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SSED 314: Kenya, Somalia, Tanzania, Uganda, El Salvador, Honduras,

COMPARATIVE ECONOMIC PLANNING Peru, India, Philippines, Vietnam

Development and Growth


TOPIC I: REAL CONCEPT OF DEVELOPMENT Is economic development the same with economic
growth? Which comes first, development or growth?
The Meaning of Economic Development Development is a progressive and dynamic process.
Development is a progressive process. It involves the Growth is the result of a process. Therefore, growth is the
interaction of different factors. For example, in the case of product of the development. For example, modern methods of
increasing the harvest of palay per hectare, various inputs are planting tobacco involve a process, and this is development
combined like fertilizers, insecticides, irrigation, and itself. The result is more and better harvests, and this is growth.
technology, among other thing. These are properly applied in In the case of students, their development is through education -
order to produce more output. Such process is development. formal and informal.
Economic development is a progressive process of Because of their proper education, they get good jobs
improving human conditions, such as the reduction or with good incomes. They spend their money for house and lot,
elimination of poverty, unemployment, illiteracy, inequality, and for modern appliances. Such material possessions represent
disease, and exploitation. Evidently, economic development is growth.
not only an economic process. It involves both economic and Economic growth is visible and measureable.
non-economic factors. Examples of economic factors are Examples are roads, vehicles, houses, buildings, hospitals,
capital, technology and market. Non economic factors are banks, schools, etc. These are the products of economic
culture, religion, government, education, among other things. development. The total market value of such products is the
The combination and interaction of these factors GNP of the country. However, economic development does not
determine the extent and nature of economic development. In stop. It has to create more and better goods and services.
fact, the non-economic factors have stronger influence on the In the long run, economic development embraces a
economic development of nations. Some countries are series of economic growths. Thus, earlier economic growths
progressive while others are not because of the aforementioned help subsequent economic development. Take for example, the
factors of development. case of England. In the beginning, it was just a pastoral
economy with primitive farming, and handicrafts industry.
Classification of Countries However, with the infusion of better technology and machinery,
The economy of a country is measured by its gross the economy of England was transformed into a factory system.
national product (GNP) or per capita Income. The basis of The new economy created more employment and production.
comparison is the economy of the highly developed countries, Such improved economic conditions further accelerated
usually the United States. If the GNP of a certain nation e near economic activities until England became an industrial
the GNP of the rich countries, it is classified as intermediate. economy. Being a rich nation, England can afford to buy the
Those that are far below are classified as less developed. The best tools and techniques of production to achieve higher
rich ones are classified as highly developed. economic growth.
Two-thirds of the countries of the world are poor
Millions of people in these places live on incomes averaging Growth without Development
$70 a year. As of 1976, there were 34 low-income countries in Is it really possible to attain economic growth without
the world, Bhutan, a country near India, had a per capita income economic development? It has been said that growth is the
of $70 per annum. In the case of Israel which is classified as a product of development.
developed country, it had a per capita income of $10,500. For Not a few less developed countries are apparently
the highly developed countries like the United States, and those progressive. They have modern buildings and well-developed
in Western Europe, their real per capita incomes are many times fruit plantations. Their many corporations are very profitable.
higher than those of the poorest countries. In the United States, But all of these are owned and managed by foreigners. Among
the per capita income is one of the highest. In fact, the poverty the masses, poverty, ignorance, squalor, and disease have been
line of 1982 was $8.414 for a family of four persons per annum. rampant. Only the foreigners and the few local elite have
To The poor countries, such amount is already a fortune. No become prosperous. There are countries in the Middle East
wonder many people in the less developed countries like to live which have experienced rapid economic growth due to their
in the United States. incomes from oil. They have been able to construct modern
In the past, poor countries were called backward buildings, and other symbols of high living. However, there are
nations. This offended the sensibilities of the countries no significant institutional changes in their education, public
concerned. So they were named as developing nations which administration, and health. Cultural lags are dominant in their
was more pleasant. However, at present they are commonly societies. Even their economic institutions are still in the process
called less developed countries (LDC) or Third World countries. of development. Because of their big petrodollars, they can
Countries which are backward, underdeveloped, import skills, technology, management, and materials. In short,
agricultural, or less developed are generally considered poor they can buy development.
nations Nevertheless, there are few they are not necessarily Development means more than imposing buildings,
poor. Good examples of these are some are few countries that beautiful houses, elegant cars, money or modern machines. It
are underdeveloped but countries in the Middle East. Countries includes fundamental changes in society, ways of life, values
which have advanced, industrial or developed economies are and institutions. An economic growth which belongs to
rich countries. Those countries whose economies are between foreigners or an economic development that has been imported
the highly developed and less developed are called intermediate is meaningless as far as the masses are concerned, unless, they
country/economies. Here are examples of classifications of receive reasonable benefits and compensations for their
some countries based on their economic developments: productive contributions to the economy. However, from the
position of the country, such growth or development is not real
Highly developed countries: because it does not belong to the country and its people.
United States, Japan, France, Denmark, Australia, Russia, On the other hand, development without growth is
Sweden, West Germany, Canada, Israel inconceivable. Whenever there is real development, there will
Intermediate countries: always be growth because growth is a natural consequence of
Argentina, Cuba, Libya, Spain, South Africa, Austria, Saudi, development.
Arabia, Singapore, Poland, Venezuela
Less developed countries
The Objectives of Development
In the past, the traditional national objective of the less Hence, many poor countries become poorer, and they languish
developed countries was to increase their gross national in the quagmire of poverty and squalor.
products. Emphasis was given to material or economic progress. However, the greatest obstacle to economic
For instance, if the real GNP in 1992 was P600 billion, and in development is man himself. Before improving his physical
1993 it was P800 billion, then there was tremendous increase in environment, he should be the first to be improved his attitudes
GNP or economic growth of the country. and values. The developing people requires institutional changes
However, the above example is not conclusive. And in in public administration, social structures, schools, courts, health
many developing countries, despite the perceptible economic services, among other things. This takes a longer time than
growth, social and economic conditions are deteriorating. The building factories or constructing roads and bridges. But the
reason for this has been obvious to the common people. The development of people is the only real and enduring kind of
fruits of development have not reached them. Only the few top development. It is the principal key to the progress of the poor
government officials, big landlords, and business tycoons have nations.
been benefited. Such situation happened because government
programs are in the wrong directions, and the ownership of the Stages of Economic Growth
factors of production is not in the hands masses. As a result, The development of nations encompasses an
mass poverty, economic servitude, unemployment, and unjust evolutionary process from the primitive to the modern societies.
distribution of income have been more widespread. However, there are still societies that have until now remained
In view of the proliferation of economic and social primitive in their economic, social, and political institutions.
problems, especially from the countryside where most of the The people are half naked, and produce their food through
people live, the leaders of the developing countries have primitive method of farming. On the other hand some modern
realized the root causes of such depressed conditions. Thus, the societies have deteriorated in their social and cultural
main focus now of development is towards the social factors. institutions. They have barbaric or medieval values although
Socially-oriented programs appear to dominate national they live in a modern society.
development objectives. The Industrial Revolution which began in the late
1700's in England paved the rapid economic growth of Western
Philippine Development Objectives Europe and the United States. Since that time, economic
Since the days of the New Society, several institutional historians have searched for a theory that would appropriately
re forms were introduced, like agrarian reform, cooperative describe the natural economic evolution that all nations will
development, human settlements, banking reforms, and other undergo through. One approach is the stages of economic
vital changes in education, public administration, labor, and growth based on the exchange systems. That is from the barter
investment. All these have been envisioned to accelerate economy to the money economy, and finally to a credit
economic development of the country. economy.
The whole development program of the Philippines has Another way of categorizing the stages of growth is
given top priority on the equitable distribution of wealth and through the dominant productive sectors of the economy.
income, food production, employment, and wider participation According to this theory as stated by the British economist
of the people in the affairs of their own communities. Colin Clark, there are three stages involved:
Nevertheless, the principal target of development is the Stage 1 - Agriculture is the principal source of employment and
development of people. The rationale of human resources income in the agricultural countries.
development is that people are the most important factor of Stage 2 - Manufacturing industry becomes the major economic
production. activity as a country develops.
According to former Prime Minister Cesar Virata, the Stage 3 - Service industries grow to be the dominant feature of
government has been committed to attain the three basic the economy as a country develops further.
objectives which are concerned with:
1. The attainment of economic stability; The Doctrine of Rostow
2. The equitable distribution of the fruits of economic Many other studies have been conducted on the stages
development; and of economic growth. However, the work of Professor W. W.
3. The achievement of total human development for every Rostow, an American economic historian, appears to be the
Filipino. most popular. He is the author of the well-known book, Stages
of Economic Growth. Based on the doctrine of Rostow, the
Obstacles to Development transition of the economy of one country from
As mentioned earlier, the less developed nations have underdevelopment to development passes through several stages
been eager to attain their economic goals in a short possible such as:
time. The affluence and prosperity that they have seen in the 1. Traditional society
highly developed countries have stimulated them to adopt their 2. Pre-conditions for take-off
technologies and development strategies. Unfortunately, such 3. Take-off
aspirations are not easy to realize. There are many formidable 4. Drive to maturity
obstacles that stand on the path of the less developed countries. 5. Age of high mass consumption
Poor nations are deficient in capital. They cannot How could a poor or underdeveloped country take-off?
afford to buy sufficient modern tools of production. Moreover, Considering the shortcomings of such countries in terms of
management and manpower skills are not adequate. The capital, values and institutions, they need a big push to take-off.
