is not in the hands of the masses. As a result,
mass poverty, economic servitude, unemployment, and unjust distribution of income have been
widespread.

In view of the proliferation of economic and social problems, especially from the countryside
where most of the people live, the leaders of the developing countries have realized the root causes of
such depressed conditions. Thus, the main focus now of development is towards the social factors.
Socially-oriented programs appear to dominate national development objectives.
Philippine Development Objectives

Since the days of the New Society, several institutional reforms were introduced, like agrarian
reform, cooperative development, human settlements, banking reforms, and other vital changes in
education, public administration, labor, and investment. All these have been envisioned to accelerate
economic development of the country.

The whole development program of the Philippines has given top priority on the equitable
distribution of wealth and income, food production, employment, and wider participation of the people
in the affairs of their own communities. Nevertheless, the principal target of development is the
development of people. The rationale of human resources development is that people are the most
important factor of production.

According to former Prime Minister Cesar Virata, the government has been committed to attain
the three basic objectives which are concerned with:

1. The attainment of economic stability;

2. The equitable distribution of the fruits of economic development; and
3. The achievement of total human development for every Filipino.

Obstacles to Development

As mentioned earlier, the less developed nations have been eager to attain their economic goals
in a short possible time. The affluence and prosperity that they have seen in the highly developed
countries have stimulated them to adopt their technologies and development strategies. Unfortunately,
such aspirations are not easy to realize. There are many formidable obstacles that stand on the path of
the less developed countries.

Poor nations are deficient in capital. They cannot afford to buy sufficient modern tools of
production. Moreover, management and manpower skills are not adequate. The Western technology
which they like to adopt is difficult to implement because it requires imported technicians and machines.
Besides, such foreign technology is capital intensive and labor-saving. This only worsens the massive
unemployment problems of the poor countries.

Another obstacle is the population explosion. Poor countries are very rich in human resources.
Their birth rate is much higher than in the rich countries. This is a serious problem because the rate of
employment and production in the poor countries is very low. So, every year more persons are to be fed
and employed. Since it is not easy to control the growth of population for cultural and religious reasons,
and it is difficult to increase production, there is a growing gap between the two. Hence, many poor
countries become poorer, and they languish in the quagmire of poverty and squalor.

However, the greatest obstacle to economic development is man himself. Before improving his
physical environment, he should be the first to be improved – his attitudes and values. Developing people
requires institutional changes in public administration, social structures, schools, courts, health services,
among other things. This takes a longer time than building factories or constructing roads and bridges.
But the development of people is the only real and enduring kind of development. It is the principal key
to the progress of the poor nations.
Stages of Economic Growth

The development of nations encompasses an evolutionary process from the primitive to the
modern societies. However, there are still societies that have until now remained primitive in their
economic, social, and political institutions. The people are half-naked, and produce their food through
primitive method of farming. On the other hand some modern societies have deteriorated in their social
and cultural institutions. They have barbaric or medieval values although they live in a modern society.

The Industrial Revolution which began in the late 1700’s in England paved the rapid economic
growth of Western Europe and the United States. Since the time, economic historians have searched for
a theory that would appropriately describe the natural economic evolution that all nations will undergo
through.

One approach is the stages of economic growth based on the exchange systems. That is from the
barter economy to the money economy, and finally the credit economy. Another way of categorizing the
stages of growth is through the dominant productive sectors of the economy. According to this theory as
stated by the British economist Collin Clark, there are three stages involved:

Stage 1 – Agriculture is the principal source of employment and income in the agricultural countries.

Stage 2 – Manufacturing industry becomes the major economic activity as a country developments.

Stage 3 – Services industries grow to be the dominant feature of the economy as a country develops
further.

The Doctrine of Rostow

Many other studies have been conducted on the stages of economic growth. However, the work
of Professor Walt Whitman Rostow, an American economic historian, appears to be most popular. He is
the author of the well-known book, Stages of Economic Growth. Based on the doctrine of Rostow, the
transition of the economy of one country from underdevelopment to development passes through several
stages such as:

1. Traditional Society – subsistence, barter agriculture

2. Pre-conditions for take-off – commercial exploitation of agriculture and extractive industry
3. Take-off – Industrialization, growing investment, regional growth, political change
4. Drive to maturity – diversification, innovation, less reliance on imports, investment
5. Age of high mass consumption – consumer oriented, durable goods flourish, service sector
becomes dominant
IDEAS AND THEORIES OF ECONOMIC DEVELOPMENT

Economic ideas and theories are generally the products of existing conditions. Difference in time
and place usually has different situations, and therefore ideas and theories are not the same. There are
also ideas and theories which are considered as impossible dreams, but in the future they may not be
impossible anymore. In the same manner, there were many ideas are now realities, and they benefit the
mankind.

