ECONOMIC DEVELOPMENT

PRELIMS
MIDTERM REVIEWER

MODULE 1 unemployed, no factory buildings

INTRODUCTION AND OVERVIEW sit idle, and so forth.
2. All available factors of production
(economic resources) are efficiently
ECONOMIC AND SCARCITY
used;
● Scarcity is often described as limited,
➔ Efficiency means that we use our
inadequate, insufficient, and meager.
knowledge and technology to
● Economic resources or factors of
produce the maximum amount of
production (e.g. land, labor, capital, and
output with these resources.
entrepreneur) are scarce, and these are
3. There is a constant quantity and
the basis of producing products (goods
quality of these factors of
and services).
production in a specific period of
● These factors of production are scarce
time;
and there is not enough supply to produce
➔ The quantity and quality of our
the products that we need and want.
resources are not changing. This
● Even though there is efficiency in the use
means that over the current time
of these factors of production and with the
period, workers do not begin new
fullest use of the advancement in
training programs to make them
technology, there is limit to our current
more productive, new natural
production.
resources are not discovered, and
● Scarcity will compel producers to choose
so forth.
among competing uses of factors of
4. Technology is constant as well
production.
➔ Technological change which might
● We are faced with another problem, and
give us better means of producing
this is the questions of what to produce?,
more goods with the same
how to produce?, whom to produce?
resources is not occurring.
● What to produce and how to distribute this
5. Two products are produced with our
output to society are the most basic
factors of production and
choices to be made.
technology.
● PRODUCTION POSSIBILITIES: shows
➔ We assume that we can produce
the maximum amounts of two different
only two goods with our resources.
goods that can possibly be produced
during any particular time period using
society’s scarce resources.
● PRODUCTION POSSIBILITIES
FRONTIER (PPF): a concept that can
easily resolve this problem. It is a
boundary showing the combination of two
products that can be efficiently produced
by using the given resources. It shows
maximum amount of two different goods
that can possibly be produced during any
particular time period using society’s
scarce resources.
● PPF is illustrated by the following ● A number of important concepts are
concepts, due to the complicated structure illustrated in the PPF. The fundamental
of the economy, we try to simplify by concept is that there is a limit to what we
making certain assumptions. In examining can produce.
PPF, these assumptions are important, ● A fundamental idea in the PPF is when we
and these are: try to produce more of a good we must
1. All available factors of production give up producing the other good as given
(economic resources) are fully by the concept of opportunity cost.
used; ● OPPORTUNITY COST: a foregone
➔ All available resources are used opportunity by not choosing the next best
fully, so that no workers are alternative.
diamla, foronda, gan 1
 ● This opportunity cost can take any
variable such as products and money. And
in our illustration, guns are the products
that society has to give up to produce
more butter. As economists are fond of
saying, there is no such thing as a free
lunch! There is an opportunity cost to
everything.
● Because the opportunity cost arises, trade
– offs happen. This is defined as one more
good thing can be obtained only by giving
up something.
● The second concept manifested in the
PPF is UNEMPLOYMENT. Realizing
different combinations of two products
represent possible quantities. We have
assumed the full use of our resources,
skills, knowledge, and technology, hence,
the phrase production possibilities.
● In reality, we rarely produce to our full
potential, some economic resources may
be unused such as factories, machines,
and ultimately our workers who are laid
off.
● If this is the case, we are working not on
the curve itself, but below the curve. We
could do much if we are working on the
curve itself.
● If there is an outward movement in our
PPF, this involves rise in economic growth.
● ECONOMIC GROWTH: an outward
movement in the PPF brought about by a
rise in technology. It may occur if the
quality and quantity of society’s resources,
or if new technologies are developed so
that we can produce more output with our
available resources.
● Services are indispensable products that
we have. And our example of these are:
Health care, education, road and bridge
repairs, etc.
● We cannot graph infinite combinations,
however, we can redefine our axes as a
staple goods for the y-axis, and luxury
goods in our x-axis.
● We can also divide our economy’s output
into agricultural goods and manufactured
goods (consumer goods and capital
goods).
● We can also examine the choice between
military and civilian goods, and private and
public goods. There are many options
involved in the production of various types
of output.
ECONOMICS AND DISTRIBUTIONS
● Production choices are very important, but
they tell us only half of the story. The
choices of distribution are as important as
the choices for the products.
● In a market-based economy, the choices
of distribution as well as production are
based primarily on prices. And prices are
determined by demand and supply.
● In our present circumstance, the
distribution of the vaccine for covid-19 is
an imperative as the discovery of the
vaccine.
● Pharmaceutical companies such as Pfizer
need to enter into a contract with various
governments. For the Philippines, the local
government units (LGU’s) need storage
facilities that require ultra-cold storage
facilities.
● And because the country is made up of
islands, the geographical location is
another type of disadvantage.
● To promote the use of vaccines, there
should be consumer confidence to
properly use the vaccine.
DEMAND AND SUPPLY
● DEMAND: Consumers desire to purchase
goods and willingness to pay a price for a
specific good. (DOWNWARD SLOPE)
➔ The simple common sense idea
that people will be willing and able
to buy more of a good or service at
low prices than at high prices is a
fundamental economic principle,
the law of demand, which is
usually stated as follows: price and
quantity demanded are inversely
related, all other factors being
equal.
➔ This means that when prices go
up, demand goes down and vice
versa.
➔ Demand curves shift if the number
of buyers changes, if consumers’
tastes change, or if the prices of
other goods that the consumers
regard as substitutes or
complements change, changes in
consumer’s income, and changes
in consumer’s expectations about
the product’s future price or
availability
➔ If the demand has increased, the
demand curve shifts to the right.
➔ If the demand has decreased, the
demand curve shifts to the left.
● SUPPLY: Total amount of a good that is
available to consumers. (UPWARD
SLOPE)
diamla, foronda, gan 2
 ➔ The law of supply states that price
and quantity supplied directly
related, all other factors being
equal.
➔ This means that price and quantity
supplied change in the same
direction.
➔ If price goes up, so does quantity
supplies; if price goes down, so
does quantity supplied.
➔ Supply curves shift if the number of
sellers shift if the number of sellers
changes or of the factors that
affect the producers’ costs change,
changes in technology used to
produce the product, changes in
prices of other products that could
be produced with the same
resources, changes in government
taxes or subsidies, and changes in
seller’s expectation about the
product’s future price.
➔ If the supply has increased, the
supply curve shifts to the right.
➔ If the supply has decreased, the
supply curve shifts to the left.
● Supply equals the Demand is equilibrium;
Supply exceeds Demand is surplus;
Demand exceeds Supply is shortage
● Complementary – x is directly proportional
with y. Substitutes – x is indirectly
proportional with y.
EFFICIENCY AND EQUITY
● Understanding demand and supply
provide better insight into the working of
the market economy and its PPF, because
demand and supply determines how much
to be produced for the product. And high
prices create thriftiness.
● In many ways,the market is an effective
allocative device. Prices encourage thrift
and careful choices among competing
goods. Goods and services are allocated
to those most willing to pay.
● Prices of the products creates efficient
means of allocation and distribution.
● The distribution of goods and services
may not be equitable.
● EQUITY: a value–laden concept and
economists cannot say whether a
particular distribution is fair. There are
certain results of the market that may not
seem fair to some of us.
● The market place is often efficient, but not
necessarily equitable.
● To illustrate this idea, let us analyze the
pharmaceutical companies that create
covid-19 vaccines., and these are Pfizer
and Sinovac.
● The efficacy of Pfizer is 95% while
Sinovac has 54%.
The following table shows their respective
prices:
MARKET FAILURES AND GLIMPSE OF
THE FUTURE
● The market performs useful functions. In
addition to efficiency a market–based
economy gives economic incentives and
tends to be highly productive.
● The combination of competition and
proper price signals encourages efficient
production of the products desired by
consumers in the least costly manner.
● Despite this, markets can also fail, the
existence of many market failures does
not imply that the market we work in is in
itself a failure.
● This is the reason why the government
involved in the market so as to assure that
the needs of the society are met. And
some of this are the following:
1. Public Goods and Services
➔ Public goods and services
have unique characteristics
that make it unlikely that the
market will provide enough of
them. As a result, the
government often provides
them.
➔ EXAMPLES: National defense,
public libraries, highway
construction, crime prevention,
public education, and others.
➔ If a private consumer does buy
such a good or service, it is
difficult to keep people who do
not pay for the product from
using it.
2. Spillovers
➔ Occurs when some cost (or
benefit) related to production or
consumption “spills over'' onto
people not involved in the
production or consumption of
the good. An example of this
would be Pollution.
➔ Other goods and services
provide spillover benefits to
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 society. An example of this
would be education.
3. Inequity
➔ Aside from discrimination,
poverty and inequality of
income distribution are also
issues of equity.
➔ We may argue that the inability
of low-income people to meet
their basic needs is unfair.
➔ Housing, health care, and
social security also raise issues
of equity.
4. Market Power
➔ Competition protects us from
unreasonable prices.
➔ Without competition, a single
supplier or the price fixing
group possesses market
power, which is the ability to
influence the market price of its
product.
5. Instability
➔ The factors that determine
whether our nation will be on
the production possibilities
curve (operating at full
employment) or below the
production possibilities curve
(with unemployed resources)
are very volatile.
➔ Because prices and
employment tend to fluctuate,
many say that our market
economy is inherently
unstable.
➔ In the process, our government
and our central banking system
can intervene in many ways to
ensure greater stability of
prices and employment.
SUMMARY
★ Economics deals primarily with scarcity;
how shall we allocate our limited world
resources to satisfy our seeming unlimited
human wants?
★ Limited resources translate into limited
production possibilities.
★ The production possibilities curve shows
us alternative combinations of the
maximum amounts of two different goods
that can be produced during any particular
time period, assuming full use of our
technology and resources.
★ Economic growth over time results in
increasingly higher levels of production of
all goods.
★ Economic liberals prefer a large role for
government in the economy, and
economic conservatives prefer a small
role.
MODULE 1.B
INTRODUCTION
● Greater emphasis was given in this area
of economic development during the
postwar era and it continued in the new
millennium.
● The “economic miracle” that spanned for
several decades followed by a severe
financial and economic crisis. Poverty and
economic inequality remained even better.
● EAST ASIAN MIRACLE: a showcase of
development up until the Asian crisis.
● Asian crisis created a number of questions
about the continued viability of a rapid
growth profile for the region.
● Economies have begun to rebound.
● The financial crisis also hampered
progress in reducing poverty and
addressing other social issues.
● The human development gains in health,
education, poverty, and equality, and the
distribution of income achieved by East
Asia in the two decades prior to the crises
was eroded to some degree, resulting in
slower growth.
ECONOMIC DEVELOPMENT IN ASIA
● Social impact of the crisis has been
substantial.
● Future development will depend upon
many factors, including public policy and
developments in industrial countries.
● This course looks at both the history and
the future outlook for the region.
DIFFERENCE BETWEEN DEVELOPMENT
ECONOMICS AND OTHER BRANCHES OF
ECONOMICS
● Economic development concentrates on
economies that have low per-capita
incomes.
● In economic development, we used the
analytical tools and methods developed in
other branches of economics such as
growth theory, macroeconomics,
microeconomics, labor economics, fiscal
and monetary policies just to name a few.
● These tools of analysis are applied to
problems and challenges of developing
countries.
● Economic development considers the
experience of industrial countries such as
North America, Japan, Australia/New
diamla, foronda, gan 4
 Zealand as relevant for analyzing the
process of economic growth.
● It looks at all of the other branches of
economics within the context of economic
development.
● It uses the tools developed in other
branches of economics to analyze the
problems and challenges of economic
development.
improvement in the quality of lives of its
people.
● Other methods such as purchasing power
parity can also be used to compare
standards of living.
OTHER MEASURES