Western technology which they like to adopt is difficult to This is easier said than done. It requires huge amount of money,
implement because it requires imported technicians and and the restructuring of values and institutions to fit them for
machines. Besides, such foreign technology is capital-intensive development. Domestic savings are not enough for significant
and labor-saving. This only worsens the massive unemployment investments. Foreign loans are mere trickles in proportion to
problems of the poor countries. their gigantic needs for national development. Likewise, their
Another obstacle is the population explosion. Poor public administration is not only inefficient but also corrupt.
countries are very rich in human resources. Their birth rate is These, and several more, are the major reasons why the poor
much higher than in the rich countries. This is a serious problem countries have remained miserable for centuries. Population
because the rate of employment and production in the poor explosion has even made their conditions worse. And in spite of
countries is very low. So, every year more persons are to be fed this, the rich countries still continue to exploit them - their
and employed. Since it is not easy to control the growth of laborers, raw materials, and markets.
population for cultural and religious reasons, and it is difficult to
increase production, there is a growing gap between the two. Two Different Worlds
The unfair distribution of global wealth and income has effectiveness of an economic system is measured by the
created two different worlds. A curtain of poverty separates the following criteria:
two different worlds. One world belongs to the rich while the -Abundance - Stability
other one is for the poor. - Security - Economic freedoms
The rich world is called North while the poor world -Growth - Efficiency
South. The latter has not been able to eliminate poverty, hunger, - Justice and equity
disease, squalor, and ignorance. In fact, their social and
economic conditions even became worse. On the other hand, the The needs of the poor masses are simple. They have no
North has become richer. More than 90 percent of the love for expensive jewelries, palaces, sleek cars, and other
manufacturing industry is located in the North. conspicuous display of wealth. All they really dream are their
The countries of the South share a common situation. basic needs, the college education of their children, and some
They are economically dependent on the North. They feed the modest properties like a decent house. Schumacher, author of
factories of the North with their raw materials and labor. They Small is Beautiful, stated that people in the rural areas of the
are the consumers of the finished products of the North. And less developed countries are simple individuals, and their needs
most of the countries of the South were the colonies of the are also simple. The economic system should only in the
North. beginning produce simple pro ducts for them. Thus, there is no
The North-South dialogues have been going on for need for modern technology which is not only appropriate but
years to resolve their conflicts and to improve their mutual also expensive.
interests. But the North appears to be unwilling to reduce its The real test of a good economic system is the welfare
exploitation on the South. Nonetheless, concerned socially- of the poorest of the poor. If the goods and services of the
oriented leaders strongly suggested that the NorthSouth system have touched their lives, and they are contented, then it
dialogues must aim to give every society a full opportunity to is a good economic system. In this connection, the 1986
develop as it wishes, and satisfy the basic needs of its people at Constitution states:
an acceptable pace. It must create a dynamic world in which The goals of the national economy are a more
every country can attain its own development. equitable distribution of opportunities, income, and wealth; a
sustained increase in the amount of goods and services
What Kind of a World Do We Want? produced by the nation for the benefit of the people; and an
The gap between the rich and the poor countries has expanding productivity as the key to raising the quality of life
become wider. The poor countries have become poorer and the for all, especially the underprivileged.
rich countries have become richer. All over the world, 800
million individuals live in extreme poverty. Most of them are TOPIC II: IDEAS AND THEORIES OF ECONOMIC
found in Africa, Asia, and Latin America (Central and South DEVELOPMENT
America).
In Africa, hungry men snatch meat from children and Economic ideas and theories are generally the products
old people. Many battles have been fought in the countrysides of of existing conditions. Difference in time and place usually has
Latin America in the name of poverty and exploitations. The different situations, and therefore ideas and theories are not the
bloody revolutions of France, Mexico, Russia, and China were same. For instance, ideas and theories during the ancient,
ex. executed by hungry and oppressed peasants. Many more medieval, and modern times in various regions of the earth have
social unrests have been committed because of economic not been all the same. There are also ideas and theories which
exploitations and deprivations. are considered as impossible dreams, but in the future they may
It has been said that God did not create poverty. not be impossible anymore. In the same manner, there were
Poverty is a product of defective manmade institutions. Social, many ideas in the past that were publicly ridiculed. But at
economic and political institutions do not only hamper present these are now realities, and they benefit mankind.
development but also they are inhuman. Death and hunger in Ideas and theories may be intended to change or
Africa have been caused mainly by man himself. The numerous improve existing conditions. If the problem is unemployment,
and endless civil wars have accomplished nothing, except deaths some bright individuals with bright ideas emerge. Keynes
to hundreds of thousands of Africans, mostly children and became famous because he was able to offer good theories on
women, and economic depressions. In the case of how to solve the Great Depression. Some countries have
Vietnam, many people have died not only from the war but also become progressive because they have citizens who have good
from the persecutions of their own present government. ideas, and these are implemented. It is rather unfortunate that in
Thousands of Vietnamese, including children and women have many less developed countries, the good ideas of their own
escaped from their own country through small fishing boats. people are ignored. They prefer to imitate the ideas, manners,
And only very few survive to see the light of freedom in other products, technology, and economic models of the rich
shores. countries, especially the United States. In the Philippines, not a
The caste system in India, although abolished by their few inventions were created by Filipinos. But these were bought
constitution, has remained an institution. The untouchables and further developed into commercial scale by foreigners.
belong to the lowest social structure of India. They are almost This chapter presents the various important economic
slaves of the upper class. They do not only suffer from social ideas and theories of development from the ancient times to the
and economic exploitations but they are also killed for very present. In addition, growth models are explained in simplistic
slight reasons. A few years ago, a whole community of forms, avoiding sophisticated equations, graphs or technical
untouchables was plundered by a group of Indians who belongs approach. This is to achieve better communication rather than
to the higher social class. They burned their houses, raped their impressions.
women, and killed the men who were not able to escape their
wrath. The poor untouchables abandoned their village, and Ancient Economic Ideas
pleaded for Justice from the national government. Ancient economic ideas were based on the Holy
Scriptures and codes of laws. Such ideas centered on the ways
A Good Economic System of making a living. The Bible and the Holy Men regulated
An economic system is responsible for improving economic practices and relationships. Justice and mercy were
economic conditions of the people. However, economic encouraged. Greed and extortion were despised. The pursuit of
condition does not only mean material sufficiency like money, excessive wealth met social disapproval.
food or houses. It also includes economic freedoms and justice. The famous Greek philosopher Plato was also against
A person who has plenty of food to eat and clothes to wear, but the accumulation of wealth through lucrative trade or
could not choose his job or he has no freedom to choose how commerce. To him, agriculture is very important, and he was in
and where to spend his income, is certainly not happy. The favor of specialization of production. He said that there is a need
for diversity of occupations since no person is self-sufficient, appreciated because of its natural shortcomings. Serra claimed
and people have many wants. In his book The Republic, he that manufactured products could be sold readily abroad than
explained an ideal state. He said that the members are to be agricultural products. He further stated that agricultural goods
educated from childhood for their responsibility, and they are to are perishable and bulky, and he mentioned other limitations,
be chosen through competitive examination. There is no gap like limited areas of land and the great dependence of
between the rulers and the ruled because the former are not agriculture on the weather conditions.
allowed to own properties, except for what is necessary to It was Thomas Mun who provided the ways of
support them. achieving favorable foreign trade. Being an experienced foreign
Another great Greek philosopher Aristotle likewise trader himself, he was a real expert. In fact, he contributed the
stressed the value of management of agriculture. Like Plato, he idea of the balance of payments. He explained about the exports
was not favor of too much wealth. He did not like usury and and imports of goods and services. Foreign trade is favorable if
trade. However, he disagreed with Plato about communal exports are greater than imports. The writings of Mun, an
property. Aristotle claimed that this is not feasible and that it Englishman, dominated the whole concept of mercantilism in
destroys individual incentives. On the other hand, Xenophon, Europe.
classmate of Plato when they had been the students of Socrates,
was in favor of capitalism. He proposed that the government Physiocracy — Rule of Nature
should promote trade and shipping. He also encouraged the Many significant changes took place in Europe,
formation of more silver mining companies to increase general especially in England and France, during the 18th century. Such
wealth. Moreover, he was in favor of joint-stock companies, developments included the growth of cities, the increase of
specialization, and division of labor. Just like the other ancient wealth, the creation of science, and the search for better ideas:
intellectuals, Xenophon considered agriculture as the basis of The Enlightenment in England and France greatly stimulated
wealth. thinkers and philosophers to question the old doctrines and
thoughts. Eventually, dependence on the Greek philosophy and
Medieval Economic Thoughts the church dogma began to diminish.
Feudalism reached its peak during the Middle Ages in The expansion of science and the increasing number of
Europe. Agriculture was the source of livelihood. With the various inventions opened up some realities of life and the
rebirth of trade and commerce in the Mediterranean region, and world. People started to rationalize human behaviour and the
its rapid subsequent growth, the merchant class became wealthy existence of institutions. They concluded that it was not the will
and powerful. The once powerful feudal lords lost their of God that created the conditions in the world. Rather, it was
influences. Ideas of cooperation developed among the the product of causes and effects which conformed to the laws
merchants to protect their own interests, and to attain their of nature. However, those who still believed in God stated that
common objectives. As a result, merchant guilds were the will of God was expressed in the natural law.
organized. Later on craftsmen guilds were also formed. Such Philosophers claimed that people are poor because they
guilds were in full control of many economic activities in violated the laws of nature. An example of this is when one is
Europe at that time. They also funded the construction of public lazy, extravagant or a drunkard. He is likely to make his life
works, and the splendid churches and cathedrals of Medieval miserable. A man who neglects his health has a greater chance
Europe. of getting sick. On the other hand, those who obey and follow
During the later part of the medieval period, the church the laws of nature were believed to promote their own good. In
became very powerful. It was an active participant not only in the same manner, an economy or society that conforms to such
religious affairs but also in political and economic activities. laws would be successful, according to the thinkers.
Most of the scholars and writers were churchmen. The most
admired of them was St. Thomas Aquinas. He preached Wealth came from the land
distributive justice and compensatory justice. The former refers In France not long before the Revolution, the first
to fair distribution of goods among the members of society. The modern school of thinkers to call themselves economists
latter means just wage and price. emerged. They subscribed to the concept of natural law as both
Aquinas condemned usury and other unfair practices of basic and benevolent. Later on this school was named
capitalism. However, the position of the church regarding Physiocracy which means the rule of nature. They stressed the
capitalism appeared ridiculous because it also actively importance of agriculture because they claimed all wealth came
participated in profitable businesses. Despite the opposition of from the land. In support of their theory, they explained that
the church, trade and commerce grew. The security of the people could not exist without food and natural resources. The
church and the feudal lords were threatened. Their powers farmers therefore are the real producers. Industrialists, traders,
started to fall as capitalism began to rise. and craftsmen are not in the real sense productive. It is only
agriculture which can double or create more goods. For
The Economic Doctrines of Mercantilism example, one seed can produce more fruits. One animal can
The great thinkers of Europe, like Machiavelli, Bodin, breed more animals. In fact, it is the farmers who feed and
and Serra, influenced much the growth of capitalism. They provide jobs to the manufacturers, traders, and industrialists.
asserted the supremacy of the state over all other sources of Such aforementioned views of the Physiocrats are still valid in
powers, including the church. Economic ideas then were agricultural countries. The farmers are the backbone of the
focused on the vital role of the state in economic development. whole national economy. Without them it is really difficult for
They claimed that it is the duty of the state to create and the people to survive and the economy to operate.
accumulate wealth. The ideas of the Physiocrats were against those of the
Wealth came from gold and silver and a wealthy nation Mercantilists who considered money as the real wealth. They
was considered powerful and prestigious. Countries without criticized the theory of the favorable foreign trade of the
gold and silver mines could acquire such precious metals Mercantilists. To the Physiocrats, favorable trade only drained
through favorable international trade, and colonies with gold the resources of the country, because it gave .more goods than it
and silver mines. As a result, the big European nations fought received. They believed the real wealth of any nation are the
one another in getting more colonies. As a matter of fact, the products of agriculture and not money in the form of gold and
notorious English pirate, Francis Drake, specialized in capturing silver. The economic ideas of the Physiocrats came from the
the ships of other countries loaded with gold. One of these was a ancient doctrines. The Greek philosophers and Roman writers
galleon which he seized near the California coast which sailed also considered agriculture as the real wealth. Since
for Manila. And he became a hero of England for his high seas mercantilism was a failure in Europe, except for England, and
adventures. that it had many shortcomings, the Physiocrats argued that their
To achieve the objectives of mercantilism, country should return to agriculture.
