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									              M5101 University
              Lecture
              Development Strategies
              and Policies
              Prof. Dr. Franz Heidhues
Universität Hohenheim, Institut 490a
                                         1
                                           M5101:Prof Franz Heidhues



No society can surely be flourishing and
happy of which the greater part of the
members are poor and miserable
          Adam Smith (The wealth of nations)



A world in which the greater part of the
members are poor and miserable cannot
be flourishing, nor happy nor peaceful.



              Universität Hohenheim, Institut 490a                     2
                                         M5101:Prof Franz Heidhues




Nature provides for everybody‘s
need but not for everybody‘s
greed.
                            Mahatma Gandhi




            Universität Hohenheim, Institut 490a                     3
                                                 M5101:Prof Franz Heidhues

Characteristics of development
Problems (I)
1.   Low levels of living standards
        Low per capita income
        Poverty
        Hunger
        Disease
        Low life expectancy, high child mortality



                    Universität Hohenheim, Institut 490a                     4
                                                M5101:Prof Franz Heidhues

Characteristics of development
Problems (I)
2.   Economic structure
      Low diversification of the economy
      Low degree of industrialization
      Large share of agricultural sector
      Predominance of primary exports




                   Universität Hohenheim, Institut 490a                     5
                                              M5101:Prof Franz Heidhues

Characteristics of development
Problems (I)
3. Factors of development
   High population growth
   Lack of capital
       a)Physical capital
       b)Human capital
   Inadequate infrastructure
   Indebtedness


                 Universität Hohenheim, Institut 490a                     6
                                               M5101:Prof Franz Heidhues

Characteristics of development
Problems (II)
4. Natural resources
     Difficult ecological conditions
     Droughts
     Erosion
     Desertification




                  Universität Hohenheim, Institut 490a                     7
                                              M5101:Prof Franz Heidhues

Characteristics of development
Problems (II)
5. Political-institutional framework
     Lack of participatory processes
     Lack of good governance
     Weak administration
     Small voice in the global economic system
     Ethnic diversity, minority issue



                 Universität Hohenheim, Institut 490a                     8
                                              M5101:Prof Franz Heidhues


 800 Mio people hungry, undernourished
 185 Mio children who suffer under food shortage
with permanent damage to their physical and
mental capacities
 50 Mio people only survive with food aid
 High population growth which eats up progress
made in food production and economic growth
 Increasing unemployment and urban
agglomeration

                 Universität Hohenheim, Institut 490a                     9
                                            M5101:Prof Franz Heidhues




 natural resources and biodiversity are
placed under increasing pressure
 poverty and discrimination result
increasingly in crises and wars
 increasing streams of refugees
rising gap between rich and poor, between
countries and within nations



               Universität Hohenheim, Institut 490a                     10
                                            M5101:Prof Franz Heidhues



Development – what is it?
 Increasing income? (economic growth?)
 Increase in total income? In per capita
  income? For some or for all?
 Improvement of social conditions? Health
  conditions? Nutrition? Others?




               Universität Hohenheim, Institut 490a                     11
                                                     M5101:Prof Franz Heidhues



Development – what is it?

   Reducing discrimination?
          Gender issue
          Ethnic minority issue
   Developing/strengthening?
          Democratic/participatory
          Decision making in private and public spheres
   Improving people‘s living conditions?
          Economically, socially, and politically for all and
           permanently, i.e. without endangering the natural
           resources


                        Universität Hohenheim, Institut 490a                     12
                                                      M5101:Prof Franz Heidhues

Assumptions of static dualistic models (Higgins &
Myint, 1960s)  (A) dualism of sectors
                         Modern sector                          Traditional sector
 Technology              Imported, modern                       Simple, traditional
 Capital intensity       High                                   Low
 Specialisation          High level                             Low level
 Ability to substitute   Low                                    High
 labour with capital
 Production              - Durable consumer                     - Food-products
                           goods                                - Consumer goods
                         - Investment goods
                         - Raw materials and
                           intermediates
 Marketing               - Export                               - Self-consumption
                         - Urban market                         - Local/rural market
 Saving                  Relatively high                        Low (?)
                         Universität Hohenheim, Institut 490a                          13
                                                          M5101:Prof Franz Heidhues