MEASURING GROWTH & DEVELOPMENT

● For some time, economic development
was considered to be synonymous with
economic growth.
● However, these two concepts namely
economic growth and economic
development are not necessarily the
same. The concept of economic 1. HUMAN DEVELOPMENT INDEX (HDI)
development is broader and much more
encompassing than economic growth, and
relates to levels of social and humanitarian
achievement and income distribution, as
● According to the United Nations,
well as a narrower measure or per-capita
Human development index (HDI) is
income
defined in the following manner:
● Using a measurement of the amount of
● The HDI was created to emphasize that
goods and services produced in an
people and their capabilities should be
economy in a year, we can get some idea
the ultimate criteria for assessing the
about the standard of living.
development of a country, not economic
● When the value of goods increases over
growth alone. The HDI can also be
time, there is economic growth.
used to question national policy
● Gross domestic product (the total
choices, asking how two countries with
production in an economy) or gross
the same level of GNI per capita can
national product (GDP plus net factor
end up with different human
income from abroad is used as a measure
development outcomes. These
of the nation’s income or production.
contrasts can stimulate debate about
● Use of GDP and GNI and exchange rate
government policy priorities.
comparisons lead to patterns of growth
● The Human Development Index (HDI)
over time.
is a summary measure of average
○ GDP/GROSS DOMESTIC
achievement in key dimensions of
PRODUCT – total value of
human development: a long and
production in an economy. GDP
healthy life, being knowledgeable and
expenditure method is regarded as
having a decent standard of living. The
the frequently used methods. The
HDI is the geometric mean of
formula for calculating GDP is
normalized indices for each of the three
expressed as:
dimensions.
GDP = C + I + G + (X – M)
● The health dimension is assessed by
life expectancy at birth, the education
○ GROSS NATIONAL PRODUCT -
dimension is measured by means of
is GDP plus net factor income from
years of schooling for adults aged 25
abroad is used as a measure of
years and more and expected years of
the nation’s income or production.
schooling for children of school entering
age. The standard of living dimension is
● Economic development means economic
measured by gross national income per
growth accompanied by an improvement
capita. The HDI uses the logarithm of
in the people’s quality of life.
income, to reflect the diminishing
● However, the experiences of many
importance of income with increasing
economies have shown that economic
GNI. The scores for the three HDI
growth can occur without any
dimension indices are then aggregated

diamla, foronda, gan 5

 into a composite index using geometric
mean.
➔ It has three components: per-capita
income, life expectancy at birth, and
level of educational attainment that
combines adult literacy and education
enrolment rates.
➔ The HDI is developed as a ratio of a
particular country to the most
developed country. It varies between
zero and one.
SIGNIFICANCE OF HDI
❖ is an index used to rank
countries by level of ‘Human
Development’,
❖ broadened prism for viewing
human progress,
❖ governments often look at the
HDI as an instrument for
assessing their performance
against that of neighboring
countries,
❖ a snapshot of average national
performance in human
development,
❖ useful entry point into the rich
information contained in the
subsequent indicator tables on
different aspects of human
development.
CALCULATING HDI:
a. LIFE EXPECTANCY: The life expectancy
index is calculated using a minimum value
of 20 years, the life expectancy needed for
a society to survive and the maximum
value is fixed at 85 years, as that can be
interpreted as an aspirational goal for
societies. These maximum and minimum
values are fixed goalposts adopted in the
2014 HDR.
FOR EXAMPLE:
What is the Life expectancy index in
Ghana, if the actual value of life
expectancy at birth in Ghana is 76.3?
b. LITERACY RATE: - Ability to achieve
knowledge.
EDUCATION COMPONENTS
INDICATORS
1. EXPECTED YEARS OF SCHOOLING
– maximum 18m are based on
enrolment by age at all levels of
education, and population of official
school age for all levels of education.
2. MEAN YEARS OF SCHOOLING –
maximum 15 are based on the
duration of schooling at each level of
education.
NOTE: The minimum value of 0 years is
used for both education variables.
FOR EXAMPLE:
Determine Ghana’s Literacy rate when:
The country’s Expected years of
schooling, 16.4
Mean years of schooling, 9.8
c. INCOME PER CAPITA - The standard of
living dimension is measured by gross
national income per capita. The HDI uses
the logarithm of income, to reflect the
diminishing importance of income with
increasing GNI.
➔ The income component is
measured using the natural
logarithm of GNI per capita
adjusted by PPP.
◆ minimum value is $100
◆ maximum value is set at
$75,000.
FOR EXAMPLE:
● HUMAN DEVELOPMENT INDEX:
arithmetic mean of the three dimension
indices. It was developed by Mahbub ul
Haq and Amartya Sen and was adopted
by the United Nations Development
Program to emphasize that people and
their capabilities should be the ultimate
criteria for assessing the development of a
country, not economic growth alone.
diamla, foronda, gan 6
 ● VERY HIGH HUMAN DEVELOPMENT:
Countries in ranks 1-66

STEP 1: Create dimensional indices

Compute for the dimension indices given the

following data set:

PHILIPPINES’ HDI
Life Expectancy at 71.2
birth (years)
● HIGH HUMAN DEVELOPMENT:
Expected years of 13.1 Countries in ranks 67-119
schooling

Mean years of 9.4

schooling

GNI per capita 9,778

STEP 2: Aggregate the dimensional indices ● MEDIUM HUMAN DEVELOPMENT:

Countries in rank 120-156

● Cut-off points for HDI Classification

diamla, foronda, gan 7


● LOW HUMAN DEVELOPMENT:
Countries in ranks 157-185
2. HEALTHY LIFE EXPECTANCY
● According to World Health
Organization (WHO) Healthy life
Expectancy is defined by the
following:
● It summarizes the expected
number of years to be lived in full
health. The years of ill – health are
weighted according to severity and
subtracted from the overall life
expectancy rate to give the
equivalent years of healthy life.
3. GREEN GNP
● One of the more recent approaches
developed to address the inherent
shortcomings of GDP and GNI as
growth and development measures
is based on what is known as a
”green” system of national
accounting.
● It is the national income measures
that are adjusted to take into account
the depletion of renewable and
non–renewable natural resources,
and environmental degradation.
● The types of adjustments made to
standard GDP would include the
cost of exploiting a natural resource
and valuing the social cost of
pollution emission.
● Others suggest that imposing
“defensive” expenditures for the
environmental protection and
compensation for environmental
damage should be deducted.
● The argument here is that these
costs would not have been incurred
if the environment had not been
damaged.
MAKING COMPARISON BETWEEN
COUNTRIES
1. EXCHANGE RATE METHOD
● The Philippine peso is compared
with a foreign currency. The value of
the GDP and GNI per capita would
then be valued accordingly.
● Depends only on the relative prices
of traded goods.
● EXAMPLE:
★ USD$-Php 52 (GDP is
expressed in terms of USD$)
2. PURCHASING POWER PARITY (PPP)
METHOD:
● PPP is defined as the number of
units of the country’s currency
required to buy the same amount of
products that a American dollar
would buy in the U.S.
● Because the PPP method uses a
basket of many goods and
calculates the relative price of these
diamla, foronda, gan 8
 goods, many economists view this
3 2 60 20 30
as a better measure of the relative
standards of living. 4 2 80 20 20
● It gives higher estimates of living
standards. 5 2 96 19 15
● Develops a cost index for
comparable baskets of consumption 6 2 108 18 13
goods in the local currency and then
compares with prices in the US for 7 2 112 16 4
the same set of commodities.
8 2 112 14 0
SUMMARY
● Economic development is a special field of TWO KINDS OF TECHNICAL PROGRESS
economics which concentrates on the 1. EMBODIED TECHNICAL PROGRESS
study of countries which are in the process ● has something to do with the changing
of moving upward from low levels of nature of the inputs into the production
income, and social progress. process
● Uniqueness of the Asian development ● These would include:
progress (Asian Miracle Economies). a. Highly educated workers
● Indicators of economic growth and b. More highly skilled and
development. computer-literate
c. The result of innovation and
MODULE 3 invention
GROWTH AND THE ASIAN ● These have changed the nature of K
EXPERIENCE and L input and the way they are
combined
COMPONENTS OF INCOME AND OUTPUT
● Output is derived by combining various 2. DISEMBODIED TECHNICAL PROGRESS
factors of production - land, capital labor ● relates to the way factors are
and entrepreneur. combined together in the workplace
● The production function is a useful tool for such as:
analyzing the process of economic growth. a. Management or organizational
This function relates the inputs of the inventions (Computer technology)
production process, such as labor (L) and b. Internet and the flexibility of
capital (K), to the output or income (Y) production process has increased
from the process. ● EX: Lean manufacturing, Warehousing
Y = f (K,L) management system, Inventory
management system
LAW OF DIMINISHING RETURNS
● As each worker acquires more capital, it TOTAL FACTOR PRODUCTIVITY (TFP)/
follows that there will be diminishing MULTIFACTOR PRODUCTIVITY
returns in the capital. ● Measures the embodied and disembodied
● Each additional worker brought in will not technical progress
add as much to output as the one that ● TFP pertain to the efficiency with which
came before are the inputs are combined to produce
● If these process were to continue for a output
long-enough period, growth would slow to ● Growth in output unaccounted for by
zero growth of labor and capital in a standard
production function
● Efficiency gains can be due to a number of
Labor Capital Output APL MPL factors including:
(L) (*K) (Q) Product ➔ Greater economies of scale
(impact of own technology)
0 2 0 0 0 ➔ Better management
➔ Marketing or organizational
1 2 10 10 10
abilities
2 2 30 15 20 ● TFP and MFP in the production function
are denoted as A.