manufacturing was given top priority. Agriculture was no longer
Laissez Faire Theory supply. For example, if the demand for labor is greater than the
Laissez faire is a French term, and it was introduced by supply of labor, then wage increases.
the Physiocrats. It connotes noninterference, liberty or freedom. Smith, in claiming that production is the only source of
In economics, it means the government should not intervene in wealth, was more or less referring to industrial production
economic affairs. Just let the forces of the market interact with which was taking place in his society. The application of
one another. This is in accordance with the natural law, and the division of labor and machinery is more appropriate in industry.
results would be good for the individuals and society, according At that time, most of the farmers of Great Britain were tenants,
to the Physiocrats. and they were exploited. For this reason they gave up their
Giving grants and subsidies to industries was rejected farms, and worked in factories. So his theory of wealth has been
by the Physiocrats. They said that it is a form of corruption and based on industrialization, and not on agricultural development.
favoritism since the industry is non-productive — unlike Therefore, in this respect, he differed from the other earlier
agriculture. Quesnay, the leader of the Physiocrats, stated that thinkers who favored agricultural development.
prices of manufactured goods are higher than the prices of their Although Smith stressed free competition, and the non-
raw materials. The difference should represent the actual cost of intervention of the government in economic affairs, he made
labor that produced the goods. Therefore, he said, market should some exceptions. For instance, he encouraged the government to
be based on the cost of labor. promote shipping. He favored the imposition of tariffs for
Individuals should be free to pursue their own bargaining purposes and for equalizing competitions.
particular economic interests. They should be free to choose Furthermore, Smith stated the role of the government should be
their own economic enterprise or occupation. The government confined to defense, justice, education, public works, and
should not help or hinder them. All these are in conformity with protection of foreign trade. And of course, the government could
the laws of nature, according to the Physiocrats. If such engage in public finance. The basic principles of taxation came
economic freedoms are allowed to take their own course, they from Adam Smith.
believed businessmen, consumers, and the whole society would
be better-off. Such theory was developed further by the classical Theory on population
economists under the leadership of Adam Smith, a Scotsman. The Industrial Revolution which started during the later
part of 1700's developed in an environment of laissez faire. It
The Classical Theories was just beginning during the time of Adam Smith, and he was
The real founder of the classical school of economics not able to witness its results. When he explained the good
was Adam Smith. He was welleducated in the classics, results of free competition, he had in mind the virtues of people.
mathematics, and philosophy, and he became a professor of But things did not materialize for the good of individuals and
moral philosophy at Glasgow University. He lived at the society. Instead, the powerful capitalists emerged, and exploited
beginning of the Industrial Revolution. His close association the workers.
with the intellectual elite like Quesnay, Rousseau, and many The flannel weaving industry in the rural collapsed
other great thinkers broadened perspectives. In 1776, his famous because of the more efficient factory system. Consequently,
book Wealth of Nations was published. It explains how wealth there was a great influx Of rural people in the urban
of the nation is created and distributed. For many years, such communities looking for jobs. This created both social and
book became the bible of economics. economic problems. The capitalist took advantage of the
Smith being greatly influenced by the ideas of the situation. They gave very low wages to their workers, and
Physiocrats believed in the merits of the free competition forced them to work up to 17 hours. The government did
concept. He said that a free market mechanism could provide nothing to help the workers. Poverty and squalor became
more benefits to individuals and society than an economy run by widespread among the workers. Thomas Malthus, a religious
the government like in the case of mercantilism which even minister, saw the growth of population and human miseries. He
established trade monopolies. This theory still is the bone of stated that population explosion is the root cause of the
contention among many economists and political leaders. Some problems of society.
favor a free enterprise while others advocate government Malthus said that the rate of population growth is
intervention in the economy. higher than the rate of food production. He did make some
Smith was not only able to influence thinkers and dismal predictions of the future of mankind. To control
scholars in his country but also in other countries. The more population growth, he proposed late marriages and abstinence.
popular ones were Thomas Malthus, the author of population Such ideas constitute what is now the famous Malthusian
theory, and David Ricardo who developed the law of theory.
comparative advantage. Likewise, the economies ideas of Karl The dismal predictions of Malthus have not taken place
Marx came from the writings of Adam Smith. Subsequent topics in the developed countries. Their higher stage of economic
explain the aforesaid theories. growth has become a very effective birth control device, and
their modern production technology has given them enough
Production is the real wealth food supply. It is only the less developed countries which are
Adam Smith explained in his economics book how the now afflicted with the Malthusian theory. They have a very high
wealth of a nation is increased, and the manner of its birth rate but they have very low food productivity. Many of
distribution. According to him, the only source of wealth is them are already dying from hunger and malnutrition.
production through labor and resources. He wrote that wealth
can be increased through of labor and the use of machinery. The theory of comparative advantage
Moreover, he noted that improvements in transportation can David Ricardo, one of the famous classical economists,
promote the growth of commerce and industry. Nevertheless, developed the theory or law of comparative advantage. Based
Smith provided the conditions for increasing the wealth of the on theory, nations should export the goods which they enjoy the
nation, such as the size of the market, labor efficiency, and the greatest advantage, and should import the goods which they
total population. He said that individual welfare depends on the have the greatest disadvantage. This simply means — do not
ratio of total production to total population. produce the product if it is cheaper to buy it. Ricardo explained
Under a free market economy, Smith claimed that this theory by giving two countries and two products as
production would be most efficient. Through free competition, examples. The comparative advantage refers to the lesser
only the best producers survive. This means they are the most number of hours or days of producing the product. To illustrate
efficient — and the consumers can get the best quality and the —
lowest price product. This cannot happen under monopoly. Such
free competition views of Smith also applied to wages and Countries Rice Calculator
interests. According to him, both are determined by demand and Japan 120 days 10 days
Philippines 90 days 15 days
condition, especially the casuals in plantations. Such
The above illustration shows that Japan has a exploitations are the root causes of many troubles in the rural
comparative advantage in calculator while the Philippines in areas, like in Central and South America.
rice. Following the theory it would be better for Japan to
produce calculator and just buy rice from the Philippines. In the Promotion of Human Values
case of our country, it would be more economical not to produce Jean Sismondi, a noted Italian writer, disagreed in
anymore calculator. Just import from Japan, and concentrate in many ways with Adam Smith. He stated that wealth should not
rice production. be measured in terms of material things but in terms of human
The classical economists, like Ricardo, equated the welfare. He pointed out that no nation can be considered
value of a product with the cost of labor that went into its prosperous if the conditions of the poor have not been improved.
production. Thus, a product which takes more hours or days in He rejected the laissez faire theory which provided
producing has a higher price or value than a product with lesser freedoms to individuals to seek their own self-interests for their
hours of producing it. For example, if it takes 4 hours to catch a own welfare and that of society. Sismondi asserted that the state
wild rooster and only 2 hours to catch a big fish, then the price should interfere to prevent the unfair distribution of wealth
of the rooster is twice that of the fish. In the aforementioned spawned by unrestrained capitalism.
illustration, it is cheaper or Japan to buy the rice than to produce The main contention of Sismondi is focused on the
it. welfare of the poor. He was more interested in social justice
The theory of comparative advantage is being practiced rather than in the accumulation of wealth by the industrial
in international trade. Agricultural countries export raw system manipulated by the powerful capitalists for their own
materials and import finished products from the industrial materialistic inclinations.
countries. The problem is that the prices of raw materials and The economic ideas of Sismondi were the products of
other agricultural products are very low in the world markets. his observations of capitalism. Like the other socialist thinkers,
And yet the prices of finished products are very high. The he was outraged to witness the human miseries created by the
industrial countries control the operations of the world markets, existing economic system. Thus, he proposed an active role for
and they can manipulate prices of goods to the disadvantage of the government in protecting human values.
the less developed countries which are basically agricultural
economies. Factors of Economic Development
Friedrich List was a German professor of economics
Theory of Karl Marx and political science. He also did not agree with the ideas of the
The economic ideas of Karl Marx were basically classical economists about production, free trade, and free
derived from the classical economists. He only qualified his competition. According to List, the progress of a nation is great
theory of value by emphasizing that labor must be socially not in proportion to the accumulation of wealth, but in
necessary. Marx maintained that the workers are the real proportion to the development of the productive forces. Such
producers of goods. And yet, he claimed the benefits of forces refer to natural resources, science, arts, government laws,
production go to the capitalists and not to the workers. education, peace and order, morality, and the harmonious
Using the process of "dialectics" of Hegel, Marx stated relationships of the various industries and occupations. As an
that there is a class conflict between the workers and the example, he mentioned some of the great productive forces,
capitalists. He said that the workers constitute the "thesis" which such as the Christian religion, monogamy, postal system,
is the positive, and the capitalists the "antithesis" which is the transportation, invention of the alphabet and printing, freedom
negative. The opposition of the two groups would result to a of conscience, parliamentary legislation, etc.
new system called "synthesis," Another disagreement of List with the classical
Karl Marx developed his theory of scientific social economists was free trade based on the law of comparative
evolution by saying that in the beginning – when it was still a advantage. He claimed that such law favors only England
primitive society - there was social equilibrium. However, when because of its higher stage of industrialization. He cited the
new ideas and new tools of doing things were introduced, the cases of younger nations like Germany and the United States
old system was disturbed. Man became greedy for power and which could not develop their economies if they applied free
wealth. Man was greatly concerned with material things. This trade. List said they could not compete with the products of
led to a class struggle between the workers and the capitalists. England.
The latter have wanted to accumulate wealth at the expense of Nevertheless, List was in favor of free trade among
the workers. nations if they are all developed. He proposed that a nation
In the class struggle between the workers and the should protect its industries by means of tariffs during its early
capitalists, Marx predicted the downfall of capitalism due to its stage of industrialization. Once such industries become viable
limitations. However, such prediction did not come true. There and strong, protection would be lifted according to List.
were no revolutions in the industrial countries. Capitalism has Likewise, he mentioned that once a nation becomes highly
not disappeared; instead it has expanded and become stronger. developed, it could practice laissez faire.
Compared with other economic systems, countries with
capitalistic societies have high standard of living, such as the Theory on Progress and Poverty
United States, Japan, Canada, and the others. The book Progress and Poverty made its American
The free enterprise economy still shows the greatest author Henry George famous. He saw the rapid economic
potential for economic growth. Profit motive is still a very good growth in California during the 1870's amidst widespread
incentive in encouraging the private individuals to participate in poverty. Such condition stimulated him to analyze the different
business. In fact, the Russian agriculture is a failure primarily theories of distribution among the factors of production, like
because of its economic system. Farmers are labor, capital, and land. He was not satisfied with the doctrines
more efficient when they are given economic incentives. of the classical economists regarding wages, profits, and rents.