Ideas and theories may be intended to change or improve existing conditions. If the problem is
unemployment, some bright individuals with bright ideas emerge. Keynes became famous because he
was able to offer good theories on how to solve the Great Depression. Some countries have become
progressive because they have citizens who have good ideas, and these are implemented.

Physiocracy – Rule of Nature

Many significant changes took place in Europe, especially in England and France, during the 18th
century. Such developments included the growth of cities, the increase of wealth, the creation of science,
and the search for better ideas. The Enlightenment in England and France greatly stimulated thinkers and
philosophers to question the old doctrines and thoughts. Eventually, dependence on the Greek
philosophy and the church dogma began to diminish.

The expansion of science and the increasing number of various inventions opened up some
realities of life and the world. People started to rationalize human behaviour and the existence of
institutions. They concluded that it was not the will of God that created the conditions in the world.
Rather, it was the product of causes and effects which conformed to the laws of nature. However, those
who still believed in God stated that the will of God was expressed in the natural law.

Philosophers claimed that people are poor and because they violated the laws of nature. An
example is when one is lazy, extravagant or a drunkard. He is likely to make his life miserable. A man who
neglects his health has a greater chance of getting sick. On the other hand, those who obey and follow
the laws of nature were believed to promote their own good. In the same manner, an economy or society
that conforms to such laws would be successful, according to the thinkers.