diamla, foronda, gan 9

 ECONOMIC EFFICIENCY
PRODUCTION POSSIBILITIES FRONTIER AND
TECHNICAL PROGRESS (A)
● The production possibility frontier (PPF) is
a curve depicting the best possible
combination of goods that is produced in
an economy.
● Best in the sense that the combination
utilizes all available inputs efficiently and
minimizes waste;
● general expression of the production
function
Y = f (K,L,A)

● the formula for the growth rate of income

g(Y) = g(K) W (K) + g(L) W (L) + A

Where:
g(Y) = growth rate of income
g(K) = growth rate of capital inv
g(L) = growth rate of labor
W(K) , W(L) = weighted shares of capital
and labor in the economy
A = efficiency factor
WORKING THROUGH AN EXAMPLE
● In Asia, much of the dynamic efficiency
resulted from a shift from the less efficient
agricultural sector to a more efficient
industry;
● Dynamic efficiency can also result from
new innovation and inventions which
boost total factor productivity

GROWTH THEORIES
● Explains how the process of economic
development takes place
● Set of techniques on how to increase the
country’s income
● Many aspects of the theories enumerated
apply to the asian experience (low level
income - high level of PCI)

A. KEYNESIAN THEORY
1. Include Rostow’s, Harrod-Domar Growth
models
2. These models stress the accumulation of
capital
3. The models does not explicitly considers the
law of diminishing returns

KEYNESIAN HARROD (1939) - DOMAR (1946)

MODEL
● The key equations that govern the Harrod
Domar model include (Ray, 1998)

Y(t) = C(t) + S(t)

Y(t) = C(t) + l(t)
S(t) = l(t)

● From this equation, it implies that all

savings in a Harrod Domar world,
translate to investment

diamla, foronda, gan 10

ASPECTS OF ECONOMIC PERFORMANCE EXAMPLE:
● High levels and growth rates of savings
and investment in miracle economies
● Both of these variables increased
dramatically as a percent of income

THE HARROD DOMAR MODEL DEPENDS ON:

Rate of Growth of GDP = Saving Ratio
Capital Output Ratio

SR = The saving ratio is the proportion of national

income that is saved.

Where:
S = Savings Based on the model therefore the rate of growth
Y = Income in an economy can be increased in one of two
ways: increased level of savings and increase the
1. The economy’s rate of growth depends on productivity of capital
the level of national savings
2. Higher savings enable greater investment in B. SOLOW NEOCLASSICAL MODEL
capital stock
3. This is the growth rate at which all saving is
absorbed into investment

CAPITAL OUTPUT RATIO (COR) = Productivity

of Capital Investment

Where:
K = Capital
Y = Income

1. The capital-output ratio is the amount of

capital needed to increase output
2. The capital-output ratio also needs to take
into account the depreciation of existing
capital.

EXAMPLE
Find the Steady State of Equilibrium of
capita-labor or K assuming that Depreciation is
0.05 and a savings rate of 0.10

1. Solve for K

diamla, foronda, gan 11

2. Solve for SSE for Y
Y=k½
Y=4½
Y=2
3. Find SSE for Consumption C
C = (1-S) Y
C = (1 - .10) 2
C= (1.8)
4. Find SSE for Investment i
5. Double check with closed economy equation
Y=C+i
SSE = 1.25 x 0.05 = 0.0625
C = 1.25 - 0.0625 = 1.1875
Y = 1.25
C. THE BALANCE OF POWER THEORY
● One of the eldest and most fundamental
concepts in international relations theory
● The theory were based on the assumption
that poor Southern economies were being
exploited by the rich industrial northern
countries
● The theory assumes that when incomes
are low, these countries will not be able to
save.
D. STRUCTURALIST APPROACH
● Models economic growth as a process of
shifts in resources
● Stresses rigidities that hinder this shift and
studies how the shift in output among
sectors takes place over time as
development progresses
● A systematic shift in output has been
observed in the industrial countries, as
well as in many developing countries
● From agriculture, industry to service sector
● US have a very large proportion of GDP in
the service sector
E. LEWIS-FEI-RANIS MODEL
● named after the three economists that
developed a two sector model- a modern
and a traditional sector
● Explains how the process of
industrialization takes place and how
inefficiencies can rise
F. TWO SECTOR MODEL GROWTH
● The beauty of the LFR model is that it
describes many of the characteristics of
the Asian economies when they were just
beginning on the path to rapid
development in the 1960s and 1970s
● That is why it has become so popular
among development economists studying
in asia
G. NEW GROWTH THEORY
● Developed by younger economists,
dissatisfied with the Solow-Swan model
● Attempts to endogenize technical change
by using external economies and
spillovers
● Effects of technology and education can
help generate increasing returns to scale
and drives growth through diminishing
returns
● One important feature of this growth
theory is the mechanism by which
technology is transferred from one firm to
another in an industry within the country,
and then across international border
MODULE 3.B
THE ASIAN GROWTH MIRACLE
● For the last forty years, a group of
countries in East and Southeast Asia have
grown at remarkably high rates.
● Japan led the way, beginning right after
World War II.
● It was joined by Thailand, Taiwan, Korea,
Singapore and Korea in the 1960s.
● Southeast Asia followed in the 1970s.
POLICY ENVIRONMENT BEFORE THE
TRANSITION TO RAPID GROWTH
● The policy environment in most
developing countries throughout the world
stressed import substitution policies for
industry.
● The import substitution theory was that
developing countries had a comparative
advantage in primary products and so
they should export these products.
● The import substitution theory also argued
that since incomes were low, savings rates
were also low. Inflows of investment and
financial aid were needed to lift growth.
diamla, foronda, gan 12
 ● To minimize on foreign exchange outflows,
industries that substituted for some
imports were promoted by government
policy.
● Such a strategy, which was followed for
several decades after World War II in
many developing countries, simply
perpetuated the cycle of North-South
trade and reinforced protectionist policies
that contributed to a lack of competition
and economic inefficiency.
POLICY ENVIRONMENT
● What Japan and later the countries of
East Asia did was to begin to develop an
environment that stressed outward looking
trade policies and the acquisition of
foreign technology.
● In the case of Japan, many believe it was
an attempt to develop a mercantilist
strategy to help it recover its influence
after the defeat in World War II.
THE ASIAN GROWTH MIRACLE
● PRIMARY FACTORS. These primary
factors in these countries form the
common denominator of the Asian Growth
experience and they are fundamental
determinants of sustained economic
growth during the period.
✩ OPENNESS
✩ MACROECONOMIC STABILITY
✩ LABOR MARKET FLEXIBILITY
✩ EDUCATION POLICIES
● SECONDARY FACTORS. These were
secondary factors that were sometimes
present and sometimes not. They
contributed to rapid growth but they varied
from country to country.
✩ INITIAL CONDITIONS
✩ SECTOR POLICIES
PRIMARY FACTORS
A. OPENNESS
● Outward looking policies and emphasis on
exports and acquisition of foreign
technology.
● First, some industrial capability was built
up by focusing on import substitution in
industries with ties to agriculture -
footwear, food processing and textiles.
● Second, after some years, industrial policy
shifted to promoting external markets.
● Initially, this focused on extending the
scope of the industries that were
producing for the domestic markets such
as textiles and apparel, leather products
and footwear and food processing.
● In Southeast Asia, the focus was also put
on rubber, sugar, coconut and palm oil
products as well as some specialized
textile products such as silk.
● Slowly the emphasis shifted toward labor
intensive industries that were not
necessarily tied to the agricultural base
such as electronics assembly and apparel.
● SHIFTED TO PROMOTING EXTERNAL
MARKETS: focused on extending the
scope of the industries that were
producing for the domestic markets
➔ focused on extending the scope of
the industries that were producing
for the domestic markets
● NON-TARIFF BARRIERS: including
bureaucratic procedures and
graft/corruption as well as import bans on
some items, were also reduced
● The shift from import substitution to export
promotion was led by a shift in the trade
regime so that there were lower tariff rates
on exports and imports (see Table 2.3).
● Transformation to labor intensive export
oriented industry was supported by flow of
foreign direct investment – initially from
Japan and the US, particularly in Korea,
Taiwan and the Philippines.
● Later the volume increased and more
flows began coming in from Europe.
● A virtuous cycle of growth was created by
this shift in emphasis from import
substitution to export promotion (see
Tables 2.4 and 2.5).
● In South Asia, on the other hand, the shift
occurred much more slowly.
● Technological transfer served to reinforce
the shift in export emphasis.
diamla, foronda, gan 13