 Assumptions of dynamic dualistic models
 (Lewis 1955, Frei & Ranis 1964)
Subsistence sector
  hidden unemployment and open unemployment
  marginal productivity of labour = 0
  elastic supply of labour
  family labour is remunerated according to the
   average productivity of the family labour
  limited supply of land
Industrial sector
  higher marginal productivity of labour than in subsistence sector
  wage labour is paid in cash according to the value of the marginal
   productivity of labour
  real capital is created by reinvesting profits
  wage income is consumed 100%
  reinvestment of profit shifts production function outwards
                             Universität Hohenheim, Institut 490a                     14
                                                                                             M5101:Prof Franz Heidhues



    II.                  Traditional Sector (X)                                      X       Y        Modern Sector (Y)                  I.



                                                                                                                          F        Y = g(A)

                                                                                                            E
                                                                                                             •                LM

           T            X = f(A)                         H             C

               LT


                                                                                                                 G



           M                       P                                                            

A                                                          R           Z                 0                       N                            A
                                                                                                                          W




               Absorbed by             After rural-urban migration
               modern sektor              openly unemployed

                                                                                                                                      IV.
    III.
                                                                 45° Line                                                     45° Line
                                                                                      A


                                                               Universität Hohenheim, Institut 490a                                      15
                                                          M5101:Prof Franz Heidhues

Static models:           no or little interaction between the traditional and the
                         modern sector

Dynamic models:          are based on the static model, but they see
                         interdependencies between the two sectors

Problems encountered in 2-sector models
 „Neglect agriculture issue“
 High population growth
 Limited economic growth and employment effects
  - imports were mainly labour saving
  - not enough employment growth in quantity & quality
  - rural-urban migration
  - distortion of production factors (interest rate for capital)
 Non-equitable income distribution
  - preference for capital owners




                             Universität Hohenheim, Institut 490a                     16
                                                  M5101:Prof Franz Heidhues

Importance of 2-sector models for
development theory & policy!

1. Demonstrated importance of agricultural sector in
   development process
2. Showed that reduction of population growth is important
3. Gave the instruments for the practical development policy
   of the 60s and 70s
   ( Objective: high growth in modern sector to resolve
   employment problem in agricultural sector)




                     Universität Hohenheim, Institut 490a                     17
                                                          M5101:Prof Franz Heidhues

(C) Inward-outward looking development
    strategy
• International trade is necessary to get those goods that the country cannot or
  can only produce at relative high costs (argument of comparative costs)
• To pay for imports, goods must be exported (foreign exchange argument).
  Access to forex difficult because
  - the real exchange relations (terms of trade) worsen
  - export receipts vary strongly
  - industrial countries create trade barriers, etc.
• Competitiveness
  - pressure to work efficiently
  - infant industry argument


   These strategies are based on the assumption that trade is beneficial.



                             Universität Hohenheim, Institut 490a                     18
                                                        M5101:Prof Franz Heidhues


1. Inward looking strategy
1. Those economic sectors should expand that supply primarily the domestic
    market.
2. The export sector should earn the foreign exchange that are necessary to
    realize the anticipated development process and the import volume.
3. Those sectors should be expanded that show a high dependency on
    imports. This should create a maximal development effect and save foreign
    exchange.
4. Points 1-3 are valid already then, when a sector, which competes with
    imported goods can increase its production and can sell it to the domestic
    market.
5. In concurrence to Point 4, some scholars of the inward looking strategy
    state that it is only successful implemented if imports decrease.

Generally accepted definition:
Imports are substituted if the domestic production of previously imported
goods covers the additional demand caused by the economic development
process and thus, the relative share of imports in the domestic supply
decreases (Hemmer, 1988, S. 527f).
                           Universität Hohenheim, Institut 490a                     19
                                                        M5101:Prof Franz Heidhues


2. Outward looking strategy

 1. Intention is to make selected economic sectors within the export
    sector to leading sectors of the domestic development process
 2. Use of the direct effects of the export sector on the domestic
    economy, i.e. the country must be competitive with its export goods
    on the world market
 3. Supply should be elastic (in order to be capable to react to the
    international demand) and linkages to other sectors should exist, to
    stimulate growth of the domestic economy
 4. If Points 1-3 do not apply, then export receipts should be used to
    import necessary goods and services, which can not be produced in
    the country itself (foreign exchange argument)
                                                 (Hemmer, 1988, S509ff)