The ideas of the Physiocrats were against those of the Mercantilists who considered money as
the real wealth. They criticized the theory of the favorable foreign trade of the Mercantilists. To the
Physiocrats, favorable trend only drained the resources of the country, because it gave more goods that
is received. They believed the real wealth of any nation are the products of agriculture and not money in
the form of gold and silver. The economic ideas of the Physiocrats came from the ancient doctrines. The
Greek philosophers and Roman writers also considered agriculture as the real wealth. Since mercantilism
was a failure in Europe, except for England, and that it had many shortcomings, the Physiocrats argued
that their country should return to agriculture.
Laissez Faire Theory
Laissez faire is a French term, and it was introduced by the Physiocrats. It connotes non-
interference, liberty or freedom. In economics, it means the government should not intervene in
economic affairs. Just let the forces of the market interact with one another. This is in accordance with
the natural law, and the results would be good for the individuals and society, according to the
Physiocrats.
Giving grants and subsidies to industries was rejected by the Physiocrats. They said that it is a
form of corruption and favoritism since the industry is non-productive - unlike agriculture. Quesnay, the
leader of the physiocrats, stated that prices of manufactured goods are higher than the prices of their raw
materials. The difference should represent the actual cost of labor that produced the goods. Therefore,
he said, market prices should be based on the cost of labor.
Individuals should be free to pursue their own particular economic interests. They should be free
to choose their own economic enterprise or occupation. The government should not help or hinder them.
All these are in conformity with the laws of nature, according to the Physiocrats. If such economic
freedoms are allowed to take their own course, they believed businessmen, consumers, and the whole
society would be better-off. Such theory was developed further by the classical economists under the
leadership of Adam Smith, a Scotsman.
The Classical Theories
The real founder of the classical school of economics was Adam Smith. He was well-educated in
the classics, mathematics, and philosophy, and he became a professor of moral philosophy at Glasgow
University. He lived at the beginning of the Industrial Quesnay, Rousseau, and many other great thinkers
broadened his perspectives. In 1776, his famous book Wealth of Nations was Revolution. His close
association with the intellectual elite like published. It explains how wealth of the nation is created and
distributed. For many years, such book became the bible of economics.
Smith being greatly influenced by the ideas of the Physiocrats believed in the merits of the free
competition concept. He said that a free market mechanism could provide more benefits to individuals
and society than an economy run by the government like in the case of mercantilism which even
established trade monopolies. This theory still is the bone of contention among many economists and
political leaders. Some favor a free enterprise while others advocate government intervention in the
economy.
Smith was not only able to influence thinkers and scholars in his country but also in other
countries. The more popular ones were Thomas Malthus, the author of population theory, and David
Ricardo who developed the law of comparative advantage. Likewise, the economic ideas of Karl Marx
came from the writings of Adam Smith. Subsequent topics explain the aforesaid theories.
Production is the real wealth
Adam Smith explained in his economics book how the wealth of a nation is increased, and the
manner of its distribution. According to him, the only source of wealth is production through labor and
resources. He wrote that wealth can be increased through division of labor and the use of machinery.
Moreover, he noted that improvements in transportation can promote the growth of commerce and
industry. Nevertheless, Smith provided the conditions for increasing the wealth of the nation, such as the
size of the market, labor efficiency, and the total population. He said that individual welfare depends on
the ratio of total production to total population.
 Under a free market economy, Smith claimed that production would be most efficient. Through
free competition, only the best producers survive. This means they are the most efficient and the
consumers can get the best quality and the lowest price product. This cannot happen under monopoly.
Such free competition views of Smith also applied to wages and interests. According to him, both are
determined by demand and supply. For example, if the demand for labor is greater than the supply of
labor, then wage increases.
Smith, in claiming that production is the only source of wealth, was more or less referring to
industrial production which was taking place in his society. The application of division of labor and
machinery is more appropriate in industry. At that time, most of the farmers of Great Britain were tenants,
and they were exploited. For this reason they gave up their farms, and worked in factories. So his theory
of wealth has been based on industrialization, and not on agricultural development. Therefore, in this
respect, he differed from the other earlier thinkers who favoured agricultural development.
Although Smith stressed free competition, and the non-intervention of the government in
economic affairs, he made some exceptions. For instance, he encouraged the government to promote
shipping. He favored the imposition of tariffs for bargaining purposes and for equalizing competitions.
Furthermore, Smith stated the role of the government should be confined to defense, justice, education,
public works, and protection of foreign trade. And of course, the government could engage in public
finance. The basic principles of taxation came from Adam Smith.
Theory on population
The Industrial Revolution which started during the later part of 1700's developed in an
environment of laissez faire. It was just beginning during the time of Adam Smith, and he was not able to
witness its results. When he explained the good results of free competition, he had in mind the virtues of
people. But things did not materialize for the good of individuals and society. Instead, the powerful
capitalists emerged, and exploited the workers.
The flannel weaving industry in the rural areas collapsed because of the more efficient factory
system. Consequently, there was a great influx of rural people in the urban communities looking for jobs.