However, the ideas of Karl Marx are not without In his analysis, he concluded that rent is the root cause
significance. His warnings greatly contributed to the welfare of of poverty. George argued that increase in the value of land is
the working class. Workers have become more united and not due to its fertility, but due to the growth of population in the
organized their labor unions. On the other hand, capitalists have community and the progress of society. He said that one can
improved their management policies towards their workers. become rich by purchasing not the best farm but a piece of land
However, in many parts of the world, capitalists still exploit near the center of a fast growing city. It does not matter, he said,
their workers. Such abuses are rampant in the less developed whether this is the most fertile land or solid granite.
countries where there is over-supply of labor, and poverty is Henry George, rent is an unearned income. The reason
widespread. Poor people are forced to accept low wages. for such view is simple. During the early days, land could be
Agricultural workers experience more miserable working acquired free through proper application from the government.
Others got their lands through inheritance or by historical Businessmen put up more factories because they expect greater
accident. Because of the sudden growth of population and demand tor their products. There are other factors which
business, land rents have increased. Thus, the landowners are determine investment, such as price, cost of production, interest
the beneficiaries of unearned incomes. Businessmen pay the rate, competition, etc. However, the m0st important factor is the
rents. If rents increase, they have to pay more. This means the expectation of profit or returns of investment. According to
cost of production or business gets higher. But such cost is paid Keynes, as long as returns or investments are higher than
ultimately by the consumers when they buy the goods of the interest rates, there is investment. Even the interest rate is very
businessmen. The latter let the buyers pay the rents in the form low, it does not follow that investment increases. During the
of higher prices. This makes the economic conditions of the Great Depression there were no investors even if they were
poor more depressed. offered very low interest on bank loans. The reason was that
there was no profit expectation. On the other hand, a very high
Key to progress interest rate does not discourage a borrower if he feels he will
Henry George proposed that increase in rent and value make more profit in his projected investment.
of land should be taken by the government in the form of tax. Keynes proposed to the United States government to
All taxes should be abolished, except tax on land. However, spend more money in order to solve their depression. So, many
improvements introduced by the landowners are not covered by public works were constructed which created massive
the single tax theory of George. Only the unearned incomes employment. The situation generated income for the people.
from the land should be taxed. George believed that such They started buying more goods and Services. This encouraged
revenues could finance all government expenses, and there the private business sector to meet the growin8 demand of the
would be no need for other taxes. Consequently, this new tax people. As a result, employment was also created by the private
program stimulates trade and commerce. Likewise, workers sector. They needed more people in producing goods and
would no longer bear the heavy bur den of paying taxes on services. Such favorable conditions accelerated further
production and consumption. Moreover, George claimed that economic activities. And the Great Depression disappeared.
landowners would be encouraged to improve their landholdings Keynes became the "father of modern economics.
to gain profits rather than give their unearned incomes to the
government. These would generate more production and Innovation Theory
competition. Articulating the good points of his single tax Joseph Schumpeter is the author of the innovation
theory, George predicted a paradise for the whole society. He theory. He placed emphasis on the role of the innovator in
said, if adopted it would mean full employment, eradication of economic development. The innovator is the economic leader or
slums, and the steady rise of wages due to rapid increase in the entrepreneur who has the courage and imagination to handle
labor demand. old systems, and be able to transform theory into practice.
The theory of single tax became popular. Some local An innovation can be any change initiated by the
governments tried it under limited applications. But it was not entrepreneur which leads to a faster and better development of
successful. However, the idea of unearned earnings of the an industry. Such change may be in the form of an invention,
landlords has gained the approval of social reformers and method of production or marketing strategy.
philosophers. Because of innovations introduced by few daring
The crusade or George for a single tax scheme did not entrepreneurs, the industry concerned became profitable. Such
succeed. Landowners were very powerful even during his time. favorable economic situation attracts more innovators. They
The rapid increase in population which George saw was brought merely follow the economic leaders. This means there is more
about by the "gold rush" in California. Together with the rapid business expansion employment and production.
increase in mining companies, the value and rent of land went Evidently, in the theory of Schumpeter, the key factor
up tremendously. The poverty that George saw was the product in economic development 1s the innovator or the entrepreneur.
of a prolonged depression in the economy. This was the result of He is the planner, organizer, coordinator and implementor of
business cycles. economic activities. 1t has been observed, however, that the role
of the innovator in the less developed countries 1s hardly felt. In
Modern Theory of Employment general, people are conservative in their investments. Many
Employment is determined by supply of and demand business enterprises are owned by families, and these are
for labor. A decline in employment means that wages are nigh managed by their own members. Their financial resources are
in relation to the prices of goods. Producers are not willing to usually invested in safe business like real estates.
manufacture goods if they know they are going o lose. So they
get more workers if they are willing to accept lower wages. This Some Growth Models
means they make more profits. Thus, the main point of the Economic models can be simple or sophisticated. It all
theory is that the cause of unemployment is high wages. There depends on the architect or the situation which the model tries to
is more employment when wages are lower. Such ideas improve. Such models show the relationships of inputs and out
constitute the classical theory of employment. This was puts. However, their key inputs vary from model to model. For
accepted for many years. instance, one economic model places capital as the key variable.
However, during the Great Depression in the United Another economic model stresses technology. Their
States in the 1930's, there was widespread unemployment. Even effectiveness, however, depends on several factors. Local
if people were willing to accept low wages, there was no conditions like climate, natural resources, manpower, money,
demand for jobs. Hence, the validity of the classical theory of social structure, culture, values and institutions have to be
employment was tested, and it failed. It was John Meynard considered.
Keynes, an English economist, who found the answer to the Most economic models were made by the United States
American problem. He claimed that high wages could not be the and Western Europe. Naturally, these were based on their own
cause of unemployment. He cited the example that workers in local conditions. Not a few developing countries have been
America could not find jobs at any wage. inclined to copy such models. Even Western economic advisers
apply these models in the economies of the less developed
Keynesian theory of employment countries. The results have been failures. This was experienced
Based on the Keynesian theory of employment, which by Japan during its formative years. But the country was quick
is a modern theory, employment determines the necessity of to modify Western technology to fit its local conditions. Here
equating the aggregate supply of goods with the aggregate are some of the more popular growth models:
demand for goods. The Ricardian growth model. This was derived from
When people buy more goods, it means there is more the law of diminishing returns of David Ricardo. He stressed the
expenditure or consumption. This condition stimulates more limits of economic growth brought about by the scarcity of land,
investments which also increases employment and production. its being a fixed input, and its diminishing productivity. To
reduce the constraints of economic growth, Ricardo proposed In economics, capital refers to finished goods which
the discover of more land for cultivation or more food at lower are being used to produce other goods. These are the machines,
prices should be imported. buildings, tools, equipment, etc. These are also specifically
The key factor in the growth model of Ricardo is land. called physical capital. In the case of money, it is financial
'This means the agricultural sector assumes a very vital role in capital. People are classified as human capital.
economic development. To the poor countries which are mainly Obviously, machines accelerate the production and
agricultural economies, this model appears to be relevant. Many distribution of goods. Work can be done in lesser time and
agricultural countries have been able to increase their farm effort. This also reduces the unit cost. During the ancient times,
production through the cultivation of more farm lands not people relied on men and animals for their production and
through efficiency. In the case of the highly developed construction. For example, their temples and pyramids were
countries, their agricultural productivity has greatly increased built by thousands of workers, mostly slaves. It took them years
through the use of technology and machinery. For instance, the to finish their projects. Unfortunately, there are still many parts
problem of scarcity of farm land in Japan has been reduced by of the world which are using primitive methods of production
producing more crops in its limited available farm. It has the and construction. And these contribute to their slow pace of
highest rice productivity in the whole world. development.
The Harod-Domar model. This model was developed The rich countries, like the United States, Japan, and
by Sir Harrod of England and Professor Domar of America. The those in Western Europe, have been using modern machines in
key factor is physical capital like machinery, buildings, agriculture, industry, and service organizations. As a result, they
equipment, etc. have become efficient in their economic activities. They
The model shows the relationship between the input produce better goods at lower cost. In the world markets, their
and the output. 1he input is capital, and its efficiency is reflected products are more preferred.
in its output. For example, a certain amount of capital stock or On the other hand, the less developed countries do not
physical capital has been invested. f the results or outputs have even have enough fur for road construction, electrification,
been substantial in terms of employment, production and communication, irrigation, and other vital projects for economic
income, then the capital has been used efficiently. The rate of development. Their incomes from selling raw materials and
growth in the economy can be measured through the GNP or crops to the industrial nations, together with taxes, are not
real per capita income. sufficient. In most cases, the less developed countries depend
Evaluating the Harrod-Domar model, the efficiency of onforeign loans and investments to develop their economies. In
capital in relation to economic growth depends on several Latin America, most of the imposing buildings and impressive
factors. For instance, values of the workers, their skills, machines are owned and managed by foreign corporations – the
technology, government policies, and the like determine multinational corporations. Most of these giant enterprises
whether capital could be productive or not. Poor nations are belong to the United States.
deficient in capital. But this is not the key factor in their However, despite the presence of these profitable
economic growth; it is more on human and institutional businesses, the countries and peoples in the region are very
developments. poor. For example, Sao Paulo in Brazil is the largest and fastest
The Kaldor model. The author of this economic growth growing urban community in the Western Hemisphere. In spite
model is Nicholas Kaldor. The key factor is technology. He of its glittering affluence, most of its people live in poverty and
pointed out that technology is embodied in physical capital. He squalor.
further stated that technical progress comes from investment.
Examples are modern machineries, tools, and equipment. These Technology
are symbols of technical progress, and they are the products of Technology generally refers to better techniques or
investments. Moreover, Kaldor claimed that it technical methods of production. However, it can also be applied in other
progress grows faster than capital stock, the additional fields like public administration, education or social work. For
productivity of capital increases. And this leads to more instance, social technology is concerned with the improvement
investments. of attitudes and values of the people. Public administration
A very good example of economic growth due to technology deals with the improvement of social goods in order
technical progress is Japan. It has invested a big slice of its to maximize the satisfaction of social wants.
national budget for research and technology. As a result, It has Research has contributed much to the development of
become very progressive as a nation. Technology has greatly technology. The discovery of a new technique is invention,
improved its industries. It is now number one n the use or robots according to Schumpeter. He pointed out that the practical
in factories. In fact, such machines are even used in hospitals as application of an invention to production for the market is
attendants, and in offices as secretaries. For the less developed innovation. However, not all innovations are for the markets.
countries of Asia, Japan can serve as a good economic model. It For example, political or social innovations are intended for
also started from a feudal economy. improving conditions in the government or society.
