Fundamental Concepts and Theories of Economic Development

Fundamental Concepts and Theories of Economic
Development
Fundamental Concepts of Economic Development
1) Economic Growth and Economic Development
 Economic growth refers to an increase in a country's output of goods and services,

typically measured by Gross Domestic Product (GDP). This increase in GDP signifies a
quantitative enhancement in the economic output of a nation. However, it does not
necessarily address the distribution of income or the qualitative aspects of economic well-
being.
 Economic development, on the other hand, is a broader concept that encompasses

improvements in living standards, reduction of poverty, and enhancement of health and
education. It focuses on qualitative changes in the economy, aiming to expand economic
and social choices and create a more equitable distribution of resources. This concept
goes beyond mere economic growth, seeking to improve the overall quality of life for all
citizens.
2) Multidimensional Process
 Economic development is seen as a multidimensional process that involves

significant changes in social structures, popular attitudes, and national institutions. It
aims to not only accelerate economic growth but also to reduce inequality and
eradicate poverty.
3) Human Development Index (HDI)
 The HDI is a composite index measuring average achievement in three basic aspects
of human development: health (life expectancy), education (mean years of schooling
and expected years of schooling), and standard of living (GNI per capita). This
approach highlights that significant income gains can have limited impacts on human
development if not accompanied by improvements in health and education.
4) Sustainable Development
 Sustainable development encompasses the integration of economic growth, social

inclusion, and environmental sustainability. It aims to achieve a balance that ensures
long-term prosperity and well-being for present and future generations. The 17
Sustainable Development Goals (SDGs) adopted by the United Nations in 2015
reflect this comprehensive approach, targeting areas such as poverty eradication,
education, gender equality, and environmental protection.
Theories of Economic Development
Classic Theories of Economic Development
1) The Linear-Stages-of-Growth model
 Rostow’s Stages of Growth

- Walt W. Rostow's theory of economic development proposes that countries progress
through five sequential stages: 1) The Traditional Society, 2) The Pre-conditions for
takeoff into Self-sustaining Growth, 3) The Take-off, 4) The Drive to Maturity, and
5) The Age of High Mass Consumption. Each stage represents a phase of economic
transformation from traditional to advanced growth.
Example: The Philippines can be seen as transitioning from the "drive to maturity"
stage to the "age of high mass consumption." Initiatives like the Build, Build, Build
program aimed at infrastructure development are indicative of efforts to create a solid
foundation for sustained economic growth.
 The Harrod-Domar Growth Model
-A functional economic relationship in which the growth rate of gross domestic
product (g) depends directly on the national net savings rate (s) and inversely on the
national capital-output ratio (c).
o Capital-output ratio- a ratio that shows the units of capital required to produce
a unit of output over a given period of time.
o Net savings ratio - savings expressed as a proportion of disposable income
over some period of time.
Example: The Philippines' efforts to increase foreign direct investment (FDI)

and savings rates to close the "savings gap" are reflective of the Harrod-Domar
model. Programs to attract investments in sectors like manufacturing and services
are essential to this approach.
2) Theories and Patterns of Structural Change
 Structural-change theory
This theory looks at how economies transform their structure over time, focusing on
the shift from agriculture to industry and services. It examines how resources,
including labor, are reallocated from low-productivity sectors to high-productivity
sectors.
Example: The shift from an agriculture-based economy to a more diversified one that
includes manufacturing and services is evident in the growth of the BPO (Business
Process Outsourcing) sector. Policies promoting industrialization and improving
agricultural productivity align with this theory.
 The Lewis Theory of Economic Development
A theory of development in which surplus labor from the traditional agricultural

sector is transferred to the modern industrial sector, the growth of which absorbs the
surplus labor, promotes industrialization, and stimulates sustained development.
Example: Urbanization trends in the Philippines, where rural labor moves to urban
centers for better opportunities in industries such as manufacturing and services,
exemplify the Lewis model. Efforts to improve rural education and infrastructure
support this transition.
3) The International-Dependence Revolution
 The Neocolonial Dependence Model
This model argues that underdevelopment is a result of historical exploitation and

contemporary neocolonial practices by developed countries. Developing countries
remain dependent on developed ones, perpetuating a cycle of poverty and
underdevelopment.
Example: The Philippines’ history as a colony and its reliance on foreign aid and
remittances can be seen through this lens. Efforts to reduce dependence on foreign aid
by promoting self-sustaining economic policies and strengthening local industries
reflect a response to this model.
 The False-Paradigm Model
This model suggests that developing countries have adopted inappropriate policies
due to misguided advice from Western experts and international organizations. These
policies do not align with the actual needs and circumstances of developing nations.
Example: Critiques of neoliberal policies imposed by institutions like the IMF and
World Bank that prioritize market liberalization without addressing structural
inequalities align with this model. The Philippines has taken steps to customize
economic policies that better fit its unique socio-economic context.
 The Dualistic-Development Thesis
This thesis highlights the coexistence of modern and traditional sectors within
developing countries, leading to economic and social dualism. It suggests that
development policies need to address the inequalities and disparities between these
sectors.
Example: The stark contrast between urban areas like Metro Manila and rural
provinces in terms of income, infrastructure, and access to services illustrates this
thesis. Government programs aimed at regional development and reducing inequality
are efforts to address these dualistic conditions.
4) The Neoclassical, Free-Market Counter-Revolution
 Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly
Approaches
Proponents argue that government intervention often leads to inefficiencies and

corruption. They advocate for policies that promote free markets, deregulation, and
privatization of state-owned enterprises.
Example: The Philippines has been moving towards market-friendly reforms, such as
reducing barriers to trade and investment, privatizing state-owned enterprises, and
implementing policies to improve the ease of doing business. These efforts aim to
create a more dynamic and competitive market environment.
 Traditional Neoclassical Growth Theory
This theory focuses on the role of market forces in promoting economic growth. It
emphasizes the importance of factors like capital accumulation, technological
innovation, and labor productivity, and suggests that government intervention should
be limited to creating an environment conducive to free-market operations.
Example: The emphasis on improving labor productivity through education and skills
development programs, coupled with technological innovation and capital
accumulation, reflects the principles of neoclassical growth theory. Initiatives like the
K-12 educational reform and investments in information technology infrastructure are
steps towards fostering long-term economic growth.

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Fundamental Concepts and Theories of Economic

1) Economic Growth and Economic Development

 Economic growth refers to an increase in a country's output of goods and services,

 Economic development, on the other hand, is a broader concept that encompasses

 Economic development is seen as a multidimensional process that involves

3) Human Development Index (HDI)

 Sustainable development encompasses the integration of economic growth, social

Theories of Economic Development

Classic Theories of Economic Development

1) The Linear-Stages-of-Growth model

 Rostow’s Stages of Growth

Example: The Philippines' efforts to increase foreign direct investment (FDI)

2) Theories and Patterns of Structural Change

A theory of development in which surplus labor from the traditional agricultural

3) The International-Dependence Revolution

 The Neocolonial Dependence Model

This model argues that underdevelopment is a result of historical exploitation and

 The Dualistic-Development Thesis

4) The Neoclassical, Free-Market Counter-Revolution

Proponents argue that government intervention often leads to inefficiencies and

 Traditional Neoclassical Growth Theory

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