This created both social and economic problems. The capitalists took advantage of the situation. They
gave very low wages to their workers, and forced them to work up to 17 hours. The government did
nothing to help the workers. Poverty and squalor became widespread among the workers. Thomas
Malthus, a religious minister, saw the growth of population and human miseries. He stated that
population explosion is the root cause of the problems of society.
Malthus said that the rate of population growth is higher than the rate of food production. He did
make some dismal predictions of the future of mankind. To control population growth, he proposed late
marriages and abstinence. Such ideas constitute what is now the famous Malthusian theory.
The dismal predictions of Malthus have not taken place in the developed countries. Their higher
stage of economic growth has become a very effective birth control device, and their modern production
technology has given them enough food supply. It is only the less developed countries which are now
afflicted with the Malthusian theory. They have a very high birth rate but they have very low food
productivity. Many of them are already dying from hunger and malnutrition.
The theory of comparative advantage
David Ricardo, one of the famous classical economists, developed the theory or law of
comparative advantage. Based on this theory, nations should export the goods which they enjoy the
greatest advantage, and should import the goods which they have the greatest disadvantage. This simply
means - do not produce the product if it is cheaper to buy it. Ricardo explained this theory by giving two
countries and two products as examples. The comparative advantage refers to the lesser number of hours
or days of producing the product. To illustrate:
Countries Rice Calculator
Japan 120 days 10 days
Philippines 90 days 15 days
The above illustration shows that Japan has a comparative advantage in calculator while the
Philippines in rice. Following the theory it would be better for Japan to produce calculator and just buy
rice from the Philippines. In the case of our country, it would be more economical not to produce anymore
calculator. Just import from Japan, and concentrate in rice production. The classical economists, like
Ricardo, equated the value of a product with the cost of labor that went into its production. Thus, a
product which takes more hours or days in producing has a higher price or value than a product with lesser
hours of producing it. For example, if it takes 4 hours to catch a wild rooster and only 2 hours to catch a
big fish, then the price of the rooster is twice that of the fish. In the aforementioned illustration, it is
cheaper for Japan to buy the rice than to produce it. The theory of comparative advantage is being
practiced in international trade. Agricultural countries export raw materials and import finished products
from the industrial countries. The problem is that the prices of raw materials and other agricultural
products are very low in the world markets. And yet the prices of finished products are very high. The
industrial countries control the operations of the world markets, and they can manipulate prices of goods
to the disadvantage of the less developed countries which are basically agricultural economies.
Theory of Karl Marx
The economic ideas of Karl Marx were basically derived from the classical economists. He only
qualified his theory of value by emphasizing that labor must be socially necessary. Marx maintained that
the workers are the real producers of goods. And yet, he claimed the benefits of production go to the
capitalists and not to the workers.
Using the process of "dialectics" of Hegel, Marx stated that there is a class conflict between the
workers and the capitalists. He said that the workers constitute the "thesis" which is the positive, and the
capitalists the "antithesis" which is the negative. The opposition of the two groups would result to a new
system called “synthesis.”
Karl Marx developed his theory of scientific social evolution by saying that in the beginning - when
it was still a primitive society - there was social equilibrium. However, when new ideas and new tools of
doing things were introduced, the old system was disturbed. Man became greedy for power and wealth.
Man was greatly concerned with material things. This led to a class struggle between the workers and the
capitalists. The latter have wanted to accumulate wealth at the expense of the workers.
In the class struggle between the workers and the capitalists, Marx predicted the downfall of
capitalism due to its limitations. However, such prediction did not come true. There were no revolutions
in the industrial countries. Capitalism has not disappeared, instead it has expanded and become stronger.
Compared with other economic systems, countries with capitalistic societies have high standard of living,
such as the United States, Japan, Canada, and the others. The free enterprise economy still shows the
greatest potential for economic growth. Profit motive is still a very good incentive in encouraging the
private individuals to participate in business. In fact, the Russian agriculture is a failure primarily because
of its economic system. Farmers are more efficient when they are given economic incentives.
However, the ideas of Karl Marx are not without significance. His warnings greatly contributed to
the welfare of the working class. Workers have become more united and organized their labor unions. On
the other hand, capitalists have improved their management policies towards their workers. However, in
many parts of the world, capitalists still exploit their workers. Such abuses are rampant in the less
developed countries where there is over-supply of labor, and poverty is widespread. Poor people are
forced to accept low wages. Agricultural workers experience more miserable working condition, especially
the casuals in plantations. Such exploitations are the root causes of many troubles in the rural areas like
in Central and South America.
Promotion of Human Values
Jean Sismondi, a noted Italian writer, disagreed in many ways with Adam Smith. He stated that
wealth should not be measured in terms of material things but in terms of human welfare. He pointed out
that no nation can be considered prosperous if the conditions of the poor have not been improved. He
rejected the laissez faire theory which provided freedoms to individuals to seek their own self-interests
for their own welfare and that of society. Sismondi asserted that the state should interfere to prevent the
unfair distribution of wealth spawned by unrestrained capitalism.
The main contention of Sismondi is focused on the welfare of the poor. He was more interested