Research and development require big funds. Through
TOPIC III: DETERMINANTS OF ECONOMIC these better ways of doing things or producing goods are
DEVELOPMENT discovered. The rich countries can afford to undertake necessary
and expensive research and development projects. They give
Economic development is not determined by economic high priority to such undertakings because their future economy
factors alone. There are noneconomic factors that affect greatly depends on them. Among the rich countries, both the
economic development, and they have greater influence than the government and the business sector are actively engaged in
economic ones. Examples of economic factors are capital, research and development.
technology, and market. While the non-economic factors are On the other hand, the less developed countries merely
government, religion, education, social structure, values, copy or imitate Western technology. Apparently, such practice
culture, etc. Clearly, solving economic problems with economic is cheaper. They are spared from spending millions of
solutions only is inadequate. More often than not, the problems money for researchers, scientists, laboratories, buildings, and
remain unsolved. For instance, the planning and implementation equipment.
of an irrigation system does not only involve money and method
but also the attitudes of those who will implement the project. Technology for the less developed countries
This part discusses the various factors of economic Actually, there is nothing wrong with the importation
development. Their effects on the development of nations, of technology. It saves both money and time. However, the
especially the less developed ones are explained. imported technology should be suitable to local conditions. The
economic, social, cultural, political, and managerial aspects
Capital
have to be taken into consideration in the application of a there is a good demand for their products. The same situation
foreign technology. applies to farmers. They are encouraged to raise crops that have
Many years ago, Japan was a notorious imitator of favorable markets. Thus, a practical and rational way of
Western technology. Immediately after eliminating its feudal convincing people to produce more goods is the presence of a
economy, Japan completely copied the agricultural technology favorable market.
of the United States and England and applied this in its farms. Obviously, it is unfair for any government agency to
The result was a dismal failure. The individual farm units of tell farmers to improve their production methods if there are no
Japan are small, and the imported machineries are not profitable markets for their products. Worst, if there are not
appropriate. These are only pro per for large farms like those in even feeder roads connecting their farms to the markets. In
Europe and the United States. Another case, a poor country reality, there are still many far-flung villages in Latin America,
bought a giant machine from Russia. This was used in Africa, and Asia which have been isolated from civilization for
constructing a huge dam in the countryside. While the giant centuries. Such condition greatly contributed to their poverty
machine was in the process of excavation, thousands of and ignorance.
unemployed people were watching with admiration the Needless to say, the industrial countries have
wonderful job of the machine. Evidently, a poor country with a considerable advantages in both local and foreign markets. Their
very large population of unemployed should give first priority to products are of better quality. Their prices are lower, if there are
labor-intensive technology. The jobless people should work in no taxes or tariffs imposed on them. The less developed
the construction of the dam not the expensive imported countries are excellent markets for their products. The colonial
machine. mentality of the people further bolsters the lucrative business of
Likewise, Professor Gunnar Myrdal, author of Asian the multi-national corporations.
Drama, noted that Western technology has been adopted in
Southeast Asia without proper consideration of the local climate Social Structure
and soil conditions. Naturally, this has an adverse effect on A society which has a more equitable distribution of
production, Being poor countries, their scarce resources should wealth and income, and economic freedoms, provides a more
not have been wasted by the improper application of fertile environment for economic development. Members of
technology. society are induced to pursue their own individual interests, be it
In the case of the industrial countries, they use economic, social, cultural or political. And this is good for
machines or capital-intensive technology, because labor is economic development. Being an open society, even the
scarce and therefore expensive. So, it is more economical for humblest citizen can aspire to be rich or be the leader of his
them to use machines rather than employ workers. For the poor country. Opportunities for improvement are open to all members
countries, they have an oversupply of unemployed and of society. Hence, a man in the lower class can move upward.
underemployed individuals. They should therefore use labor- On the other hand, a society whose wealth and income
intensive technology. This means more labor and less machines. be long to very few families does not encourage economic
In a meeting with farmers and fishermen in a fishing development. Since the fruits of development do not go to the
village in Cavite, former Prime Minister Cesar Virata discussed people, they have no enthusiasm to participate in any
the local economic problems. In the process, one farmer stood government development program. It is even worst, if it is a
up and complained about the bad condition of his crop. He close society. People who belong to the lowest social class
proposed a technique to remedy his problem. However, Virata cannot move to higher social structure because it is the written
told the farmer that his approach is a "cadillac technology" law. Such situation only breeds poverty and ignorance. The poor
which is expensive and imported. He then suggested that a local have no more desire to work hard and study. Their social classes
technology be develop which is more suitable and less are already pegged, and there for they have no better future and
expensive. In the same manner, Schumacher, author of Small is that of their children.
Beautiful, suggested an intermediate technology for the less In the case of the caste system of India, it was
developed countries. This type of technology is between a abolished by the constitution. However, such evil has not been
primitive technology and modern technology. It is more erased from the abusive nature of the more privileged members
efficient than a primitive technology and less expensive than a of the Indian society. They still consider the poorest people as
modern technology. Such technology is labor intensive. untouchables. These are the slaves of India. They perform all
the dirty work, such as water carriers, street cleaners, hospital
Market helpers, laborers, and servants. They are the social outcasts of
The growth of markets reflects an expanding economic India, and they are exploited. In the case of the Apartheid policy
development. For as long as the various sectors of the economy of South Africa, the Blacks are considered the lowest in the
are equitably benefited, economic growth is real and enduring. social ladder. In terms of population, they are the majority. And
A flourishing market which enriches only the foreigners and the yet, they cannot vote in the elections. They have practically no
very few local elite only aggravates the problems emanating political, economic, and social freedoms. The inhuman laws
from the maldistribution of wealth and income. Such condition have been made by the Whites who only constitute a minority
is wide spread in the less developed countries. group.
Transportation, communication, and electricity are No less than Mohandas Gandhi, then a young lawyer
greatly helping the growth of markets. Such external economies and a new graduate from a university in England, was kicked
of scale reduce cost for both producers and traders. In addition, out from a first-class train. He had not known earlier that the
contact between sellers and buyers is easier and more locomotive was exclusively for Whites. It has been, indeed, a
convenient. In this connection, capital and technology are paradoxical situation. South Africa is a land of the Blacks but
directly involved. Machines and other physical facilities are the few Whites who claimed to be educated and therefore
needed to accelerate production, processing, and distribution. civilized rule the country with injustice.
Likewise, technology improves production, processing, and
distribution. This is not only favorable to the sellers but also to The Family System
the buyers. A more modern production and marketing system Family members in Western societies like the United
saves cost and improves the quality of the pro ducts. Goods with States are more individualistic and self-reliant. Adult children
lower cost of production and distribution have generally lower are financially independent from their parents. They are free to
prices. This increases the purchasing power of the buyers, and pursue their economic inclinations anywhere. Considering the
so demand for the products also increases. security of the parents, their family obligations are minimized.
A market becomes bigger when more people buy more Unlike in the less developed countries, especially among
goods. This stimulates investments and production. It is only Asians, the children have to take personal care of their poor old
expected that businessmen are willing to produce more if parents.
An extended family system, which is common in the clothes, and using their appliances and tools. This is colonial
Philip pines and other developing countries, is good in the sense mentality, pure and simple. They love the products of their
that there is unity, and the welfare of the old and the young former colonial masters.
members are protected by the stronger adult members, usually The local elite in the Caribbean islands display their
the eldest sons. However, it has dominant features which are not European goods in order to enhance their social status. Their
favorable to economic development. For example, many houses were built in Western architectural style. They wear
married children live with their parents. In case their parents can Western clothes. Their cars are cadillacs. Even the unschooled
afford to support them, the children are likely to lose their self- who are wealthy display their Parker pens. The Philippines is no
reliance. They do not work hard and just depend on their exception. Imported goods are very attractive to the Filipinos. In
parents. In fact, not a few young men have the courage to marry fact, a few Filipinos imitate the diction of the Americans, and
even if they are jobless because they know their parents will other American mannerisms.
take care of them in the meantime - or even for many years. Another example is Argentina. Its people fervently
Another, close family ties hamper labor mobility, and emulate the Europeans. Based on a Newsweek article, the
the choice of better economic opportunities. Their grandparents Argentinians were described as a bunch of Italians who speak
or parents do not like their children to work in far places, Spanish. But they wish they were British and act like they were
especially if they are women. As obedient children, they follow French. Buenos Aires is proud of the five-star hotel, Claridge,
the wishes of their old folks. However, there are exceptions in Harrod Department Store, and a temporary reproduction of Big
the case of Ilocanos and Visayans. They are courageous Ben. The children of the Argentine elite study in English
adventurers. They are willing to work in any part of the world. language schools and play polo. The laborers of Argentina
In the remotest barrios in the Philippines, almost always you can patronize soccer teams with English names like River Plate and
find an Ilocano public schoolteacher. Likewise, the family Newell's Old Boys.
obligations of the older children to their parents and younger Such misplaced cultural values do not encourage at all
brothers and sisters have been a part of culture. The unmarried the production of local goods. They do not help the development
older children especially have an obligation to support their old of local industries. People do not take pride and appreciation in
parents, and the younger siblings. Such responsibilities restrict their own products and industries. In the case of Japan, despite
the economic opportunities of the older children. If the family is its adoption of Western technology in the beginning of its
engaged in farming, then the unmarried older son has to help his economic development, it has never lost its own culture and
father. In the Philippines, many poor marriageable children tradition. The Japanese people love their own country, its
postpone their marriages in order to fulfill first their obligations products and its institutions.
to their parents and other immediate relatives. Whenever an underdeveloped country attains rapid
In the highly developed countries, the governments industrial growth through foreign investments or through its
take care of the aged and the jobless. So children of poor own resources, some of its cultural values which are not
families are relieved of the burden of supporting their close favorable for economic development do not change. Such
relatives. They have more opportunities to work for their own cultural lags form barriers to real and meaningful economic
future. And this augurs well for economic development. development. Most of these problems of development take place
in some societies in Africa and the Middle East due to foreign
Cultural Values investment and their petro-dollar resources. With these, they can
Some cultural values have negative effects on easily build beautiful houses, modern buildings, and other
economic development. They retard the growth of the economy. external symbols of apparent economic progress.
For example, in the Philippines, cultural values such as However, in spite of their physical development, some
bahalana, mañana habit, ningas cogon, and other similar values so cities practice cannibalism, and others still consider the big
are not conducive to economic development. rivers, violent volcanoes, the moon and the sun as their gods.
