Economic Development

 Development occurs as a result of economic growth. Aid, investments,

spending (expenditure) and savings is necessary for economic
development. Accelerated capital accumulation (purpose of producing a
product not for social uses, rather profit) was priority in economic
development. The goal is to increase investments.
 Let’s look at four types of economic growth:
-Linear stage of growth model (1950s and 1960s)- it means you have
natural resources and the money is coming and you’re slowly improving.
You are slowly improving your economy. That is an old model and we still
have it today.
-Theories and patterns of structural change (1970s)- this is where you
are changing your whole economy in order to improve more growth. The
government intervenes and changes its taxing policy and its development
policy in order to jump-start the economy. You invest money in research,
you invest money in university, you invest money in private sector (you
build the private sector, if necessary), so this is where the government has
to step in. Singapore, Russia, Azerbaijan, Kazakhstan, Turkmenistan, Saudi
Arabia all stopped in the linear stage of growth. Singapore and Korea are
the countries that are sitting on the structural change; they went from
peasant culture to developing/building culture/manufacturing culture.
-International-dependence revolution (1970s)- these are the countries
whose economies are depending on other countries. Without another
country, you broke. Your economy is based on the foreign help. Let’s give
an example. You take Palestine for example. It needs constantly aim of
other countries to survive. They are dependent on aid. Some countries in
Africa are also dependent on aid.
-Free-market revolution (1980s and 1990s)- this is where they go from
government control to capitalist free market method.

 Rostow’s stages of growth. There are five stages:

1) The traditional/agricultural economy- lack of class or individual
economic mobility (Russia in 1900s; China in 1920 and 1930).
2) The pre-conditions for take off- external demand for resources,
commercial agriculture, widespread and enhanced investments,
increase of technology, change in social structure, and development of
national pride and economic interests. This is the stage where you
actually take off to become a much more powerful economy.
3) The take-off- Urbanization increases, industrialization proceeds,
technological breakthrough, shift from primary sectors in the
economy towards secondary. Baku in 1920s can be given as an
example (from agriculture to developing something new). This is
American in 1800s (industrial revolution basically).
4) The drive to maturity- rapid development of infrastructure and large
investments, shift from investment driven goods to domestic
consumption. This is for example China in 2000s when China used to
produce everything for the outside and now in 2000 they start
producing for themselves. Today China’s economy is well run, so it
 doesn’t necessarily have to have all these friends outside purchasing
their products; they can actually develop products for their own
people. Let’s give an example. Today China buys a lot of rice than it
actually produces. They are the point where there is not enough rice
for Chinese people, so they have to eat potatoes. China imports a lot of
meats now, they do not have enough cows to make for themselves, so
they have to buy from India or elsewhere because they are at the point
where they consume. This is America in 1930.
5) The age of high mass consumption- dominance of the economy by
the industrial base, widespread and consumption of high value goods,
disposable income and beyond all basic needs. This is America, France,
Great Britain, Germany, Japan or South Korea. It means you are at that
point where your economy is so well; you start consuming things that
you don’t necessarily need. Whenever you reach this stage you are
finally at the place where high-value products you start investing
money in luxuries; you start buying things that you don’t need
necessarily but because you have the money for it.

 The Harrod-Domar Growth Model- he believes that the principal

strategy for development is mobilization of saving and generation of
investments to accelerate economic growth (the H-D model). It basically
argues that if you have investments then the growth will occur. This is
more of a conservative approach to economy. Some economists like H-D
believes that if you save a lot of money; if you have a lot of savings then
that means you are a powerful person; you can be trusted and you can be
invested money. Modern outlook of economy argues that if you don’t have
money you can borrow money; you borrow money and you make money
out of it (spend money make money). You borrow money then you put it
to work and from there you make money. You borrow money to start a
business, you make money, you pay your loan back and you still keep
making money. H-D model argues that you have savings, which leads to
investment. What does that mean? The idea is very simple. If another
country sees you as a strong country with savings they are more likely to
invest in your country simply because you have the money to cover that;
you have the money to match it. You only invest in an economy that has
money. Whenever they have money, you put money down, they will
match it.
 Having savings in itself is not considered intelligent any more today. As
Warren Buffet would say if you have savings and you keep those savings
that means you are not a good finance person/good economist. A good
economist will actually have its money invested and will be making
money out of money. For example, if you have 50,000 manats and it is
sitting somewhere (50,000 manats in cash) then you are losing value of
your money every day because of inflation. It drops in value. If
devaluation happens your money is gone in value. A good finance person
would actually take 50,000 manats and purchase the business, a house, a
bus or something. Some economists would argue that having oil is a
saving. It is just money that has not been turned into bills like gold.
 The next model is endogenous growth model. It is a very common
economic theory on growth. This theory holds that economic growth is
primary the result of endogenous forces such as investment in human
capital, innovation, and knowledge that contributes to economic growth.
If the government invests in people, helps them to develop their skills and
with that growth will happen. For example, provision of better public
education in computer science has a positive impact on computer
technology that creates jobs and further increases growth. Hence,
subsidizing research for education, technology, and science creates
innovation. Which countries do that? Japan, South Korea, the U.S, the UK,
and almost all western countries. They understand that we don’t have to
extract oil; that can be part of your economy but people develop things
(investment in research and innovation).
 Companies are interested in developing and bringing in intelligent people.
 There is AK theory of endogenous growth theory, which argues that
economy’s long run growth rate depends on its savings rate. An increase
on savings rate will lead to a permanently higher growth rate. Innovation
based model argues that intellectual capita is the source of technological
progress and it is different from human or physical capital. It is not the
human capital that matters but it is the innovation that matters. You
should not just invest in people for the sake of educating them; just
because you are educated doesn’t mean that you have much impact. Just
because you get a degree in history then what is your impact on the
economy? Just because you are investing in people doesn’t mean that all
of them will have financial impact. You should create programs like
engineering, computer science, or finance as they can actually have an
impact.
 Endogeneity of savings- per capita income and distribution is influenced
by economic growth.
 Endogeneity of population growth- when population grows, so does the
economy. Hence, economic growth is dependent on population.
 Solow-Swan model is typically an exogenous growth model that analyses
long run economic growth within the framework of neoclassical
economics. It highlights that economic growth is in technological
progress. Hence, population growth, capital accumulation, and increase in
productivity are part of technological progress. You can imitate from
other models or different places and you can just develop it. Let’s give an
example. Today oil prices are low. Why are oil prices so low? Because
today to find oil is very easy. It is not as hard as it used to be. Or we can
say that it is not easy but it is not simple. You go to Azerbaijan for
example, you drill down, and extract oil. The idea is that with this
particular model you don’t have to invest in people; all you need to do is
that any other country has invented technology and you take that
technology and develop it. You can increase your productivity through the
technological progress.
 Let’s talk about the structural change model. This theory focuses on the
mechanism whereby underdeveloped economies transform their
domestic economic structures from traditional to an industrial economy.
These are the countries that basically don’t have much choice and they
 have to either change or die out. Examples can be Japan, China, or South
Korea. China went from peasant/agricultural economy to industrial
economy within just about 15-20 years.
 Let’s talk about economic development. How does economic development
occur in the government? You have to have economic development plan.
Planning takes a lot of time and a lot of resources. Community
development is another one. People have to be interested in changing and
growing; if people are not interested then nothing is going to happen.
Marketing communities is another one.
-cutting down monopolies; economic freedom, economic liberty