in social justice rather than in the accumulation of wealth by the industrial system manipulated by the
powerful capitalists for their own materialistic inclinations.
The economic ideas of Sismondi were the products of his observations of capitalism. Like the other
socialist thinkers, he was outraged to witness the human miseries created by the existing economic
system. Thus, he proposed an active role for the government in protecting human values.
Factors of Economic Development
Friedrich List was a German professor of economics and political science. He also did not agree
with the ideas of the classical economists about production, free trade, and free competition. According
to List, the progress of a nation is great not in proportion to the accumulation of wealth, but in proportion
to the development of the productive forces. Such forces refer to natural resources, science, arts,
government laws, education, peace and order, morality, and the harmonious relationships of the various
industries and occupations. As an example, he mentioned some of the great productive forces, such as
the Christian religion, monogamy, postal system, transportation, invention of the alphabet and printing,
freedom of conscience, parliamentary legislation, etc.
Another disagreement of List with the classical economists was free trade based on the law of
comparative advantage. He claimed that such law favors only England because of its higher stage of
industrialization. He cited the cases of younger nations like Germany and the United States which could
not develop their economies if they applied free trade. List said they could not compete with the products
of England.
Nevertheless, List was in favor of free trade among nations if they are all developed. He proposed
that a nation should protect its industries by means of tariffs during its early stage of industrialization.
Once such industries become viable and strong, protection would be lifted according to List. Likewise, he
mentioned that once a nation becomes highly developed, it could practice laissez faire.
Theory on Progress and Poverty
The book Progress and Poverty made its American author Henry George famous. He saw the rapid
economic growth in California during the 1870's amidst widespread poverty. Such condition stimulated
him to analyze the different theories of distribution among the factors of production, like labor, capital,
and land. He was not satisfied with the doctrines of the classical economists regarding wages, profits, and
rents.
In his analysis, he concluded that rent is the root cause of poverty. George argued that increase
in the value of land is not due to its fertility, but due to the growth of population in the community and
the progress of society. He said that one can become rich by purchasing not the best farm but a piece of
land near the center of a fast growing city. It does not matter, he said, whether this is the most fertile land
or solid granite.
To Henry George, rent is an unearned income. The reason for such view is simple. During the early
days, land could be acquired free through proper application from the government. Others got their lands
through inheritance or by historical accident. Because of the sudden growth of population and business,
land rents have increased. Thus, the landowners are the beneficiaries of unearned incomes.
Businessmen pay the rents. If rents increase, they have to pay more. This means the cost of
production or business gets higher. But such cost is paid ultimately by the consumers when they buy the
goods of the businessmen. The latter let the buyers pay the rents in the form of higher prices. This makes
the economic conditions of the poor more depressed.
Key to progress
Henry George proposed that increase in rent and value of land should be taken by the government
in the form of tax. All taxes should be abolished, except tax on land. However, improvements introduced
by the landowners are not covered by the single tax theory of George. Only the unearned incomes from
the land should be taxed. George believed that such revenues could finance all government expenses, and
there would be no need for other taxes. Consequently, this new tax program stimulates trade and
commerce. Likewise, workers would no longer bear the heavy burden of paying taxes on production and
consumption. Moreover, George claimed that landowners would be encouraged to improve their land
holdings to gain profits rather than give their unearned incomes to the government. These would generate
more production and competition. Articulating the good points of his single tax theory, George predicted
a paradise for the whole society. He said, if adopted it would mean full employment, eradication of slums,
and the steady rise of wages due to rapid increase in labor demand.
The theory of single tax became popular. Some local governments tried it under limited
applications. But it was not successful. However, the idea of unearned earnings of the landlords has
gained the approval of social reformers and philosophers.
The crusade George for a single tax scheme did not succeed. Landowners were very powerful
even during his time. The rapid increase in population which George saw was brought about by the "gold
rush" in California. Together with the rapid increase in mining companies, the value and rent of land went
up tremendously. The poverty that George saw was the product of a pro cycles.
Modern Theory of Employment
Employment is determined by supply of and demand for labor. A decline in employment means
that wages are high in relation to the prices of goods. Producers are not willing to manufacture goods if
they know they are going to lose. So they get more workers if they are willing to accept lower wages. This
means they make more profits. Thus, the main point of the theory is that the cause of unemployment is
high wages. There is more employment when wages are lower. Such ideas constitute the classical theory
ofemployment. This was accepted for many years.
However, during the Great Depression in the United States in the 1930's, there was widespread
unemployment. Even if people were willing to accept low wages, there was no demand for jobs. Hence,
the validity of the classical theory of employment was tested, and it failed. It was John Meynard Keynes,
an English economist, who found the answer to the American problem. He claimed that high wages could
not be the cause of unemployment. He cited the example that workers in America could not find jobs at
any wage.
Keynesian theory of employment
Based on the Keynesian theory of employment, which is a modern theory, employment
determines the necessity of equating the aggregate supply of goods with the aggregate demand for goods.