B. MACROECONOMIC STABILITY
● Foreign technology acquired by buying
from foreign companies under license.
● By copying it without license – sometimes
legally and sometimes not.
● By entering into joint ventures (FDI).
● East Asia (Korea, Japan, Taiwan) by and
large followed the first route while
Southeast Asia followed the second.
● The flow of FDI increased following the
Plaza accord in 1985 when the yen
appreciated and Japan began to move
some of its labor intensive industries
offshore.
● Technology played a crucial role in Miracle
Economies growth in income and is a
function of growth in inputs and TFP.
THE ROLE OF FOREIGN TECHNOLOGY
1. Industrialized economies attracted and
used foreign technology through licensing
2. Japan sent missions overseas to learn the
most updated technology
3. In other Asian countries, technology was
acquired through foreign direct
investments
4. Countries spent on R & D to adopt
overseas technology which improved
efficiency
● Governments generally followed policies
that created and supported a competitive
environment for export oriented industries
but not necessarily for the domestic
market. Japan is a good example of the
latter.
● Governments supported this market-led
development through the pursuit of:
➔ Prudent fiscal and monetary policy
➔ Low inflation environment
➔ Emphasis on human development
➔ Physical and social infrastructure
● The amount of government intervention
didn’t seem to have a direct effect on
performance.
● There was a lot of government
intervention in the industrial and financial
sectors in some countries and little in
others.
● In Korea, Japan and Singapore, there was
a lot while there was less in Malaysia and
Taiwan.
● In Hong Kong and Thailand, on the other
hand, there was virtually no intervention.
● What was important was the efficiency
and incorruptibility of the bureaucracy.
● In the Philippines and Sri Lanka, policy
environments were similar to those in the
successful countries but growth was
slowed by other factors such as
corruption, lack of political will, corruption
and domestic unrest.
● The efficiency of government as well as
policies followed were important. Taiwan
and Singapore are good examples.
● Efficient governments are characterized
by:
➔ little rent seeking
➔ salaries are competitive
➔ promotions are based on
performance not on seniority,
patronage or crony connections.
● Some policies such as financial repression
and directed government lending
programs were wasteful.
● But the flow of resources for investment
were substantial and the wastefulness and
distortions created by these policies didn’t
surface until the 1990s bubble broke.
diamla, foronda, gan 14
C. EDUCATION AND LABOUR PRODUCTIVITY
● Education (based on new growth theory)
➔ played a critical role in both the
transition to an export led growth
strategy and to the ability to
sustain it
➔ By 2000, some of the educational
advantages of Asia had began to
erode
➔ Rapid investment growth and
technological transfer increased
capital per worker
➔ Workers’ education to adopt to
technological change increased
productivity
● There were two reasons for the fading of
advantages despite having education.
➔ diminishing returns since more
resources had to be devoted to
secondary and tertiary education.
➔ rapid rate of income growth that
tended to outstrip the corresponding
growth in human development.
● Behrman and Schneider concluded that
schooling attainment in miracles
economies was not particularly
outstanding.
D. LABOR MARKET FLEXIBILITY
● one where firms are under fewer
regulations regarding the labor force
● firms can therefore set wages, fire
employees at will and change their work
hours
● The conclusion is that labor market
flexibility has to be considered along with
education.
● The miraculous economies did not have
strong unions until recently (Korea) and
weak minimum wage legislation.
● ILO rates the miracle economies as
among those with the most flexible labor
markets.
● Mobility from rural to urban is also high.
SECONDARY FACTORS
A. DIFFERENCES IN INITIAL CONDITIONS
● Initial conditions played a part in the
success of the miracle conditions.
● Land, income and wealth distribution in
the miracle economies were generally
more even than in other countries and
regions.
● Average educational attainment was high
at the beginning of the high growth period.
B. SECTOR POLICY
● Sector policies were influential to the
growth of the miracle economies.
● Agricultural sector policies were not
particularly onerous. There were taxes on
agriculture but the sector was still viable
as we will see in Chapter 4.
● Industrial policies were benign and
competition flourished in most countries.
➔ In Korea and Taiwan, “infant
industry” protection policies were
strictly enforced and favored export
industries were monitored for
efficiency and export performance.
➔ Subsidies were withdrawn if
performance was below
expectations.
➔ Government policies that supported
capital intensive industries such as
subsidized credit to compete in
international markets
● There is considerable debate about
whether industrial policy in these two
countries was beneficial or not.
● Whatever the outcome of these
discussions, it is a fact that growth was
rapid in both countries.
A. AGRICULTURAL SECTOR POLICIES
● Gradual then more rapid increase
in saving and private investment
rates
● Reduced tax on agricultural
product exports
● Provision of support to crops with
greater profit potential
● Green revolution provided raise in
rural incomes
● Enlargement of irrigated areas
B. INDUSTRIAL POLICIES
● Government policies that
supported capital intensive
industries such as subsidized
credit to compete in international
markets
● Subsidies were given
ASPECTS OF ECONOMIC PERFORMANCE
1. High levels and growth rates of savings
● Both of these variables increased
dramatically as a percent of income (see
Tables 2.6 and 2.10).
● Furthermore, the saving-investment gap
was small or even negative for some
countries (see Table 2.11).
diamla, foronda, gan 15
 REASONS FOR SLOW GROWTH IN
SOUTH ASIAN COUNTRIES
● Not open to trade
● Inflexible labor markets in spite of high
level of employment
● Educational attainment was lower than in
the miracle economies
● Laxity in meeting the market test for
international competition and in meeting
production and efficiency targets

CONVERGENCE OF INCOME
Question:

The Solow model tells us that incomes will

converge to a steady state irrespective of where
they started out.

This assumes that the technical progress

coefficient remains constant across all countries.

Is this a realistic inference?

● To test this hypothesis of absolute
convergence, we can see if there is a
relationship between per capita income in
an initial period and the growth in income
in successive periods.
● Using logs to denote growth we have, for
the period 1960 to 1990,

A. Tests of this model for several sets of

countries shows that it doesn’t hold for a
heterogeneous group of countries around
the world.
B. It does hold for OECD countries and for
OECD and Asian countries together.
C. It does not hold for developing countries in
general.
D. A less restrictive form of convergence is
called conditional convergence.
E. In this form of the model, we allow the
various parameters of the growth
equations to change between different
countries or groups of countries
F. There would still be a convergence in
growth rates of income but the level of
income in the steady state would differ.
G. This level would depend upon saving
rates, population growth rates and
2. Increased productivity in miracle depreciation rates of capital.
economies. H. Tests of this model show that there is still
● Measures of TFP show a modest a lot of unexplained variation in per capita
contribution to output growth until the income, although variations in population
middle of the 1980 and an acceleration growth rates and saving rates did explain
afterwards. about half of the variation in per capita
● ACCELERATION: the combined result of income across countries.
previous transfer of technology and more I. However these results imply that the rate
rapid FDI following the Plaza accord of convergence is very slow.
diamla, foronda, gan 16
 J. What is likely is that a number of other
factors are involved aside from the saving
and population growth rates, such as the
spread of technology and the role of
education.
K. There is evidence that there is
convergence within groups of countries
with similar geographic and economic
similarities such as the European Union or
countries in East Asia.
L. However there is less evidence that there
is convergence between rich and poor
countries
M. For example globally there is strong
evidence for divergence. Rich countries
get richer and poor countries get poorer.
N. This does not hold within countries
although the convergence is slow.
O. German states and Japanese prefectures
and states of the US are converging.
CONVERGENCE
● Catch up effect
● Process by which poorer economies per
capita incomes will tend to grow at faster
rates than richer economies
● As a result, all economies should
eventually converge in terms of per capita
income
● Whether countries from the lower level
end of the spectrum will ever catch up with
the development levels of the
industrialized economies
ABSOLUTE CONVERGENCE
● Imply that all countries or regions are
converging to a common steady state
potential level of income
THE SOLOW MODEL
● says that all economies will converge to
the same level of per capita capital and
per capita income irrespective of where
they started out
● Countries with low income in 1960 would
tend to grow faster than from 1960-1990
than countries with a high income in 1960
CONDITIONAL CONVERGENCE
● less restrictive form of convergence
● Various parameters of the growth
equations are allowed to change between
different countries or groups of countries
● There would still be a convergence in
growth rates of income but the level of
income in the steady state would differ
● Level of income would depend upon
saving rates, population growth rates and
depreciation rates of capital
● Results from this model show that there is
still a lot of unexplained variation in per
capita income & imply that the rate of
convergence is very slow.
● NOTE: There is evidence that there is
convergence within groups of countries
with similar geographic and economic
similarities such as the European Union or
countries in East Asia
➔ However there is less evidence
that there is convergence between
rich and poor countries
● Table 3.14 Income Convergence among
Developing Regions, Coefficient of
Variation in Per Capita income
(1960-1990)
● Developing regions show no such
tendency to converge since it is diverging
further from both the industrial countries
and other developing countries and
regions.
SUMMARY
● Review of the various economic growth
theories.
● Application of the growth theories to the
Asian growth miracle.
diamla, foronda, gan 17
 ● The importance of primary and secondary
factors in the success of the Asian miracle
economies.
MODULE 4.A
AGRICULTURE & ECONOMIC
GROWTH IN ASIA
INTRODUCTION
● Economic development has often been
equated with the change in the economy
where the importance of agriculture is
increasingly diminished in favor of
manufacturing and service industries.
● Agriculture is widely acknowledged as a
crucial element in the progress of
structural transformation.
AGRICULTURE
● At the heart of a country’s economic
structural transformation
● Serves as catalyst to the economic growth
of a country
● No country has made a transition to
high-income status without successful
agricultural transformation
● Agriculture Reforms in 1970s caused
economic development for countries
● NAFTA: North American Free Trade
Agreement
➔ US, Canada and Mexico
➔ Reduce tariff barriers in terms of
international trade
THE ROLE OF AGRICULTURE IN
ECONOMICS
A. FOOD
➔ Philippines manufactures its own
agricultural needs Agriculture
➔ Plays a key role in the process of
economic development
➔ Rich source of factor inputs to feed
the growing labor force in the
industrial sector and other modern
sectors
B. WORKFORCE/LABOR
➔ Employment
C. MANUFACTURED GOODS FROM
URBAN SECTOR
D. CAPITAL
➔ Major source of investment and
capital formation
➔ Capital comes from savings and
savings come from income
E. TECHNOLOGY & EXPERTISE
F. EQUIPMENT & INTERMEDIATE
THROUGH FOREIGN EXCHANGE
AGRICULTURE & ECONOMIC GROWTH
● The agricultural sector is a rich source of
factor inputs to feed the growing industrial
and other modern sectors of the economy.
1. LABOR. The agricultural sector is virtually
the only source of increased labor power
for the urban sector. Importation of labor
resources is another option, but it can
hardly be sufficient as a short-term
solution.
2. CAPITAL. Capital comes from invested
savings and saving from income. It is
common for developing countries to import
capital in the form of aid or private
investment to speed up the rate of capital
accumulation, and hence the growth of the
economy.
3. FOREIGN EXCHANGE. Agricultural
products serve as the principal source of
foreign exchange. The agricultural sector's
ability to supply foreign exchange enables
the economy to import capital equipment
and intermediate goods necessary for its
continued growth. The availability of
foreign exchange also facilitates the inflow
of technology and industrial management
expertise.
4. OUTPUT. The rural population depends
on products from the industrial sector that
are directly linked to the type of income
distribution current in the economy. If
income distribution is highly uneven, the
large majority of the rural population will
be poor. However, if there is a greater
degree of equality in the distribution of
income, the living standards of rural
families will be higher and this can
increase demand for products from the
modern sector.
LEWIS FEI RANIS MODEL
● Traditional Sector
● Modern Sector
● Best illustrates and incorporates
agriculture in the model
● If an economy has strong agricultural
formation
➔ This will pave deve for industrial
economy
➔ Because it is need to fuel investment
in industrial
● ARTHUR LEWIS: Industrial revolution and
agriculture revolution go together
● OTHER ECONOMISTS: Agriculture is
stagnant and do not show development
● Development in agriculture paves the way
for the development of industry and
services
diamla, foronda, gan 18
 ● Surplus from the increase in profitability of
AGRICULTURAL TRANSFORMATION IN agriculture fueled the beginning of
ASIA industrialization.
● Sectoral Distribution of GDP Employment
of Labor Force TENDENCY FOR AGRICULTURE’S SHARE
OF INCOME
● First, there is a low income elasticity of
demand for agricultural products, often
called ENGEL’S LAW. As income
increases, a smaller portion of this
increase in income is spent on
agricultural products.
● Second, given that demand is sluggish
because of the engel effect, if
productivity increases in agriculture
are relatively strong, then it is likely
that the terms of trade for agriculture in
international markets will begin to
decline.