According to Professor Myrdal, industrialization They appeal to these for the success of their crops, and their
requires efficiency, mobility, discipline, and punctuality. In his own personal welfare. Definitely, such practices do not
ten years field research in Asia, he observed that many Asians contribute to real economic development.
do not have these. In our country we have the familiar Filipino
time. If the time of the meeting is 8:00 A. M., it means 9:00 A. Political Conditions
M. or even 9:30 A.M. Another characteristic of the Asians is to Political conditions have considerable impact on
say yes when they really do not mean it. The idea is to please or economic development. Political stability and fair economic
not to embarass the other person who makes the request or policies stimulate economic development. These attract local as
invitation. For instance, you ask them to attend a meeting, and well as foreign investments.
they say yes. But they do not attend and they have a good The major role of the government is to provide a high
excuse. standard of living for its people. This can be attained through
It is really very different in Western culture. They are higher levels of investments which generate employment and
efficient, punctual, and responsible. These can be observed in production, and through the equitable distribution of wealth and
the Philippines among the American offices. For instance, at the income. Plans, policies and programs are tools of economic
United States Embassy the American officers work hard, and development. These can only operate efficiently under a regime
they are extremely punctual. The Filipino employees at the of good and honest public administration.
embassy have to work hard also. However, many of them But if governments keep on changing very often,
cannot yet equal the consistent punctuality of the Americans. economic programs and projects are likely to suffer. This is a
In contrast, Filipino officers, especially those in the waste of scarce resources. Not a few countries in Africa and
government are not as efficient. Many government offices are Latin America have very unstable governments. Coup d'etat has
doing very little between 8:00 A.M. and 9:00 A.M. In fact, even become a common spectacle. There were cases that only a
during office hours some employees are selling all sorts of sergeant in the army, together with his followers, toppled an
consumer goods. Somehow, they could not be blamed for existing government. Such frequent political disorders and
making sidelines because of their low salaries. And sometimes, changes do not inspire economic development. And this is one
they have nothing to do. major cause why the countries in such regions are generally
poor.
The desire to imitate Singapore is a tiny state. In terms of natural resources,
Many peoples in the less developed countries admire it is very poor. And yet it is very affluent and progressive,
the consumption habits of the Americans and the Europeans. So, compared with most Asian countries. The principal keys to its
they take extreme pride in eating their foods, wearing their economic growth are foreign investments and tourism. These
have been very successful in Singapore because there is an
excellent political stability and a very efficient and honest public presence of dominant values like thrift, industry, and
administration. entrepreneurial spirit among Protestant nations. He
In fact, Singapore has put up a modern infrastructure pinpointed the rise of Protestantism as the cause of the growth
for computer technology. It intends to transform its place into a of the capitalist order in Europe. As an example, China with an
computer center of the world. This would attract more older civilization and richer natural resources was not the
international institutions to invest in Singapore. And this would birthplace of the Industrial Revolution.
be favorable to the economy. More investments mean more Former colonies of Spain are Catholics. They inherited
employment, production, and income. Singapore is one of the their religion from their former colonial master. Most of these
very few countries which can handle foreign investments coin tries belong to the less developed countries. Many of the
effectively without sacrificing the interests of its countries in South and Central America were former territories
people and society. of Spain. Myrdal classified the cultural and religious values of
the Philippines as similar to Latin America. The more than three
Corruption in Public Administration hundred years of Spanish rule in the Philippines has tremendous
According to an economics professor in Singapore, effects on our pervading attitudes and values.
government corruption is the number one obstacle to economic There are several Catholic practices which are not
development in Southeast Asia. He pointed out that very consistent with the principles of economic development. For
precious scarce resources, like money, are not properly utilized instance, barrio and town fiestas are celebrated to honor their
for development due to graft and corruption. respective patron saints. Usually, these are expensive
Government corruption is present in any society. celebrations. Most people, especially in the rural areas, spend all
However,based on observations, such corruptions are more their savings. In fact, many people even borrow money to feed
rampant in the less developed countries like those in Asia. their hundreds of guests from neighboring barrios and towns.
Professor Myrdal stated that corruption has reached even the Such expenditures are wasteful and misplaced, especially for the
higher levels of government officials and politicians. He cited poor. There are also other celebrations which are religious in
the various government offices which have been corrupt, such nature, like marriages, baptisms, etc. In most cases, these are
as the public works departments, government purchasing also conducted in expensive style. They always say it is once in
agencies, and those involved in the collection of taxes, customs a lifetime. However, for the rich to splurge, there is nothing
duties, and export and import licenses. Myrdal mentioned that wrong. They can afford lavish celebrations. But for the poor, it
corruption has not spared even the courts of justice and the is different. They become poorer and incur more debts in trying
universities. very hard to comply with religious traditions.
In dealing with government offices, bribery has been a Nevertheless, religion is only one of the factors of
common practice. There has been a need to bribe government economic development. It cannot totally influence economic
personnel to expedite applications or approvals. Myrdal further growth. The claim of Weber that Protestantism was responsible
observed that through the use of middlemen, businessmen have for the growth of capitalism is not exactly correct. In later years,
bribed high government officials. Of course it has been difficult countries like Spain, Japan, Israel, Singapore, and Taiwan have
to prove that such middlemen really gave the money to said shown great strides in economic development. These countries
officials. The policemen and government clerks have gained the are not Protestants.
reputation of ac accepting bribes in full view of the public. It has
become an ordinarypractice. Their low pay encourage them to Population
commit petty corruption. Population is both an advantage and a disadvantage in
Nevertheless, Asian government have taken measures economic development. It is an advantage if people are
and actions to weed out inefficient and corrupt employees and productive and creative. They can support themselves by
officials. In the Philippines, the present political leadership has harnessing the resources of their environment and by
restructured some government institutions, and removed the manufacturing their raw materials for commerce. Some
corrupt ones. However, the task of cleaning the government is a development economists are not in favor of birth control. To
long and difficult process, considering our Oriental values and them, people are the most important resources in economic
depressed economic conditions. Besides, corruption has become development. Instead, they have suggested the improvement of
an institution. It cannot be eradicated overnight. Laws and the methods of production, especially food production.
punishments are not enough to remove corruption. It is more Developed countries that have insufficient number of people
important that economic conditions of minor employees be encourage immigration of aliens. These are needed to help them
improved, and the moral values of government officials be accelerate their economic development. Other countries recruit
changed. Moreover, the honesty and integrity of top government specialists, technicians, and skilled workers from other
officials can serve as a good example for their subordinates. countries. For example, in the case of the Middle East countries,
it takes time for them to develop their economies if they rely
Religion only on their sparse population.
During the Biblical times, materialism and the pursuit On the other hand, population is a great burden if the
of wealth were despised and discouraged. Similar attitudes were rate of population growth is higher than the rate of production
shown during the time of the ancient Greek philosophers and the growth. Such situation is more serious if the resources of the
Scholastics led by Aquinas. In fact, the Bible contains many economy are not equitably distributed. And these are exactly the
statements against wealth or materialism. For instance, it says problems of the less developed countries. For example, Black
that the poor are blessed for they shall inherit the kingdom of Africa with a population of about 400 million has one of the
heaven. Moreover, it is harder for a rich man to enter the gate of highest birthrates, and the shortest life expectancy – which is
heaven than for a camel to pass through the eye of a needle. only 47 years. Its population explosion growth exceeds its
Such religious concepts and teachings against growth in local production. Indeed, they have been experiencing
materialism are not favorable to economic development. When the curse of the Malthusian theory.
people shy away from the pursuit of wealth, economic growth Poor countries with high birth rates are advised to
tends to be slow and primitive. There is no need for them to adopt family planning programs. However, in general such
work harder and to search for innovations. They are just programs are not really successful due to religious, cultural, and
contended with their simple living. Of course, it depends on the economic reasons. On the other hand, there are many countries
values of people. Many hate economic progress because of its with abundant natural resources and with few people, but they
bad effects, such as pollution, traffic congestion, and the are poor. Brazil is a good example. So the problem is not
destruction of the natural beauty of the environment. population but production. Even if a country is overpopulated, if
Max Weber, author of the Protestant Ethics and the it has a very high productivity, there is progress. Example is
Spirit of Capitalism, claimed that the Protestant countries are Hongkong or Singapore. Actually, there are many rich countries
more progressive. He proved his theory by pointing out the which are overpopulated but they are prosperous.
understandable. They are naturally after the profitability of their
Geography investments.
Geography refers to climate, soil, natural resources, It is noted that in the less developed countries, the rate
topography, and structure of the land. These have considerable of unemployment is high. And even those who are employed
influence on economic development. Countries which are received low salaries or wages. This means the purchasing
endowed with abundant natural resources have greater potentials power of people is very low. Thus, their ability to purchase
for economic development. Nevertheless, there are some goods and services is very limited. In fact, they cannot even buy
countries with barren land but they are rich in oil resources such their most basic needs like food, clothing, shelter, medicare, and
as the Middle East countries. Such resources are good sources of education.
income for funding various programs of the government. For Clearly, from the point of investment, market is small.
example, the massive construction projects in that region are This does not stimulate further investments. Thus, low levels of
financed by petro dollars. These are the export earnings from employment, production, income and consumption become a
oil. vicious circle. In short, poverty and all its miserable
In the case of Africa, it is a giant continent, but only 7 implications remain.
per cent of its land is arable. And only 50 percent of the arable A low purchasing power becomes even lower during
land is used for food production. Such very limited agriculture inflation. High prices reduce the value of money or purchasing
land is further compounded by floods and droughts. Rains are power. The poor and the fixed-income groups suffer most
too much, too little or none at all. Many times rains fall at the during inflation. Inflation is created by several factors. For
wrong time. Such natural hazards greatly impoverish the instance, if there is an oversupply of money in the economy in
peoples of Africa. Many die of hunger and disease. During proportion to the production of goods. Whenever a government
prolonged drought, crops die as well as their work animals. And prints money, there is going to be inflation. When foreign loans
of course, the agonies of the millions of Africans are also man- are used for consumption and not for production, this is
made disasters like tribal slaughters, civil wars, banditry, and inflationary. Other causes of inflation are high cost of
graft. production, like price of oil, and the great demand for goods.