When people buy more goods, it means there is more expenditure or consumption. This condition
stimulates more investments which also increases employment and production. Businessmen put up
more factories because they expect greater demand for their products. There are other factors which
determine investment, such as price, cost of production, interest rate, competition, etc. However, the
most important factor is the expectation of pro fit or returns of investment. According to Keynes, as long
as returns of investment are higher than interest rates, there is investment. Even if the interest rate is
very low, it does not follow that investment increases. During the Great Depression there were no
investors even if they were offered very low interest on bank loans. The reason was that there was no
profit expectation. On the other hand, a very high interest rate does not discourage a borrower if he feels
he will make more profit in his projected investment.
Keynes proposed to the United States government to spend more money in order to solve their
depression. So, many public works were constructed which created massive employment. The situation
generated income for the people. They started buying more goods and services. This encouraged the
private business sector to meet the growing demand of the people. As a result, employment was also
created by the private sector. They needed more people in producing goods and services. Such favorable
conditions accelerated further economic activities. And the Great Depression disappeared. Keynes
became the "father of modern economics."
Innovation Theory
Joseph Schumpeter is the author of the innovation theory. He placed emphasis on the role of the
innovator in economic development. The innovator is the economic leader or the entrepreneur who has
the courage and imagination to handle old systems, and be able to transform theory into practice.
An innovation can be any change initiated by the entrepreneur which leads to a faster and better
development of an industry. Such change may be in the form of an invention, method of production or
marketing strategy.
 Because of innovations introduced by few daring entrepreneurs, the industry concerned became
profitable. Such favorable economic situation attracts more innovators. They merely follow the economic
leaders. This means there is more business expansion - employment and production.
Evidently, in the theory of Schumpeter, the key factor in economic development is the innovator
or the entrepreneur. He is the planner, organizer, coordinator and implementor of economic activities. It
has been observed, however, that the role of the innovator in the less developed countries is hardly felt.
In general, people are conservative in their investments. Many business enterprises are owned by families,
and these are managed by their own members. Their financial resources are usually invested in safe
business like real estates.
Some Growth Models
Economic models can be simple or sophisticated. It all depends on the architect or the situation
which the model tries to improve. Such models show the relationships of inputs and outputs. However,
their key inputs vary from model to model. For instance, one economic model places capital as the key
variable. Another economic model stresses technology. Their effectiveness, however, depends on several
factors. Local conditions like climate, natural resources, manpower, money, social structure, culture,
values and institutions have to be considered.
Most economic models were made by the United States and Western Europe. Naturally, these
were based on their own local conditions. Not a few developing countries have been inclined to copy such
models. Even Western economic advisers apply these models in the economies of the less developed
countries. The results have been failures. This was experienced by Japan during its formative years. But
the country was quick to modify Western technology to fit its local conditions. Here are some of the more
popular growth models:
The Ricardian growth model. This was derived from the law of diminishing returns of David
Ricardo. He stressed the limits of economic growth brought about by the scarcity of land, its being a fixed
input, and its diminishing productivity. 'To reduce the constraints of economic growth, Ricardo proposed
the discovery of more land for cultivation or more food at lower prices should be imported.
The key factor in the growth model of Ricardo is land. This means the agricultural sector assumes
a very vital role in economic development. To the poor countries which are mainly agricultural economies,
this model appears to be relevant. Many agricultural countries have been able to increase their farm
production through the cultivation of more farm lands - not through efficiency. In the case of the highly
developed countries, their agricultural productivity have greatly increased through the use of technology
and machinery. For instance, the problem of scarcity of farm land in Japan has been reduced by producing
more crops in its limited available farm. It has the highest rice productivity in the whole world.
The Harrod-Domar model. This model was developed by Sir Harrod of England and Professor
Domar of America. The key factor is physical capital like machinery, buildings, equipment, etc.
The model shows the relationship between the input and the output. The input is capital, and its
efficiency is reflected in its output. For example, a certain amount of capital stock or physical capital has
been invested. If the results or outputs have been substantial in terms of employment, production and
income, then the capital has been used efficiently. The rate of growth in the economy can be measured
through the GNP or real per capita income.
Evaluating the Harrod-Domar model, the efficiency of capital in relation to economic growth
depends on several factors. For instance, values of the workers, their skills, technology, government
policies, and the like determine whether capital could be productive or not. Poor nations are deficient in
capital. But this is not the key factor in their economic growth. It is more on human and institutional
developments.
The Kaldor model. The author of this economic growth model is Nicholas Kaldor. The key factor
is technology. He pointed out that technology is embodied in physical capital. He further stated that
technical progress comes from investment. Examples are modern machineries, tools, and equipment.
These are symbols of technical progress, and they are the products of investments. Moreover, Kaldor
claimed that if technical progress grows faster than capital stock, the additional productivity of capital
increases. And this leads to investments.