GROWTH OF AGRICULTURE & GDP IN

THE 70’S

● In some countries, productivity came from

expansion of land/irrigation and in others
THE from improved yields using better crop
DECLINE OF THE AGRICULTURE SECTOR varieties
● appeared to be directly proportional to
overall rate of economic growth MODULE 4.B
● Agriculture’s share of output declined AGRICULTURAL
gradually from over 60% in the 1950s in
most Asian countries to less than 20% by
TRANSFORMATION IN ASIA
the 1990s
AGRICULTURAL DEVELOPMENT IN
GROWTH IN AGRICULTURE MONSOON ASIA
● was high in countries where overall growth ● Monsoon weather cycle in Asia led to
was high and vice versa reliance on rice production, which is well
● Rapid growth in both agricultural and adapted to growing where there are large
overall economy has to do with the initial amounts of rainfall and flooding.
conditions that prevailed in these ● Traditional farming was practiced
countries in the 1970’s post-war, requiring more intensive
● During those times, the industrial manpower specially during planting and
economies were in the early stages of harvesting.
industrialization ➔ quite efficient, given its limitations
➔ In between planting and
PRODUCTIVITY IN AGRICULTURE harvesting, farmers had to seek
● Generally higher than that of the industry employment elsewhere. Wherein,
at the beginning of the process when OPPORTUNITY COST OF
industry is still weak and in need of LABOR is high during planting and
protection from foreign competition. harvesting, since industries cannot

diamla, foronda, gan 19

 hire full-time employees due to
intermittent demand of labor.
● As a result of intermittent nature of
workforce availability, the industries that
developed in the rural areas were also
small and labor-intensive.
● There are few opportunities to supplement
their incomes by growing secondary
crops, and multiple cropping was limited
because of lack of irrigation.
SHIFT FROM AGRICULTURE TO
INDUSTRY
● Two keys: irrigation and higher yielding
varieties increases agricultural productivity
1. IRRIGATION. More extensive irrigation
helped to regulate the level of water in the
fields and also allowed farmers to plant
more crops with a concomitant increase in
income with the same number of workers.
2. HIGHER-YIELDING VARIETIES.
Designed for more stable water level,
having a shorter stem and more fruit per
plant, and were therefore more suitable for
irrigated land.
development, and the sector was
not “squeezed” as it was in some
other developing region
➔ Nevertheless there were still taxes
on the sector which were used to
subsidize growth in other sectors
of the economy, particularly
industry.
EFFICIENCY OF TRADITIONAL
AGRICULTURE
TRADITIONAL AGRICULTURE
● Dates back hundred years or more ago
● Antiquated methods of cultivation
● Trial and error
INDIAN EXPERIENCE
● Refined methods of cultivation
● Crop rotation
● Water use
● Farm animals in soil fertility
● Varieties in weather factor
● Availability and quality of traditional seeds
and other varieties

AGRICULTURAL SURPLUS WAS

IMPORTANT
1. Farmers earned higher income, capable of
buying consumer goods.
2. Some farmers can afford to migrate to
cities to work in industries without
diminishing agricultural output.
3. Added income is used to adopt more
labor-saving harvesting and cultivation
techniques.

ADOPTION OF MORE MODERN

TECHNOLOGY
● It was slowed by the risk averse behavior
of small farmers
● Several new developments were key
components in the transformation to
higher yielding and more progressive
agriculture
➔ included adoption of higher yielding STUDIES IN DETERMINING IF
varieties, application of fertilizers,
TRADITIONAL AGRICULTURE WAS
herbicides and pesticides and
greater use of irrigation
EFFICIENT, AN INDIAN EXPERIENCE
● COBB-DOUGLAS PRODUCTION
● Other developments didn’t help much.
FUNCTION: Variable Factors of
These included changes in farm size and
production are efficiently allocated.
in land tenure.
Biological assets are not efficiently
➔ Far reaching land reform was
allocated.
difficult, if not impossible, and
● ECONOMIC MODEL: All resources were
changes in tenancy arrangements
allocated efficiently.
didn’t bring about any uniformly
● LINEAR PROGRAMMING: The potential
significant gains in productivity.
output of agriculture was higher than the
➔ Macroeconomic policies were
actual output. There are inefficiencies but
generally supportive of agricultural
diamla, foronda, gan 20
 these could be removed by improving DISINCENTIVES TO INCREASING
coping patterns. AGRICULTURAL PRODUCTIVITY
➔ Potential output > actual output ● Landlords secured all the gains
➔ Tentative conclusions: ● Government guaranteed price was not
Traditional Agriculture-Efficient but paid
minor improvements could be ● Lenders captured all the profits
made. ● Complementary inputs were not made
available

MICROECONOMICS OF AGRICULTURE
● The aim is to translate the inputs of land,
labor, fertilizer, pesticides, irrigation, and
mechanization into higher levels of output.
This process will depends upon the size of
holding and the fertility of the soil, weather
conditions, susceptibility to flooding and/or
drought, potential for natural disasters,
land tenure arrangements, availability of
storage and marketing, transfer of
THRUST IN AGRICULTURE AFTER technology through an agricultural
extension system, and so on.
WORLD WAR II
● Modern Farming

WHY DO FARMERS RESIST INNOVATION

AND MODERNIZATION?
● Leaving our comfort zone is never easy
because of possible uncertainties we may
encounter as we move to our zone.
● There is one major obstacle that
constantly faces those who introduce new
framing techniques and modern
technology into a traditional agrarian
society and that is apparent resistance to
employ new production methods. There WHAT REALLY WORKED?
are perfectly justifiable explanations for ● There are three aspects of modern
this seeming irrationality: agriculture that have served to increase
1. Cultural value of the traditional agricultural productivity, both in output per
farming system unit of land area and per worker.
2. Uncertainties of change
➔ 2 square meals instead of 3
➔ Children might stop
schooling
➔ Serve the landlords as
servants
3. Inadequate insurance and credit to
serve as fall back mechanism in
the event of crop failure
● OBJECTIVE: Maximize family’s chances
of survival, not to maximize profit, and
subsistence farming.

MODULE 4.C 1. GREEN REVOLUTION

● Phenomenon created by the
MICRO AND MACROECONOMICS development of a higher-yielding
OF AGRICULTURE variety of rice at the International
Policy Issues in Agriculture Research Institute in Los Banos.
● This study broke down rice production
growth into several components,
diamla, foronda, gan 21
 including area effects from greater
irrigation, and yield effects from
fertilizer, and new technology.
2. APPLICATION OF FERTILIZERS,
PESTICIDES, AND HERBICIDES
● Fertilizers were most profitable when
used with new varieties and
appropriate levels of irrigation.
● Increased use of fertilizer has been the
single most important indicator of
technological change in agriculture. It
reflects increases in irrigation and the
development of new crop varieties,
since they raise the productivity and
profitability of greater quantities of
fertilizer.
3. IRRIGATION
● It is true that better irrigation and water
management have contributed
significantly to agricultural
development in Asia by allowing
farmers to increase productivity
through regulating the flow of water
and reducing the risk of flooding.
● It also introduces flexibility into the
cropping system by facilitating the
application of fertilizers, allowing
farmers to introduce multiple cropping
and higher-profit cash crops.
WHAT DID NOT HELP MUCH?
1. FARM SIZE
● There is an inverse relationship
between farm size and overall farm
productivity in traditional agriculture.
● REASON: it is difficult to substitute
labor for other inputs in a modern
technology setting - and more
intensive use of the land.
● Inverse relationship disappears with
the use of farming intensity, land
quality, use of irrigation and
technology.
2. CHANGES IN LAND TENURE
● Major Forms of Land Tenure and land
use in Agriculture
1. Owner-operated farms
2. Tenancy agreement - operated
farms. There are two kinds of
tenancy arrangements:
➔ Farmers give their landlord
a share of their harvests
➔ Landlord rents out his land
to farmers at a fixed rate
● In countries where land distribution is
an issue programs on land
redistribution are advocated on equity
grounds and efficiency.
MACROECONOMIC ASPECTS OF
AGRICULTURE
● Agriculture in Asia is an intensive sector
➔ Adopt labor and capital-intensive
technology.
➔ Keep undervalued exchange to
maintain appropriate trading terms
and promote appropriate
labor-intensive production
technology.
● It was important to keep the currency
exchange rate at an appropriate level to
discourage inappropriate use of capital for
technology.
● A bonus from exchange rate regimes that
tended to undervalue the currency was
that the terms of trade for agriculture also
improved. This was because agricultural
products were more tradeable than
industrial goods, which were often more
protected than agriculture in the early
stages of development.
➔ It helped agriculture to maintain
appropriate terms of trade with
industry so that it was not
discriminated against
➔ To promote appropriate
labor-intensive production
technology.
● Another sometimes forgotten aspect of
macroeconomic policy is that interventions
designed to protect an industry or sector
or a factor of production usually have
unintended and often adverse impact.
diamla, foronda, gan 22