                           Universität Hohenheim, Institut 490a                     20
                                                    M5101:Prof Franz Heidhues



Arguments for trade with outward orientation

 competitiveness
   • pressure on efficiency or what is wrong with
     import substitution
   • infant industry argument

 foreign exchange argument
   • import of essential goods (investments,
     intermediate products, technology) or
   • the advantage of late comers

 what about protection of industrialized countries
   • subsidization of textiles, agriculture
   • tariffs on imports from less developed countries
   • non-tariff barriers
   • tariff escalation



                       Universität Hohenheim, Institut 490a                     21
                                                 M5101:Prof Franz Heidhues


   Criterion   Outward looking strategy                        Inward looking
                                                                  strategy


Concept          Expansion of the                           reduction of the
                participation in international               participation in
                trade                                        international trade
                 use of advantages in                        protection policies
                     -division of labor                      (tariffs and quotas)
                     -externally available
                      technical progress
                     -competition




                    Universität Hohenheim, Institut 490a                             22
                                                    M5101:Prof Franz Heidhues

    Criterion    Outward looking strategy                     Inward looking strategy




Advantages       Use of the advantages in                     Easy identification of the
                                                              
                international division of labor               sectors to be promoted
                Promotion of the                             Reduction of imports (?)
                competitiveness, pressure to
                use resources efficiently
                Divesification and flexibility
                in economic structure




                       Universität Hohenheim, Institut 490a                         23
                                                    M5101:Prof Franz Heidhues

    Criterion    Outward looking strategy                     Inward looking strategy




Problems         Production of primary                        orientation according to
                                                              
                goods as bases for outward                    cost disadvantages
                looking strategy
                                                              Protectionism and
                Vulnerability due to world                   inefficiency
                market developments (ToT,
                                                              Narrow domestic markets
                price shocks)
                                                              High share of imports in
                 Initiation of new industries
                                                              inputs (no absolute foreign
                                                              exchange use, but only
                                                              change of imported goods)
                                                              Reduction of protectionism
                                                              and moving towards export-
                                                              orientation
                       Universität Hohenheim, Institut 490a                         24
                                                    M5101:Prof Franz Heidhues


Rural Development Strategies

    1. Rural Regional Development Strategy (RRD)
    RRD is a strategy which intends to contribute to the
    development of rural areas while securing the
    ecological base in the long run. Particularly, the poor
    groups of the population shall be empowered to
    improve their living conditions and to build their
    future in a self-responsible manner.




                       Universität Hohenheim, Institut 490a                     25
                                                        M5101:Prof Franz Heidhues


Development of the Rural Regional Development Strategy
50er & 60s   1. Dualistc model with traditional (agricultural) and dynamic
                (modern industrial) sector.
             2. Understanding that the traditional sector supplies labour, food,
                primary goods, foreign exchange, savings and a market for the
                modern goods.
                Mobilization of savings for the modern sector:
                 growth, employment, income increase for all (”trickle down”).
             3. Development strategies such as the balanced & unbalance
                growth theory, inward- & outward orientation concentrate on
                growth through industrialization and foreign exchange creation.
             The industrialization & modernization strategies lead to
             1. Neglect of agricultural sector, particularly food production
             2. Misallocation of factor use
                - high capital- & import intensity
                - little degree of competitiveness & emplowment creation
             3. Less equity in the inter-sectoral income distribution


                           Universität Hohenheim, Institut 490a                     26
                                                         M5101:Prof Franz Heidhues

End of 60s Development strategies, which were designed according to the dualistic
begin 70s model, could not cope with the increasing poverty, food insecurity, and
           unemployment
            1. The modern sector could not create employment according to the
               population growth and the rural-urban migration
            2. The receipts of the growth went to few (no trickle down effect)
               creating greater intra-national income inequity
            Based on this experience, the development goal of more equitable
            income distribution became more important:
            • Strategy of satisfying basic needs while at the same time incresing
               productivity and income for the poor population groups
            • 80-90% of all chronic malnourished (absolute poor) are rural. For this
               reason the agricultural sector became more important and the
               strategy of rural development. First, agricultural development projects
               worked with pilot farms (Musterbetriebe), isolated productivity
               increases
            • Approaches to go multi-disciplinary: agricultural development projects
               (production) were expanded