DETERMINANTS OF ECONOMIC DEVELOPMENT

Economic development is not determined by economic factors alone. There are non-economic
factors that affect economic development, and they have greater influence than the economic ones.
Examples of economic factors are capital, technology, and market. While the non-economic factors are
government, religion, education, social structure, values, culture, etc. Clearly, solving economic problems
with economic solutions only is inadequate. More often than not, the problems remain unsolved. For
instance, the planning and implementation of an irrigation system does not only involve money and
method but also the attitudes of those who will implement the project. This chapter discusses the various
factors of economic development. Their effects on the development of nations, especially the less
developed ones are explained.
Capital
In economics, capital refers to finished goods which are being used to produce other goods. These
are the machines, buildings, tools, equipment, etc. These are also specifically called physical capital. In the
case of money, it is financial capital. People are classified as human capital.
Obviously, machines accelerate the production and distribution of goods. Work can be done in
lesser time and effort. This also reduces the unit cost. During the ancient times, people relied on men and
animals for their production and construction. For workers, mostly slaves. It took them years to finish
their projects. Unfortunately, there are still many parts of the world which are using primitive methods of
production and construction. And these contribute to their slow pace of development.
Technology
Technology generally refers to better techniques or methods of production. However, it can also
be applied in other fields like public administration, education or social work. For instance, social
technology is concerned with the improvement of attitudes and values of the people. Public
administration technology deals with the improvement of social goods in order to maximize the
satisfaction of social wants.
Research has contributed much to the development of technology. The discovery of a new
technique is invention, according to Schumpeter. He pointed out that the practical application of an
invention to production for the market is innovation. However, not all inventions are for the markets. For
example, political or social innovations are intended for improving conditions in the government or
society.
Market
The growth of markets reflects an expanding economic development. For as long as various
sectors of the economy are equitably benefited, economic growth is real and enduring. A flourishing
market which enriches only the foreigners and the very few local elite only aggravates the problems
emanating from the maldistribution of wealth and income. Such condition is widespread in the less
developed countries.
Transportation, communication, and electricity greatly help in the growth of markets. Such
external economies of scale reduce cost for both producers and traders. In addition, contact between
sellers and buyers is easier and more convenient. In this connection, capital and technology are directly
involved. Machines and other physical facilities are needed to accelerate production, processing, and
distribution. Likewise, technology improves production, processing, and distribution. This is not only
favorable to the sellers but also to the buyers. A more modern production and marketing system saves
cost and improves the quality of the products. Goods with lower cost of production and distribution have
generally lower prices. This increases the purchasing power of the buyers, and so demand for the products
also increases.
A market becomes bigger when more people buy more goods. This stimulates investments and
production. It is only expected that businessmen are willing to produce more if there is a good demand
for their products. The same situation applies to farmers. They are encouraged to raise crops that have
favorable markets. Thus, a practical and rational way of convincing people to produce more goods is the
presence of a favorable market.
Social Structure
A society which has a more equitable distribution of wealth and income, and economic freedoms,
provides a more fertile environment for economic development. Members of society are induced to
pursue their own individual interests, be it economic, social, cultural or political. And this is good for
economic development. Being an open society, even the humblest citizen can aspire to be rich or be the
leader of his country. Opportunities for improvement are open to all members of society. Hence, a man
in the lower class can move upward.
On the other hand, a society whose wealth and income belong to very few families does not
encourage economic development. Since the fruits of development do not go to the people, they have no
enthusiasm to participate in any government development program. It is even worst, if it is a close society.
People who belong to the lowest social class cannot move to higher social structure because it is the
written law. Such situation only breeds poverty and ignorance. The poor have no more desire to work
hard and study. Their social classes are already pegged, and therefore they have no better future and that
of their children.
Cultural Values
Some cultural values have negative effects on economic development. They retard the growth of the
economy. For example, in the Philippines, cultural values such as bahala na, mañana habit, ningas cogon,
and other similar values are not conducive to economic development.
According to Professor Myrdal, industrialization requires efficiency, mobility, discipline, and
punctuality. In his ten years field research in Asia, he observed that many Asians do not have these. In our
country we have the familiar Filipino time. If the time of the meeting is 8:00 A. M., it means 9:00 A. M. or
even 9:30 A.M. Another characteristic of the Asians is to say yes when they really do not mean it. The
idea is to please or not to embarass the other person who makes the request or invitation. For instance,
you ask them to attend a meeting, and they say yes. But they do not attend and they have a good excuse.
It is really very different in Western culture. They are efficient, punctual, and responsible. These
can be observed in the Philippines among the American offices. For instance, at the United States Embassy
the American officers work hard, and they are extremely punctual. The Filipino employees at the embassy
have to work hard also. However, many of them cannot yet equal the consistent punctuality of the
Americans.
Political Conditions
Political conditions have considerable impact on economic development. Political stability and fair
economic policies stimulate economic development. These attract local as well as foreign investments.
The major role of the government is to provide a high standard of living for its people. This can be
attained through higher levels of investments which generate employment and production, and through
the equitable distribution of wealth and income. Plans, policies and programs are tools of economic
development. These can only operate efficiently under a regime of good and honest public
administration.
But if governments keep on changing very often, economic programs and projects are likely to
suffer. This is a waste of scarce resources. Not a few countries in Africa and Latin America have very
unstable governments. Coup d'etat has become a common spectacle. There were cases that only a
sergeant in the army, together with his followers, toppled an existing government. Such frequent political
disorders and changes do not inspire economic development. And this is one major cause why the
countries in such regions are generally poor.
Singapore is a tiny state. In terms of natural resources, it is very poor. And yet it is very affluent
and progressive, compared with most Asian countries. The principal keys to its economic growth are
foreign investments and tourism. These have been very successful in Singapore because there is an
excellent political stability and a very efficient and honest public administration.
Religion
During the Biblical times, materialism and the pursuit of wealth were despised and discouraged.
Similar attitudes were shown during the time of the ancient Greek philosophers and the Scholastics led
by Aquinas. In fact, the Bible contains many statements against wealth or materialism. For instance, it