MODERNIZING AGRICULTURE
● Mechanization and demand for labor.
● Technological transfer, growth, and equity.
● Genetic Engineering.
● Zero tillage.
● Research and development.
● Food prices and linkages to energy.
● Shifts out of primary grain production.
SUBSIDIES TO MECHANIZATION SHOULD
BE REMOVED
● Mechanization should be left to the market
since its profitability and scope of
applicability will depend upon local
conditions
● Higher yielding varieties may have had an
adverse effect on income distribution
● Further development in genetic
engineering are necessary to sustain
growth in yields
➔ These could involve breeding
crops that are disease resistant,
drought resistant, flood resistant
and need less fertilizer
● Greater transfer of technology from
industrial countries and development of
new varieties in Asia would be involved
● Improved farm extension is needed to
ensure that new developments in seeds,
crop rotation and new varieties can be
spread to farmers efficiently and quickly
● Greater emphasis on water conservation
and improved productivity
● Genetically modified organisms (GMOs) •
are becoming more important despite
objections from EU countries
● ZERO TILLAGE: Shift away from primary
grains toward tree crops, horticulture,
fishing and secondary food crops should
be encouraged
MODULE 5
INDUSTRIALIZATION AND
STRUCTURAL CHANGE
INTRODUCTION: INDUSTRY AS A workers is zero.
LEADING SECTOR
● The main structural development that
separates a modern high-income
economy from a traditional low-income
economy is the rapid development of the
industrial sector.
● Industrial sector comprises anything that is
not agricultural in nature, all
non-agricultural products.
● Large countries are likely to have a larger
share of income generated by the
industrial sector because of economies of
scale. Higher income per capita is closely
associated with a higher level of
industrialization if we look at a broad
range of developed and developing
countries.
A MODEL OF STRUCTURAL CHANGE
● The Jamaican economist and Nobel Prize
winner, W. ARTHUR LEWIS(1954)
developed the first-two sector model which
attempted to capture the interaction
between a traditional agricultural sector
and a modern industrial sector for a
developing economy.
● JOHN FEI AND GUSTAV RANIS (1964)
developed Lewis-Fei Ranis (LFR) model,
this model has two sectors which can be
defined as traditional and modern,
agricultural and industrial, or rural and
urban. The essence of the model is to
contrast traditional agricultural methods
and rural social organization, which
revolves around family enterprises, with
the modern industrial sector where
workers and industrial goods are
produced.
FEATURES OF THIS MODEL
● Capital accumulation fuels the
development of the industrial sector. It
grows faster as capital accumulates.
● There is assumed to be surplus labor in
the rural/agriculture sector. The supply of
this labor is virtually unlimited. Its
opportunity cost is virtually zero.
● By removing excess labor from the
traditional secretary and moving it to the
industrial sector, the productivity of labor
increases. Furthermore, the productivity of
those remaining in the rural sector also
improves since there are fewer workers -
the surplus workers have been removed.
● The LFR model assumes a particular kind
of social organization in the agricultural
sector, which is traditional in nature, and
also that the marginal product of the last
● This partly reflects that higher productivity
of workers using more capital and
therefore a higher wage in the city, but
diamla, foronda, gan 23
 also reflects the lower average wage in
agriculture when the land is flooded with
labor.
● In the LFR (1954-1964) model, the surplus
labor movement into industry provides a
net gain to society. If the total output of the
agricultural sector does not fall, then food
production is unchanged and the
transferred workers will be fed by the
agricultural sector (without trade), which
will also be adding output in the industrial
sector.
● Once the stock of surplus is exhausted,
the process of industrial development
becomes an interplay between the two
sectors as the wage rate is driven up in
both sectors.
➔ If the terms of trade move too
strongly against the agricultural
sector, they will not be able to buy
enough equipment to fuel
technological developments in the
sector. By starving agriculture,
industrialists will choke themselves
to death in the long run.
➔ If the terms of trade turn against
industry, then industrial
investments will not be profitable
and investment will slow.
INTRODUCTION OF TRADE INTO THE LFR
MODEL
● For sustained growth to continue once the
surplus labor phase has ended, the
balanced treatment by the government in
terms of taxes and subsidies has to be
maintained in order for growth to be rapid.
● The surpluses from agriculture have to be
mobilized to create investment for the
industrial sector.
● Export taxes or an artificially low exchange
rate are not good ways to extract the
agricultural surplus as these could have
detrimental effects in long-term export led
growth.
BACKWARD AND FORWARD LINKAGES
● The interaction between industrial and
rural sectors can be studied using the
concept of backward and forward
linkages.
● If direct backwards linkages are strong,
when an industry grows its suppliers also
grow.
● It can be measured by subtracting the
purchases from abroad and its own costs
from the value-added generated by the
industry itself.
● Both backward and forward linkages are
determined from coefficients in
input-output tables for individual
economies. They are useful to better
understand the interrelationships that exist
within an economy, and can serve as
beginning point for analysing changes in
industrial structure,
INDIRECT BACKWARD LINKAGES
● Indirect backward linkages are the
secondary effects which growth in an
industry has on its suppliers.
● Industries that have strong backward
linkages have low value-added and a
large input from local suppliers.
FORWARD LINKAGES
● Forward linkages tell us how a product is
related as an input into the product athe
next stage (i.e. textiles into apparel and
petroleum into plastics)
● It is a good indication to which the
economy can upgrade its industrial base
by using its existing expertise and
resource base.
ASPECTS OF INDUSTRIAL
DEVELOPMENT
CHOICE OF TECHNOLOGY
● In the early stages of industrialization,
countries have limited capital and plentiful
labor. Using simple production theory,
factor proportions are determined by the
relative costs of capital and labor.
● Labor intensive technologies may be
appropriate in a poor country with plenty
of low-skilled and cheap labor but
because of factor market distortions (such
as those created by tax breaks for capital
equipment), the choice of technology may
be more capital-intensive.
ECONOMIES OF SCALE
● Economies of scale come into play when a
country is exporting, or when production is
taking place on a large scale for the
domestic market.
● This enables companies to operate at the
low point on their cost curves.
● The standard for measuring the efficiency
of an industry is to use the price of
imports. Sometimes a protective tariff is
imposed to keep out cheaper foreign
products through infant industry
protection.
EFFICIENCY ISSUES
diamla, foronda, gan 24
ECONOMIC EFFICIENCY AND SCALE OF
PRODUCTION
● Efficiency depends upon a number of
special factors. It may be that all firms can
be efficient if they have reached a viable
size of production that takes full
advantage of economies of scale.
DO PROTECTED INDUSTRIES BECOME
EFFICIENT OVER TIME?
● In order to be competitive, they should be
in an industry where the country has a
comparative advantage or else they will be
inefficient.
● INDIA: India protected many of its
domestic industries for a long time -
automobiles, iron, steel, and others. These
industries did not become competitive
internationally and have been a drain on
the public purse for many years. Only in
the 1990a, when regulations on the inflow
of foreign capital were relaxed, was India
able to produce a range of automobiles at
reasonable prices through the use of
modern technology.
● KOREA: subsidies were also given, but
these subsidies were performance related
- that is, were withdrawn if the industry did
not emerge with strong export products
after the initial years of protection.
ARE THE ADVANTAGES TO SMALL-SCALE
INDUSTRIAL DEVELOPMENT
● Small-scale enterprises are generally
more labor-intensive. Start-up costs are
small and entry and exit is easy because
of the small amount of capital needed,
● Small-scale firms can be very successful
when they concentrate in particular
locations where they can share a skilled
labor force base and where they can
produce differentiated products of high
quality.
● Small-scale firms depend more on
economies of agglomeration, which are
generated by proximity to firms engaged in
similar sectors or in complementary
production.
FOREIGN TRADE
● There is evidence that better internal
allocation of resources can add greatly to
economic efficiency.
● Firms financed by foreign direct
investments are, other things being equal,
more efficient than their domestic
counterparts.
THE ASIAN EXPERIENCE WITH
INDUSTRIALIZATION
● From the mid-1960s to 1990s, the growth
rate of the East ASian economies of Hong
Kong, Korea, and Taiwan, together with
SIngapore in Southeast Asia grew at a
faster rate than any other economy or
group of economies had in history.
● Per capita incomes increased by 7 percent
per year, so that income doubled every
ten years, At the end of thirty years,
incomes per capita had increased fourfold.
● During the same period the industrial
sector’s share of GDP in these countries
also increased sharply.
● In the case of Korea, the share went from
about 24 percent of GDP in 1970 to nearly
38 percent in 1980, and even higher in
1990. This implies an even more
spectacular growth rate for the industrial
sector than for the overall economy,
● In Taiwan, Singapore, and Hongkong, the
increase in the share of industry was
more modest but it also saw a more rapid
growth in the industrial sector than in the
economy as a whole.
A FURTHER LOOK AT TOTAL FACTOR
PRODUCTIVITY (TFP)
● KRUGMAN-LAU-YOUNG ANALYSIS:
The reason for the rapid growth was brute
force application of a simple
Harrod-Domar growth model augmented
by the growth of the population. They
argue that both the capital stock and the
labor force grew rapidly. Combined with
good government policies.
● ALICE AMSDEM (2001, KOREA),
HOBDAY (1995), NELSON AND PACK
(1998): In order to sustain a rapidly
growing industrial sector in appropriate
pricing of inputs and incentives for export,
It requires a continuous process of
learning, innovation, experimentation, and
continuing structural change. The proof of
the efficiency and competitiveness of
those successful firms are their ability to
adapt to new technology to changing
domestic and international circumstances.
HISTORICAL TRANSFORMATION OF THE
INDUSTRIAL SECTOR
● In 1960, primary commodities accounted
for a large share of total output and
exports in Asia while manufactured
commodities generally played a
supporting role.
● THe structure of manufacturing was
slanted toward labor-intensive products
diamla, foronda, gan 25
 and geared for the domestic market. specifications (original equipment
Manufacturing itself was a small portion of manufacturing - OEM) or according to
total output. their own designs or a combination of
● By 1975, there was a dramatic shift both in foreign and local designs (own design
the composition of industrials and the manufacturing - ODM). Later in the
share of manufacturing in total output. industrialization process, they also made
● By 1990, there were further increases in some overseas acquisitions and formed
manufacturing as a percentage of total strategic partnerships with overseas
output and machinery industry had grown companies to acquire technology.
in importance in all the Asian countries,
with the exemption of Indonesia and FOUR BASIC FACTORS UNDERPINNING
Thailand. Textiles continued to increase as THEIR SUCCESS
a share of GDP. 1. Firms benefited from low rates of interest,
● Another way to view the transition in low inflation, and high rates of saving
manufacturing that took place is to within the economies.
consider the shift in terms of different 2. They all responded to the open and
levels of technology. S. Lall (1998) has outward-looking export-led strategies that
broken down manufacturing into five were generally followed.
components: 3. All the NIEs developed an appropriate
1. Resource-based industries human resource development strategy
2. Labor-intensive industries that complemented and provided trained
3. Scale-intensive industries workers for the growing industrial sector.
4. Differential industrial products This included engineering, technical, and
5. Science-based industries vocational schools.
4. Government intervention was undertaken
ELECTRONICS SECTOR whenever it was needed.
● Hodbay (1995) suggests that the changes
in the electronics industry can be Government Low FDI High FDI
described by a stylized S curve Intervention openness/Relatively
closed economy
openness/Relatively
open economy
representing the size of exports, as well as
High Korea: large firms that Singapore: large firms
the technological frontier and research are locally owned that are foreign-owned
and development (R&D) expenditures.
Low Taiwan: small local Hongkong: small local
● In the 1950s and 1960s, the industry grew firms and some large firms and large foreign
slowly as firms became familiar with foreign firms firms