On the other hand, there are countries with poor natural When demand is greater than supply, prices go up. This is a
resources but they were able to achieve remarkable economic basic economic law.
growth. Good examples of these are Japan and Israel. In Japan, To reduce the problems- or eliminate in some
only about 16 percent of its total land area is arable or can be countries- of unemployment and inflation, appropriate economic
farmed. During winter, one-half of said farm area is covered policies must be vigorously pursued by the government. The
with snow. Because of its meager natural resources, Japan most important of such policies are monetary and fiscal policies
imports about 90 percent of raw materials for its industries. and their respective tools, and their limitations. In addition, the
Despite its geographical limitations, Japan has become the role of such policies in economic development is discussed.
fastest growing industrial society in the world. Through capital
and technology, it has achieved phenomenal economic growth. The Nature of Economic Policies
The same is true with Israel. Formerly, it was a barren land. In An economic policy is based on economic theory of
the beginning, it had a pastoral economy. Today, Israel has a principle. It is the application of a theory or principle. Economic
developed economy. Through modern agricultural technology, policies are formulated to attain specific objectives or solve
its arid land became fertile and verdant. It is now an exporter of certain problems.
farm crops, aside from industrial goods. An economic theory is derived from facts. Data are
Transportation and communication are likewise gathered and presented for analysis. Out of this process, a theory
affected by geographical structure. The presence of excellent is produced. However, in the case of economic policies, it is no
harbors favors both local and international trade. Great rivers longer possible to depend only on facts. Policy makers are
help accelerate economic development. In fact, the first people with various values, orientations and interests. Many
civilizations emerged in great river valleys like Tigris, policy makers are politicians or top government officials who
Euphrates, and the Nile. Mountainous countries pose obstacles have been elected by the people. In most cases, they are inclined
to both transportation and communication systems. In the case to make policies which ensure their re-election or matters of
of the Philippines, it has more than 7,000 islands. Such political expediency rather than economic interests. Thus, value
geographical layout does not provide good network of judgments interact with facts. Obviously, the values of the
transportation and communication. And this adversely affects policy makers greatly influence the policies that they make.
the process of economic growth. In cases where the policy makers are not politicians,
Geographical disadvantages can be eliminated or the effects are just the same. Technocrats are appointed by top
reduced through the proper use of technology and capital. government officials who are politicians. Naturally, such elected
However, to the poor nations, such task of conquering natural officials influence the decisions of their technocrats. Of course
shortcomings is almost impossible. They are deficient in both those who have principles and conscience can resign, if there are
capital and technology. In fact, they cannot even feed their conflicts of interests or values.
hungry peoples and pay their foreign debts. Therefore, economic policies are as good as their
makers. If the policy-makers are only after their own personal
TOPIC IV: MONETARY AND FISCAL POLICIES interests and that of their friends and relatives, then their
policies have little effects or adverse effects on the other sectors
Countries at one time or another have suffered of the economy. In some cases, there are good policies but these
economic dislocations, like unemployment, inflation or more have not been implemented or poorly implemented.
serious problems such as depressions. Even the United States
experienced depressions in the early 1900’s. However, the What is a Good Economic Policy?
problems of inflation and unemployment have become  It must be stated in broad terms.
permanent characteristics of the less developed countries.  It must be long range, but flexible to a certain
Evidently, their low level of investments has been greatly degree.
responsible for their economic problems. An analysis of such  It must be in writing and easy to understand.
conditions shows that the basic causes are capital deficiency on  It must be widely acceptable.
one side and little effective demand on the other side.  It must be reasonable.
The ability of businessmen to invest, like putting up a  It must be consistent with the objectives and
textile factory, depends on their available financial resources. goal to be attained.
But this is only one factor. The other one is the demand for the  It must be communicated to all concerned.
products by the people. Businessmen are only willing to invest  It must be implementable.
if there is a good market for their products. This is only  It must cover all important relevant aspects.
 It must be in accordance with the law. a happy balance between economic growth and economic
stability. Clearly, this is not an easy task for policy makers.
Nevertheless, the most important element of a good
economic policy is its deep concern for the welfare of the Monetary Policy
people, especially the poorest of the poor. Precisely, it is this Professor James Boughton of Indiana University
group- which is the largest group in the less developed defined monetary policy as the process whereby the monetary
countries- that needs most the benefits of a good policy. For one authority attempts to achieve a desired set of economic goals by
reason or another, some good economic policies remain controlling either the money supply, the cost and availability of
unimplemented. The interest of a few but powerful groups credit or the allocation of credit to its various uses. Monetary
appears to dominate other more important considerations. policy-making body of the government is the Monetary Board
headed by the Central Bank governor. The Bangko Sentral ng
People-oriented policy Pilipinas is responsible for implementing the monetary policies
A good economic policy should be people-oriented. formulated by the members of the Monetary Board. The primary
The welfare of the people is always the primary consideration. monetary goals of the Bangko Sentral ng Pilipinas are:
Some former poor nations became progressive because their  To maintain internal and external monetary stability
policies have been focused on the improvement of the quality of in the Philippines and to preserve the international
life of the masses. Japan is one good example. Even the business value of the peso and its convertibility into other
corporations of said country fashion their policies towards freely convertible currencies; and
human resource development. To them their employees are the  To foster monetary, credit and exchange conditions
most important assets. They take good care of their employees. favorable to a balanced and sustainable growth of the
Such paternalistic attitude of corporate institutions has made economy.
employees happy and efficient.
In the Philippines, it has been proclaimed that the main Major Monetary Tools
program of the government is to improve the quality of life of Legal reserve requirements - increase or decrease of
the people. In fact, the Six Year Development Plan (1987-1992) the percentage of reserve deposits of banks as required by the
is a multi-pronged human development approach. Dr. Placido Central Bank.
Mapa, Jr., former Minister of Economic Planning said: Open-market operations - purchases and sales of
Man has always been the focus of all development government securities by the Central Bank.
efforts; hence, the ultimate goal of all development efforts; Moral suasion – appeal of the Central Bank to the
hence, the ultimate goal of all development activities is to banks to expand or contract their credit or to suspend types of
improve the people’s quality of life. This brings us to a point: bank credit.
that of sharing the fruits of development. And this goal can only The aforementioned monetary tools can either expand
be achieved by pursuing national development policies for or contract money supply to suit the needs or conditions of the
various regions, through which the government hopes to redress economy. For instance, if there is inflation, the policy is to
income disparities caused by growth imbalances. contract money to supply by increasing the reserve
requirements, selling government securities and by appealing to
Objectives of Economic Policies the banks to control their loans. This is tight money policy. On
Economic policies are broad rules or guides for actions. the other hand, if the economy needs expansion of the money
They are made for the administration of a project, program or supply, a reverse monetary policy is adopted.
the whole economy. The most important economic
objectives of any democratic society are: Ideas on Monetary Policy
 Economic growth The Keynesians, led by Samuelson, Tobin, and Heller,
 Full employment believe that a free enterprise economy has several inherent
 Economic freedom limitations. For example, it does not provide social goods, it
 Equitable distribution of wealth and income does not properly allocate resources, and it leads to the unfair
 Economic security distribution of income. Furthermore, a free enterprise economy
 Economic stability or capitalism cannot balance investments and savings. Thus,
To attain such economic objectives, appropriate business fluctuations are created and this is not good to the
policies are needed. However, this is easier said than done. economy.
Policy makers are human beings with various orientations and The followers of John Meynard Keynes consider the
values. Whether they like it or not, these influence the substance active role of the government in stabilizing economic activities.
and form of the policies that they formulate. For instance, the This is fiscal policy which refers to government expenditures,
concept of equitable distribution of wealth and income has taxation, and borrowings. They believe such government
varied interpretations. The same is true with the economic activities or fiscal tools are better than monetary tools in
objectives, especially economic freedom. achieving economic stability, resource allocation, and income
How far and how wide should economic freedom be? distribution. Professor Paul Wonnacott of the University of
This is debatable and it all depends on the values and Maryland stated that Keynesian economics underestimates the
orientations of the policy makers. Policy makers have their own role of monetary policy in stimulating aggregate demand and
vested interest to protect- including those of their relatives and that the Keynesian theory stresses the instability of private
friends. All these come into play with their competence. markets.
However, competence and intelligence are not enough qualities Free market system is better
of good policy makers. Above all, they must have integrity and On the other hand, the monetarists, headed by Milton
honesty. Friedman challenged the Keynesian concepts. They believe a
Another problem in policy making is that some free enterprise economy or laissez faire is better for the whole
economic objectives are interdependent while others are economy. This is also what the classical economists under the
conflicting. For interdependent objectives, focus of policies Adam Smith developed during the later part of 1700’s. They
should be on the key objective. The linkage effects help the stresses that free competition automatically distributes resources
attainment of the other objectives. This is wise use of scarce efficiently. Through free market mechanism, goods and services
resources. In the case of conflicting ones, compromises have to are better allocated than trough government agencies or
be made. For instance, in achieving a certain rate of economic interference in the market system.
growth, inflation is likely to crop up. This means disturbance of The Monetarists claim that the government decision-
economic stability. Since inflation cannot be totally removed making process is bureaucratic, inefficient, and harmful to
during the process of economic growth, there is a need to strike individual incentives – not to mention the frequent blunders of
government policies. Likewise, the centralized decisions of the important because we need these to buy our oil and raw
government destroy individual freedoms. To the monetarists, materials for our factories and industries. We need also dollars
monetary policy is the key determinant of aggregate demand. to purchase machines for economic development.
Through the role of money and price, level of economic Moreover, Todaro gave his negative impressions on the
activities can be determined. And these thrive better in an dual monetary system of most less developed countries. That is
environment of free enterprise economy or free market one for the rich and another for the poor. However, the system
economy. Believers of free enterprise emphasize the importance tends to serve more the needs of the wealthy groups who are
of natural liberty in the economy. If individuals are free to seek considered safe burrowers. These are the foreigners and the
their own interests through competition, they believe this will well-known local elite. Thus, the poor – which is the biggest
promote the interests of the whole society. group - are neglected. As a result, they seek loans from
unlicensed moneylenders who usually demand very high
Role of money supply interest. The more they become miserable.
Another area of conflict between the Keynesians and
Monetarists is the role of money supply in producing changes in Fiscal Policy
the level of national income. The Keynesian economists believe Fiscal Policy is another major economic policy. It
that monetary policy has an indirect effect on national income refers to the revenue and expenditure measures of the public
by causing changes in the interest rate which in turn changes budget. Fiscal policy-making involves the voters, the president
consumption and investments. On the other hand, the and his cabinet, and the legislative body. In a democratic
Monetarists argue that changes in the money supply have direct society, the needs and wishes of the people are reflected in the
effects on the national income. budget. These are prioritized based on available resources. For
In addition, they claim that stable prices and a steady example, the felt need for a public elementary school in a barrio
growth rate of real GNP can only be achieved by allowing the in Palawan or an irrigation system in Tayug, Pangasinan is
money supply to increase at approximately the anticipated real included in the budget. This is not only social or economic
growth rate of the GNP. In contrast, the Keynesians believed reason but also for political reason. In most cases, political
that monetary policy can successfully keep the economy on interests appear more dominant. Usually, such projects are given
steady growth with low unemployment only when it is to the people when elections are near.
combined with appropriate fiscal policies. Preparation of the budget is done by the president and
his cabinet. The budget proposal is submitted to the legislative
Shortcomings of Monetary Policy body for discussion and decision. The task of administering the
When a monetary or financial problem or need budget belongs to the President and his cabinet.
emerges, monetary authorities have to confirm it by gathering As stated earlier, the monetarists and the classical
facts. These have to be presented and analyzed in order to be economists believe that the free market system is the best way to
able to formulate sound and appropriate monetary policies. The allocate the resources of society. Such idea is not completely
whole process takes time, and even longer for the less developed correct. There are market imperfections such as the inadequate
countries with inefficient public administration. Another delay market knowledge of both sellers and buyers, obstacles to a free
is the impact lag which is the time between the implementation entry in the market and the unfair business practices. Because of
of the monetary policy and the time the effects of the policy these the interests of the consumers should not be left to the
becomes evident on the various sectors of the economy. In view invisible hand of the free market forces of demand and supply.
of the conflicting interests of the different groups in the Otherwise, buyers would experience several forms of
economy, it is not easy to evaluate the effects of monetary exploitations like over pricing, adulterated products, tampered
policies. weights and measurement, etc.