                            Universität Hohenheim, Institut 490a                     27
                                                        M5101:Prof Franz Heidhues

End of 60s Consequent result of above experience:
- today    Concept of integrated rural development
           1. No isolated activities in a socio-economic system
           2. No production increase without social progress, i.e. participation of
              the rural poor
           3. In the long-run, production and income shall increase along with
              human capital

           Objective:
             Ecological sustainable economic development of rural regions,
             improvement of living conditions for poor population groups




                           Universität Hohenheim, Institut 490a                     28
                                                          M5101:Prof Franz Heidhues

                     Objectives of RRD and areas of intervention
    Improvement /
                                   Improvement of                   Promotion of handicraft,
   maintenance of
   production ease
                                 marketing, access to               small-scale industry and
                                  production inputs                        processing
Productivity in areas in
agriculture and forestry


    Improvement of                                                  Development of reliable
 infrastructure: roads,       Improvement of living                   financial markets
          etc.                  conditions in rural
                                      areas
  Promotion of rural                                                Improvement of public
   health services                                                   administration “public
                                                                        governance”
                               Promotion of education
   Improvement of                                                   Promotion of rural self-
                                  and professional
    extension and                                                    help groups (SHGs)
                                     formation
information services

                                         Woman

                             Universität Hohenheim, Institut 490a                         29
                                                              M5101:Prof Franz Heidhues


  RRD - Direct improvement of living conditions of the rural poor through


Productivity and income         Improvement of physical Participatory planning,
Increase                        and social infrastructure decision making and
- Use of local resources        - Improvement of physical implementation
- adapted (normally labor        and social infrastructure              - Decentralization of
   intensive) technologies                                                decision making
- long-term protection of       This means                              - Group-building and self-
  resources (environmentally    - community infrastructure                 help-groups
  sound technologies,           - rural road infrastructure             - Building of sustainable
  regenerative energies) and    - community water and                     (local/regional) institutions
Employment creation               sanitation
                                - priority on primary school
- agriculture, handicraft and
                                  and professional formation
 small scale industry,
                                - basic health services
 community infrastructure




                                 Universität Hohenheim, Institut 490a                             30
                                                       M5101:Prof Franz Heidhues


3. Comprehensive Development Strategy (World Bank)
Objective   All relevant organisations of development aid are supposed to
            work together, i.e.. government, civil society and target group
            • Responsibility with government
            • Incorporation of institutional environment
            • Avoidance of uncoordinated activities
            Expansion of traditional objectives (economic growth &
            macroeconomic stability):
            • Good & clean governance (verantwortungsvolle
              Regierungsführung)
            • Legal framework
            • Education &health etc.
Result      Decentralisation of development policy
            • Each country develops a long-term framework (Planning matrix)
            • Efficiency increase with scarce financial means through CDF-
              Matrix

                          Universität Hohenheim, Institut 490a                     31
                                                                                                                           M5101:Prof Franz Heidhues
                                                                           The prerequisites for sustainable growth and poverty alleviation
                                                                            Struktural            Human                   Physical           Specific Strategies
                                                                      (1)     (2)   (3)    (4)    (5)   (6)    (7)    (8)    (9)    (10)   (11)     (12)  (13)    (14)
                                                                     Good Justice Finan- Social Educa- Health Water Energy Roads, Envi-    Rural   Urban Private (Coun-
                                                                       &    Syste  cial  Safety tion &   &      &          Trans- ron-     Stra-   Stra- Sector    try
                                                                     Clean     m   Sys-  Net & Know- Popu- Sewe-           port & mental   tegy     tegy  Stra-  Speci-
                                                                     Gover-        tem   Social ledge lation  rage          Tele- & Cul-                  tegy     fic
                                                                                                                                                                   Hea-
                                                                     nance                Pro- Institu-                     com    tural
                                                                                                                                                                   dings
                                                                                         grams tions                              Issues
                                                        Govern-
The activities of partners in the development process




                                                        ment
                                                        National
                                                        Province
                                                        Local

                                                        Multi-
                                                        lateral &
                                                        bilateral
                                                        Insitution

                                                        Civil
                                                        Society



                                                        Private
                                                        Sector




                                                                                              Universität Hohenheim, Institut 490a                            32

								
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