elementary technology, including simple

assembly and the assessment and
selection of production techniques.
● In the 1970s, the rate of export growth
accelerated and the inflow of technology
from foreign firms also increased.
● In the 1990s, the industry moved toward
indigenous design for manufacturing and
applied R&D.
DIFFERENT PATTERNS OF TECHNOLOGICAL
TRANSFER
● The methods varied from economy to
economy.
● Singapore and Hongkong were open to
foreign direct investments and worked
hard to attract it by offering full ownership,
low taxes, and access to modern
infrastractures and a well-educated
workforce.
● Korea and Taiwan were less open in the
manner in which they obtained foreign
technology. They adopted arrangements
where local subsidiaries produced for the
foreign companies, either to their exact
COUNTRY EXPERIENCES
SINGAPORE
● Singapore followed a model of attracting
foreign enterprises (transnational
corporation or TNCs) to set up operations
in Singapore.
● These TNCs were initially attracted by low
labor costs, political stability, good
infrastructure, and an attractive
environment provided by the government
which allowed foreign control and
ownership subsidiaries.
● There were also various attempts by the
government to promote advances in
higher-end technology over the years but
these were frustrated by the economic
downturns in 1874-1975 and 1985-1986.
● Nevertheless, upgrading of facilities and
technologies was a general practice as
the TNCs had to remain competitive in
international markets.
diamla, foronda, gan 26
 ● The development of telecommunication
and transport infrastructure made it an
attractive corporate headquarters site.
● To provide a skilled labor force, the
Economic Development Board (EDB)
supported technical training, including
engineering and technical schools to
ensure the growth of the industrial sectors.
● By the early 1990s, more than a third of
value-added in manufacturing was coming
from the electronics industry.
● Electronics production in Singapore is not
the leading edge but it has been upgraded
continuously over time so that new
advances from the parent company have
been incorporated.
● Some backward linkages have also been
forged with local suppliers, and forward
linkages developed with Hewlett Packard
and Canon.
● Singapore was the world’s largest
producer of disk drivers in 1991 and this
leadership extended into the 1990s.
● Competition in the international arena has
intensified and Singapore attractiveness
as an electronics manufacturing base has
slipped in recent years.
● In order to remain competitive, Singapore
has undertaken various measures to move
up the value chain. They include the shift
of the manufacturing focus from low-end
products such as desktops, computers,
television sets, and audio parts, towards
high-end electronic components such as
integrated circuits, transmitter receivers,
and optical disk drivers.
● Singapore has also encouraged the
development of stronger linkages between
local suppliers and the multinational
corporations (MNCs).
● Additional measures include the
promotion of other high-technology
industries in integrated circuits and
semiconductors, as well as the
establishment of closer ties with other sian
countries through the signing of regional
and free trade agreements.
● The role of the latter is to open up new
markets and promote Singapore’s new
role and capabilities as producer of
high-end components and finished
products.
KOREA
● Korea became a leader in the chip
industry and developed the capability to
produce household appliances (TVs and
cassettes), as well as computers and
peripherals.
● They moved slowly from OEM in the
1980s and ODM in the 1990s, and there
was a substantial increase in R&D
investment as the industrialization process
continued.
● The large chaebols, including Samsung,
Lucky Goldstar (LG), and Daewoo, were
the centers of electronics production as
Korea followed the example of Japan in
developing large conglomerates.
TAIWAN
● Taiwan developed its electronics and other
industries using the same approach as
Korea, in the sense that it discouraged
TNCs and instead set up domestic firms
using subcontracting, licensing, and
OEM/ODM.
● They relied on small and medium-sized
industries which were fast, skillful, and
agile in developing new products and
adjusting to the intense competition in
international markets. These small and
medium-sized industries were supported
in their development by government
policies and the availability of skilled
technicians and managers supplied by the
educational system.
● Taiwan became a specialist in the
production of desktop and laptop
computers, terminals, monitors, disk
drivers, peripherals, and other computer
components.
● They move toward their own brand
manufacturing (OBM) from OEM and
ODM.
● It was important to Taiwanese businesses
to develop networks of subcontractors and
forward linkages with buyers in other
countries.
COUNTRIES IN SOUTHEAST ASIA
● In MALAYSIA, electronics made a
substantial contribution to economic
growth during the 1980s and 1990s. By
the end of the decade, electronics
accounted for the major part of total
exports and of manufacturing output.
● Despite such progress, Malaysia’s R&D
remains weak and the electronics industry
is sensitive to global swings in demand
and also to the vicissitudes of foreign
investment inflows. However, the active
direction of foreign investment inflows into
various high-technology and
capital-intensive projects by the
government has served to enhance and
upgrade the strength of its existing
electronic capabilities and to further
diamla, foronda, gan 27
 improve Malaysia’s attractiveness to
MNCs.
● In THAILAND and PHILIPPINES, the
emphasis has been on lower-level and
simple electronics. In the Philippines, the
emphasis was on chip manufacture while
Thailand focused on computers,
particularly hard-disk drives. Both
countries followed Sinagporean and
Malaysian models of relying on TNCs for
technology transfer and production
know-how. There has been less
development of local expertise and
backward and forward linkages.
COMPARATIVE ADVANTAGES AND ASIAN
INDUSTRIALIZATION
● The notion of revealed comparative
advantage was first suggested by Balssa
(1965). According to this line of reasoning,
products that are being exported more
intensively are those that a country has
comparative advantage in producing and
exporting. Unfortunately, this is only an
indirect way of measuring comparative
advantage. Nevertheless, it does show
how competition weeds out the less
competitive and rewards those that are
efficient by exporting more.
● Another way of demonstrating
comparative advantage has been
suggested by Amsden (2001), who
recommends that the mix of industries in
Japan and the United States be taken as
a benchmark for comparative advantage.
Other countries can be measured against
these two countries.
● Amsden (2001) suggests that to calculate
whether a country would have a dynamic
comparative advantage for a product in a
sector, the share of output in that sector
should be compared with those of the
United States and Japan, then it has
attained a (dynamic) comparative
advantage in that product.
● By looking at the developing countries of
Asia, Amsden determines that the NIEs
have a dynamic comparative advantage in
electrical and non-electrical equipment, as
well as transport equipment. This is
consistent with the conclusion of analysis
of revealed comparative advantage that
shows strong growth in the same
industries.
● Dowling and Ray (2000) have constructed
an index of export growth for the Asian
economies that is, by design, heavily
influenced by the changing structure of
exports. If a country changes its export
structure in favor of products for which
import growth from the rest of the world is
growing rapidly, then this index will be
larger than when a country’s exports are
not responding to this shift in world import
demand.
● What has happened in Asia is that almost
all countries have moved swiftly to take
advantage of markets that are growing
rapidly, such as electronics computers,
and pharmaceuticals. These three
industries rank as the top-three when the
average annual growth of world exports is
calculated for the 1980-1995 period
(Dowling and Ray, 2000).
● There are several inferences that we can
draw from this evidence on the
industrialization experience of the Asian
economies:
1. First, a very dramatic shift took
place in the structure of industry
and of exports in Asia during the
thirty to forty years from the 1960s
to the end of the century. The
share of manufactured goods in
total industrial production
increased; at the same time, there
was a shift toward manufactured
goods as a share of total exports of
goods and services.
2. The shift in production of
manufactured goods within Asia
corresponded closely to a similar
pattern of production that was
taking place in the world economy.
3. The shift toward manufactured
goods production and exports
within Asia began with
labor-intensive products and
moved toward high-intensity
technological and science-based
exports, especially electronics, in
several countries. The shift was
particularly strong in Taiwan,
Singapore, Malaysia and Thailand.
In Korea, there was an additional
emphasis on heavy industry. In
Hong Kong, the sift was less
dramatic., since there had been a
strong emphasis on manufacturing
from the early 1970s and Hong
Long did not move as rapidly into
the electronics field as did other
economies. Indonesia, Pakistan,
and India did not move as rapidly
into science-based fields of
manufacturing, partly because of
trade restrictions and the inward
orientation in the latter two
countries, and because of the
diamla, foronda, gan 28
 resource-based nature of exports
and production in Indonesia until
the latter part of the period.
THE ROLE OF INNOVATION
● Growth in the labor force alone
contributed about 20 percent of total
growth in income.
● Temple (2001) suggests that education
may account for one-fifth or more of
growth in gross output in the OECD
countries.
● Innovation requires a creative process of
abandoning old ways of doing things and
the adoption of new methods and
processes.
● To do this effectively and dynamically
requires the ability of the economic system
to facilitate the exit of inefficient
companies and the entry of new and more
productive ones.
● In East and Southeast Asia, the barriers to
entry include not only the need to have
sufficient capital, but also to satisfy the
government requirements in terms of
registration, labor, and other regulations,
including environmental and industrial
codes.
● Entry costs are low for small and
medium-sized firms and exit is also
generally easy by declaring bankruptcy.
For larger firms, rules and regulations are
very widely. Exit is particularly difficult
where larger firms have a hold on
government agencies or where the fear of
adverse employment effects is great.
● In Hong Kong and Singapore, costs are
low while those in South Asia, Indonesia,
and Vietnam are high.
● One method for facilitating entry is to set
up special economic zones (SEZs) within
an economy where sites and services are
provided and regulatory and licensing
requirements are minimized.
● Such SEZs have been set up in many
countries in the Asian region, including
Malaysia, Philippines, Singapore,
Indonesia, Southern China, and Thailand.
● They include the growth triangle involving
Singapore, Johor in Malaysia, and Riau
Island in Indonesia, as well as the growth
triangle comprising Southern China, Hong
Kong and Taiwan.
● The concept of SEZs can be extended to
the notion of an industrial cluster. Some of
these clusters have emerged naturally,
with few explicit government incentives,
such as the Silicon Valley in California.
● MAIN KINDS OF CLUSTERS
1. Large metropolitan agglomerations
that contain a mix of different
industries
2. Small groups of networked firms with
similar but not identical interests,
such as in Northern Italy, Brazil, and
India
3. Clusters which have a few main
producers and their suppliers, such
as MNC plants with their component
suppliers, like those existing in
Penang, Malaysia, and in Bataan and
the region south of Manila,
Philippines. In the United States,
Korea, and China, there are clusters
anchored by a major enterprise, such
as automobile or steel plants, and
their affiliates.
● Innovation in Southeast Asia has primarily
been the result of spending by MNCs.
● In East Asia, innovation has been
developed through licensing
arrangements rather than MNC
participation.
● The business sector plays a key role in
both funding R&D and the private sector in
Southeast and East Asia, including China.
● State-owned mental agencies or
institutions of higher education.
● While most innovation and knowledge still
flow from the industrial countries either
through joint ventures or foreign direct
investment (FDI), some NIEs are
producing new knowledge that is on a par
with those at the frontiers in the industrial
countries.
● Total factor productivity is higher in firms
which receive FDI, and there is some