Furthermore, a monetary policy is very weak during
deep depression. Even if banks offer the lowest possible interest Provision of Social Goods
rate to investors, still there are no takers because the expected The free market mechanism cannot perform effectively
returns of investment are even lower than the interest rate. As a all economic functions. A government policy is needed to guide,
good example, during the Great Depression in the United States correct, and supplement it. Actually, there is one area in which
in 1930’s, monetary policies miserably failed to accomplish the free market mechanism hesitates to engage in. This is the
their missions. provision of social goods like anti-pollution projects, roads and
bridges that are not heavily used and other social infrastructures
Other limitations which do not yield good profits.
Professor Michael Todaro criticized the ability of the Social goods generally incur huge investment of funds,
Third World countries to regulate money supply and interest and yet many of them are not profitable. Thus, the private
rates. He observed that the developed countries like the United business sector does not want to undertake such activities. This
States and those in Western Europe have well-organized and is only understandable. Businessmen do business or put up
efficient money and credit markets. It is therefore possible for factories for profit. For instance, constructing a long road in a
such countries to regulate their money supply and interest rates mountain village is not a sound business project. However, there
to suit the needs of their economies. This is not the case in most are exceptions like the North Diversion Road and the South
less developed countries. Their money markets and credit Superhighway. It appears that these two projects are good
institutions are unorganized and fragmented. This makes the investments for CDCP.
administration of monetary policies less effective. Since the government is for service and not for profit, it
Prof. Todaro further noted that many commercial banks can construct roads, bridges, and other projects like
in the developing countries are branches of big banking communication facilities, electrification and huge Irrigation
institutions in highly developed countries like the United States, dams. Anyway funds come from the people in the form of taxes.
Great Britain, France and Canada. Naturally, such branches of Such socio-economic infrastructures are set up not only to serve
foreign banks are more interested in the monetary policies of the the people but also to help the private business sector. When
their own countries than the local policies. transportation and communication facilities are adequate and
The ability of the Third World governments is further efficient, trade and commerce grow faster.
limited by their dependence on foreign exchange earnings like It is clear therefore that a pure market economy is not
dollars. As a source of local financial resources, such earnings powerful enough to attain the major economic objectives like
are unpredictable and uncontrollable. For instance, a employment, price stability, and a satisfactory rate of economic
considerable decline in demand for our decrease in the prices of growth. The role of the government is to accelerate economic
our agricultural products in the world market has major adverse development and to distribute equitably the fruits of
effects on our monetary condition. This decreases national development among the various groups of society. This role is
income and foreign exchange earnings. Dollars are very more dynamic and more aggressive in developing countries.
go to government clinics and hospitals whose services are free.
Fiscal Policy Objectives In more progressive countries, many of the very poor are given
- Provision for social goods free by the government. These are also pensions for the aged
- Equitable distribution of wealth and income and salaries for the unemployed for the aged and salaries for the
- Maintain high employment unemployed.
- Ensure price stability Such social welfare programs are funded by taxes paid
- Sustain a satisfactory rate of economic growth by the people. Based on the principle of ability to pay, the more
fortunate pays for higher taxes. Yet, they seldom or do not
In the Philippines, the Six-year Development Plan patronize at hospitals, public schools, housing projects and
intends to use a large portion of the national resources for social programs. On the other hand, the poor who or none at all are the
services like public education, health, nutrition, housing, main beneficiaries of the welfare programs. Thus, a part of the
national social security, and the administration of justice, mostly resources other high-income groups are extended to the poor.
for benefits of the lower-income groups. Progressive taxation
and construction of rural infrastructures, among other things, are Weaknesses of Fiscal policy
to be pursued to widen the sharing of the fruits of development. Fiscal-policy making is more of a political rather than a
market process. Many and varied interests do influence fiscal
Fiscal Effects on the Economy policy making. In general, some of the popular interests are
Fiscal policy through its fiscal tools like taxation and those of the voters, business group, farmers group, and other
government expenditures envisions to perform its functions of special groups. Needless, to say that a good fiscal policy is more
allocation distribution and stabilization in the economy. Proper concerned about social justice and the equitable distribution of
measures on taxation and government expenditures can the social and economic resources of society. It should benefit
stimulate savings, investments, employment, production, and the greatest good of the greatest number of the population.
income. These can also help redistribute wealth and income and It is the assemblyman (congressman and senator) who
achieve price stability. introduce and decide tax and expenditure measures. Every
Individuals can save more, for instance, if prices are assemblyman has his own project in his own political territory.
lower, if incomes are higher or if taxes are lower. Higher taxes However, it is not possible to accommodate all the projects of
do not only decrease the disposable income of people but also assemblymen due to limited funds. Hence, these are prioritized.
increase the cost of production. As a result, producers and But, in practice this is not always followed. The more powerful
sellers increase the prices of their goods. When prices are higher and influential lawmakers get more projects. During the old
and incomes are lower because of the increase in taxes, the society, congressmen and senators who belonged to the minority
purchasing power of the people decreases. This affects party got the remnants of the budget. And so they could not put
adversely their consumption and savings. up impressive or big projects to satisfy the people in their
They have less consumption and less savings. When territories.
there is a decrease in consumption, investment and production Another bad political parties of some congressmen and
also decrease. And when savings decrease, funds that can be politicians was that they did not give the projects to the place
used for investments also decrease. Clearly, all these negative where they lost in the last election. On the other hand, groups
economic implications are disastrous to the well-being of the who could donate substantial campaign money or who can
poor people and the whole economy. These bad conditions of ensure the victory of politicians were favored more by fiscal
the economy started only from one source — the increase of policies. Such situations also happen in the developed countries
taxes. Hence, the indiscriminate use of tax measures should be like the United States. nevertheless, the said bad political
avoided. practices are more rampant in the less developed countries
where personal interests have the upper hand, and where the
Encourage investments corruption is more widespread.
The government can encourage investments by giving
tax exemptions or reasonable taxes, and by extending the Booms and lags
necessary external economies of scale like transportation, Another weakness of fiscal policy happens during the
communication, electrification, and peace and order. All these period of boom. Under such condition, the proper fiscal
benefits reduce the cost of production of businessmen, and measures should be to increase the taxes and/or decrease the
therefore, they have a greater chance |of | getting better returns government expenditures. But in the reality these are difficult to
or profits of their investments. implement.
More investments mean more employments, Naturally, people will oppose the increase in the taxes.
production, incomes, consumption, and savings. For instance, Also, those who are affected by the decrease in government
when more businessmen put up more factories and expenditures like in education, public health and social security
supermarkets, workers and employees are needed. More benefits will complain. It is hard for most of people to
employment results to more production goods and services and understand that such fiscal measures are needed to reduce
generates more incomes. When people have more money, they economic instability. They are more aware of the direct and
naturally buy more goods and services. This further accelerates short-run effects on their welfare.
more investments, production and incomes. Eventually, these Thus, for political expediency, such fiscal measures are
lead to higher economic growth for the whole economy and not likely to be adopted. Also, like monetary policy, fiscal
higher standard of living for the people. And these have been policy suffers a lag. This involves the discussions of the
made possible by fiscal policy tools like tax incentives and problem, the implementation of the appropriate fiscal policy,
government expenditures on the external economies of scale. and its subsequent effects on the economy. The usual process
takes longer delays than that of monetary policy. It is possible
Redistribution of wealth and income that the nature of the economic problem has already changed by
Another function of fiscal policy is to redistribute the time fiscal policy is to be implemented. Thus, the policy is
wealth among the various groups of society. The government no longer the right solution for the problem.
can attain this through appropriate fiscal programs like agrarian
reform program, cooperatives development program, and health Other shortcomings
programs. The ability of a country to finance its various programs
The aforementioned projects or programs provide and projects depends on its available resources and borrowings.
social to the poor. For instance, tenants have been given lands to Such resources come mostly from taxes, and these are not
cultivate on an easy-instalment basis. The low-income acquire enough to fund even the most essential projects. In less
housing units at a very low price. Children of the poor can study developed countries, government income from taxes is low.
in public elementary schools for free. The poor who are sick can Many are not employed and those who are employed have low
wages. The few who have the ability to pay higher taxes do not
pay correctly. Such conditions contribute to the poor revenue
collections of the government. Clearly, these are not enough to
support the social economic needs of the people. The last option
is to encourage foreign investments and acquire more foreign
loans.
Many economists have observed that the tax
administration is not only inefficient in many less developed
countries but also corrupt. The big shots, both foreigners and
local elite do not pay the right taxes because of their tax
collectors or the top tax years ago:
In many underdeveloped countries the low revenue
yield of taxation can only be attributed to the fact that the tax
provisions are not properly enforced, either on account of the
inability of the administration to cope with them or on account
of straightforward corruption … an efficient administration
consisting of persons of high integrity is usually the most
important revenue . . . (Todaro, 1977).

Dominance of indirect taxes


Another defect of taxation in the less developed
countries is that most of the tax revenues are indirect taxes.
These are taxes on goods but businessmen pass them on to the
buyers by raising the prices of their goods. Examples are sales
tax, specific taxes, specific taxes, amusement taxes, and customs
duties. So, it is actually the buyers who pay the taxes.
In less developed countries, most of the people are
poor. They become poorer because of indirect taxes. Every time
they buy a basic commodity like notebooks, clothings or
housing materials, they pay taxes. Since most of the revenues of
the government come from such taxes, it is the poor who really
finance the programs of the government like schools, hospitals,
housing, etc.
Some giant business corporations take pride in
announcing to the public that they have paid millions of pesos as
tax payments to the government. But where did they get these?
Such big amount of taxa actually came from the. buyers of their
goods. Whenever the government increases the taxes of certain
goods and services, their price also go up. Thus, the burden of
sacrifice is being carried by the buyers. Since most of the
consumers are poor, it is this group who suffers most.

Coordination between Monetary and Fiscal Policy


Both monetary and fiscal policies have the same
objective — the attainment of greater economic growth. Hence,
there is a need for cooperation and coordination between the
two. For instance, in times of inflation the job of monetary
policy is to contract money supply while that of fiscal policy is
to eliminate useless government expenditures. During a
period of great depression, monetary policy is weak. On the
other hand, fiscal policy is more effective in solving the
problem. To fight depression, the government undertakes
massive government expenditures on public works to generate
employment and income. This means consumption of goods and
service will increase and so with production. However, fiscal
policy is quite helpless in a period of boom. Under such
condition, the proper weapon to combat the problem is
monetary policy. It increases interest rates, reserve requirements
and controls credit. Such policy instruments regulate
unnecessary consumption, and may stimulate savings.
In many less developed countries, a harmonious
balance between monetary and fiscal policy is a difficult task to
achieve. Even if the economy requires a tight money policy and
austerity, the fiscal authorities do not cooperate in many cases
for personal or political reasons. For instance, it is not unusual
for such countries to spend their scarce financial resources on
unproductive programs and projects. Billions of funds are spent
on projects that have no direct value to the poor masses. Such
projects were constructed to impress the foreigners or to
enhance the political prestige and power of the incumbent
rulers.

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