says that the poor are blessed for they shall inherit the kingdom of heaven. Moreover, it is harder for a
rich man to enter the gate of heaven than for a camel to pass through the eye of a needle.
Such religious concepts and teachings against materialism are not favorable to economic
development. When people shy away from the pursuit of wealth, economic growth tends to be slow and
primitive. There is no need for them to work harder and to search for innovations. They are just contended
with their simple living. Of course, it depends on the values of people. Many hate economic progress
because of its bad effects, such as pollution, traffic congestion, and the destruction of the natural beauty
of the environment.
Max Weber, author of the Protestant Ethics and the Spirit of Capitalism, claimed that the
Protestant countries are more progressive. He proved his theory by pointing out the presence of
dominant values like thrift, industry, and entrepreneurial spirit among Protestants nations. He pinpointed
the rise of Protestantism as the cause of growth of the capitalist order in Europe. As an example, China
with an older civilization and richer natural resources was not the birthplace of the Industrial Revolution.
Corruption in Public Administration
According to an economics professor in Singapore, government corruption is the number one
obstacle to economic development in Southeast Asia. He pointed out that very precious scarce resources,
like money, are not properly utilized for development due to graft and corruption.
Government corruption is present in any society. However, based on observations, such
corruptions are more rampant in the less developed countries like those in Asia. Professor Myrdal stated
that corruption has reached even the higher levels of government officials and politicians. He cited the
various government offices which have been corrupt, such as the public works departments, government
purchasing agencies, and those involved in the collection of taxes, customs duties, and export and import
licenses. Myrdal mentioned that corruption has not spared even the courts of justice and the universities.
In dealing with government offices, bribery has been a common practice. There has been a need
to bribe government personnel to expedite applications or approvals. Myrdal further observed that
through the use of middlemen, businessmen have bribed high government officials. Of course it has been
difficult to prove that such middlemen really gave the money to said officials. The policemen and
government clerks have gained the reputation of accepting bribes in full view of the public. It has become
an ordinary practice. Their low pay encourage them to commit petty corruption.
Population
Population is both an advantage and a disadvantage in economic development. It is an advantage
if people are productive and creative. They can support themselves by harnessing the resources of their
environment and by manufacturing their raw materials for commerce. Some development economists
are not in favour of birth control. To them, people are the most important resources in economic
development. Instead, they have suggested the improvement of the methods of production, especially
food production. Developed countries that have insufficient number of people encourage immigration of
aliens. These are needed to help them accelerate their economic development. Other countries recruit
specialists, technicians, and skilled workers from other countries. For example, in the case of the Middle
East countries, it takes time for them to develop their economies they rely only on their sparse population.
On the other hand, population is a great burden if the rate of population growth is higher than
the rate of production growth. Such situation is more serious if the resources of the economy are
not equitably distributed. And these are exactly the problems of the less developed countries. For
example, Black Africa with a population of about 400 million has one of the highest birth rates, and the
shortest life expectancy - which is only 47 years. Its population explosion growth exceeds its growth in
local production. Indeed, they have been experiencing the curse of the Malthusian theory.
Poor countries with high birth rates are advised to adopt family planning programs. However, in general
such programs are not really successful due to religious, cultural, and economic reasons. On the other
hand, there are many countries with abundant natural resources and with few people, but they are poor.
Brazil is a good example. So the problem is not population but production. Even if a country is
overpopulated, if it has a very high productivity, there is progress. Example is Hongkong or Singapore.
Actually, there are many rich countries which are overpopulated but they are prosperous.
Geography
Geography refers to climate, soil, natural resources, topography, and structure of the land. These
have considerable influence on economic development. Countries which are endowed with abundant
natural resources have greater potentials for economic development. Nevertheless, there are some
countries with barren land but they are rich in oil resources such as the Middle East countries. Such
resources are good sources of income for funding various programs of the government. For example, the
massive construction projects in that region are financed by petro dollars. These are the export earnings
from oil.
In the case of Africa, it is a giant continent, but only 7 percent of its land is arable. And only 50
percent of the arable land is used for food production. Such very limited agriculture land is further
compounded by floods and droughts. Rains are too much, too little or none at all. Many times rains fall at
the wrong time. Such natural hazards greatly impoverish the peoples of Africa. Many die of hunger and
disease. During prolonged drought, crops die as well as their work animals. And of course, the agonies of
the millions of Africans are also man-made disasters like tribal slaughters, civil wars, banditry, and graft.
On the other hand, there are countries with poor natural resources but they were able to achieve
remarkable economic growth. Good examples of these are Japan and Israel. In Japan, only about 16
percent of its total land area is arable or can be farmed. During winter, one-half of said farm area is
covered with snow. Because of its meager natural resources, Japan imports about 90 percent of raw
materials for its industries. Despite its geographical limitations, Japan has become the fastest growing
industrial society in the world. Through capital and technology, it has achieved phenomenal economic
growth. The same is true with Israel. Formerly, it was a barren land. In the beginning, it had a pastoral
economy. Today, Israel has a developed economy. Through modern agricultural technology, its arid land
became fertile and verdant. It is now an exporter of farm crops, aside from industrial goods.
The Family System
Family members in Western societies like the United States are more individualistic and self-
reliant. Adult children are financially independent from their parents. They are free to pursue their
economic inclinations anywhere. Considering the security of the parents, their family obligations are
minimized. Unlike in the less developed countries, especially among Asians, the children have to take
personal care of their poor old parents.
An extended family system, which is common in the Philippines and other developing countries,
is good in the sense that there is unity, and the welfare of the old and the young members are protected
by the stronger adult members, usually the eldest sons. However, it has dominant features which are not
favorable to economic development. For example, many married children live with their parents. In case
their parents can afford to support them, the children are likely to lose their self-reliance. They do not
work hard and just depend on their parents. In fact, not a few young men have the courage to marry even
if they are jobless because they know their parents will take care of them in the meantime - or even for
many years.
Another, close family ties hamper labor mobility, and the choice of better economic
opportunities. Their grandparents or parents do not like their children to work in far places, especially if
they are women. As obedient children, they follow the wishes of their old folks. However, there are
exceptions in the case of Ilocanos and Visayans. They are courageous adventurers. They are willing to
work in any part of the world.