evidence of spillovers and management
style of the foreign-invested firms.
● Innovation has also taken place in
marketing and distribution as ICT and
transportation efficiencies have cut costs.
INNOVATION, EDUCATION, AND GROWTH
CONVERGENCE
● The process of industrialization and
innovation is not necessarily linear and
those countries that get left behind have to
employ a different strategy to catch up
with those who have moved forward and
acquired a leading edge in new
developments.
● Nelson and Phillips (1966) have argued
that learning takes place only when
technology is changing
● Findlay (1978) noted that if technology
changes too fast then those who fall
behind can get lost.
diamla, foronda, gan 29
 ● Leung (2003) has pointed out that
appropriate technology as opposed to
state of the art technology is the way for
these counties to move forward, and a
way to access this technology is through
Foreign Direct Investment.
● Gill and Kharas (2007) pointed out that
R&D not only increases with per-capita
income but also accelerates at an
increasing pace.
● Countries beginning industrialization need
an entirely different set of policies for
education and technology transfer
compared with those economies at a more
advanced level.
● However, to become equipped they will
still need some of the modern tools of
technology, including computers and
information technology.
EMPLOYMENT GROWTH AND
INDUSTRIALIZATION
● When technical progress is
labor-intensive, it will help employment,
and when it is capital-intensive, it will
retard the growth in employment.
● It is also important that wages be flexible,
otherwise labor can be priced out of the
market and capital used instead.
● This is the risk that faces labor unions and
other institutional factors that limit labor
mobility.
● Employment growth is directly related to
output growth as well.
● Using the case of Asia, no rapidly growing
Asian economy has had an employment
problem in the long term, at least until the
Asian crisis. This is partly because growth
was so rapid that it was easy to absorb the
labor generated by rapid population
growth.
● All the NIEs and Malaysia and Thailand
were running a fully employed economy.
● Indonesia and Vietnam also improved and
the Philippines showed signs of growth
that eventually helped the employment
situation.
● In South Asia, which grew more slowly,
there was still a lot of underemployment.
A MODEL OF RURAL-URBAN MIGRATION
● Productivity in the rural sector is low.
● Productivity is higher than in the urban
sector. Therefore, migration will take
place.
● Harris-Todaro (1970) model argues that
migration will take place when the
expected future income stream in the city
(minus relocation costs) exceeds the
expected income stream in the rural
areas. Such a model implies that a
significant amount of unemployment or
underemployment can be experienced as
long as the stream of income expected in
the long run is large.
● The Harris-Todaro model implies the
existence of continued immigration into
the city and rising unemployment, even
though wages in the informal sector in the
city are very low.
ARE EXPECTATIONS UNBIASED?
● Given the skills and background of the
migrant, the agricultural wage floor could
be considerably lower as the probability of
getting a job in the formal urban sector
declines.
● The feedback from these distortions in
terms of reverse migration is likely to be
limited since the costs of relocating back
to the rural areas will also be very high,
and the social stigma of coming home
without being a “success” often holds
migrants in the urban sector.
OTHER EVIDENCE
● Other evidence on migration suggests that
underemployment in the informal sector of
the urban areas is not unproductive but
rather reflects the limited opportunities in
the rural economy.
● Strategies for rapid industrialization should
continue, balanced by a greater stress on
employment creation in the rural areas,
particularly when overall economic growth
is not strong.
● Labor market probably work in a
competitive way in both the rural and
urban areas, the combination of high
expectations and low education generally
among the migrants from the rural areas
puts a premium on skill and raise the
return on a higher and secondary
education - not necessarily an indication
of strong market segmentation but a
failure of the educational system to keep
up with the shifting demand.
● If the urban wage in the formal sector is
much higher than the informal wage in the
rural sector, but perhaps comparable with
the wage in the urban informal sector,
then agricultural workers will still migrate,
even though the probability of getting a job
in the formal sector is low.
diamla, foronda, gan 30
 ● It is probably unlikely that a worker from
the province with a little education will
make these sorts of calculations.
● In Asian cities, migrants from different
parts of the country tend to migrate and
cluster in different occupations.
OTHER FACTORS AFFECTING THE
MIGRATION DECISION
● The rural setting provides a social capital
in the form of insurance (loans and other
support) from relatives and friends in and
times.
● Insurance depends on whether society is
highly interconnected so that legitimate
insurance claims can be separated from
poor judgement or laziness, in which case
the insurance system would break down
because of moral hazard.
● Implicit in all of this is the idea of
reciprocity in a static and traditional
society: “You rub my back and I will rub
yours.” This is also the basis for the
patron-serf relationship in traditional
societies.
INTRAREGIONAL AND INTERNATIONAL
LABOR MIGRATION WITHIN ASIA
● There is much less freedom in people
movement than there is in the movement
of capital and goods and services. Thus,
international labor migration is often
neglected.
● Patterns of labor migration are most easily
understood by looking at the cycle of
economic growth and unemployment,
● A typical developing country starts with a
low level of employment and much surplus
labor.
● As a developing country progresses, its
poverty level declines as employment
increases along with wage levels when
workers’ productivity increases.
Eventually, it reaches nearly full
employment.
● As it continues to grow, it experiences
labor shortages. Depending on the pattern
of the growth, these shortages could
appear in skilled occupations, but more
often in unskilled occupations.
● There will be in- and out-migration at the
same time.
● Also, there will be a brain drain in some
skilled occupations in the poor countries
and some of the poorer sections of the
economy may also migrate even when
incomes are generally high.
CAUSES OF LABOR MIGRATION
● Generally, the economic factors for
migrations are very strong.
● Low domestic earnings and
underemployment will offer a large
incentive to migrate.
● Combined with employment opportunities
abroad, this will be enough to stimulate
migration, even when there are
uncertainties and substantial costs.
● Workers migrate in order to provide
remittance income for their families at
home.
● This remittance flows are substantial for
the Philippines where it is estimated that
remittance incomes form as much as 10
percent of its GDP each year.
● Bangladeshi, Indian, Pkaistani and
Chinese migrants also remit substantial
amounts to their home countries.
LABOR MIGRATION AND PUBLIC POLICY
● Immigration in all the high0icnome
countries in the Asian region has been
strictly controlled and very selective,
● The basic immgiration policy for all these
countries is very similar and follows what
has been dubbed the THREE S POLICY -
skilled workers are sought for short term
employment in specific sectors.
● To analyze the economic impact of this
migration, the effects on both the source
and destination country need to be
considered.
● Migration will result in a decrease in the
real output of the source country and an
increase in the real output of the host
country.
● Since productivity is higher in the host
country, migration will raise the real world
output.
● There will also be a redistribution of
income in keeping with marginal
productivity as the increase in labor in the
host country will raise the productivity of
capital and lower that of labor, assuming
that diminishing returns to factors prevail.
HOW ARE INTERNATIONAL LABOR
MOVEMENTS RELATED TO MOVEMENTS IN
CAPITAL AND CHANGES IN THE PATTERN OF
INTERNATIONAL TRADE?
● Some labor movements will complement
the flows of capital, such as FDI.
● This would be true for managerial and
other highly skilled workers who
accompany the FDI and who could help to
develop the production apparatus and
train domestic workers.
● In some countries, such as the Philippines
and China, the governments have
diamla, foronda, gan 31
 followed a conscious policy of exporting
labor with a view to raising foregin
exchange earnings through remittances.
Most of these immigrants are temporary
workers and have low skills, but this is
changing as the governments try to
improve the skills levels and therefore the
wages earned by immigrants.
● Despite controls on immigration, there has
been a rapid increase in temporary, often
illegal, migration from labor surplus to
labor scarce economies in Asia during the
past two decades. This movement has
increases the flexibility of labor markets,
thereby contributing to the ability of
countries in the region to respond quickly
and effectively to the changing pattern of
external and domestic demand.
THE ROLE OF THE GOVERNMENT
● Government policy in the industrial sector
has adopted a hands-off attitude in terms
of providing direct incentives for individual
industries.
● This is particularly true in the case of
Taiwan, where there are no specific
industries supported by the government.
● In the case of Korea, strong industrial
policies were advocated and the emphasis
has shifted over time. Nevertheless, a bias
toward particular large industries has been
maintained.
● In Southeast Asia, a more balanced
attitude has prevailed, with few subsidies
or promotional advantages offered.
NURTURING GROWTH IN THE INDUSTRIAL
SECTOR
● Exchange rates were maintained in such a
way that the industrial sector was not
penalized.
● Educational opportunities were enhanced
through a continual buildup of
technological capacity, particularly in
Korea and Taiwan.
● Infrastructure spending was maintained so
that transport, communication, and
information technology could be used to
enhance innovation and productivity.
● Where policies allowed for the free entry
and exit of business firms, a flexible
environment conducive to rapid change
and adaptation to new techniques and
ideas flourished and economic growth
accelerated.
● Labor market policies, even when unions
started to grow in the past decade, were
flexible enough to allow firms to adapt to
changes in demand.
● In cases where such industrial policies
were not followed, industrial growth has
been slower and less flexible. This has
been particularly true in those economies
where SOEs have established a strong
foothold, such as India and other South
Asian countries, and also in Vietnam and
parts of the Chinese economy
EFFICIENCY AND WELFARE
● The bubble preceding the financial crisis
led to a misallocation of resources in
several economies in the Asian region.
● Markets may also fail to allocate resources
effectively in cases where there may be
elements of a natural monopoly, although
recent developments in public utility
economics suggests that these elements
are less widespread.
● The provision of unemployment and
retirement benefits is part of the fabric of
industrial policy in the industrial countries.
● This area requires a growing share of
resources as populations begin to age.
● To some extent, there is a trade-off
between efficiency and welfare.
● There is a need to recognize the necessity
of planning for retirement and that a social
safety net should be provided for workers
that are retrenched in periods of slack
demand.
● When the growth has slowed and
unemployment has increased, the issue of
retirement and social safety have become
more pressing.
SUMMARY AND CONCLUSIONS
● Growth in the sector has been
characterized by rapid structural change
and dynamism, particularly in East and
Southeast Asia.
● The movement from primary products to
labor-intensive manufacturing and then to
skill and capital intensive manufacturing
and services has been rapid.
● Although East and Southeast Asia choose
different paths to attract foreign
technology, both regions were successful
in developing a vibrant industrial sector
and a highly successful export strategy.
● It is important to recognize that industrial
and employment policies will be critical in
helping the private sector to continue to
adapt to a changing external environment
while incorporating new technology and
responding to the challenge of
globalization.
● Flexibility and transparency will both be
important as the region continues to move
diamla, foronda, gan 32
forward and become further integrated
into the global production network and the
world economy.

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