For two Economic Models, briefly describe the Model, and carefully compare and contrast their application to any one developing country Essay
India is still seen as a developing nation, even though it has an ever growing economy, and is likely to become one of the largest economies within the next two decades - For two Economic Models, briefly describe the Model, and carefully compare and contrast their application to any one developing country Essay introduction. It has a strong currency, the Rupee, and its GDP is growing at a stable and secure rate of between 5 and 7% per annum.
* Population (2001): 1.0329 Billion
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* Rural Population (of total population, 2001): 72%
* Life expectancy at birth (2001): 63 years
* Gross National Income per Capita (2001): US$ 460
The Government has played a large part in making sure India has a stable economy, with an infrastructure suitable to deal with the expected future expansion. There is a growing further education sector, with over 300 universities teaching 12,000 students. Education is vital for developing nations. This is due to its need to keep up with developed countries, and have an intelligent generation capable of moving the country forward in all directions. It is however, important to look at this in context. There are over one Billion people in India, so those at university count for around 1% of the population.
There is an expanding social benefits package within the economy, allowing people to retire at 55 with a state pension, however, this is not enough to live on alone at the minute. Unfortunately, like many developing countries, there are weaknesses within the system, and so it is open to corruption. However, the Government are putting a lot of time into closing the gaps and loopholes.
Although all this looks promising, there are still around 27% below the international poverty line, this is far greater in some areas. With India been such a large country, both in population and land mass, it is difficult to implement economic theories and plans throughout the whole economy. There are differing trends throughout the various regions in all sectors of the economy. ‘The market orientated policy reforms initiated in 1991 were blamed by some for a rise in rural poverty but poor agricultural performance was an important additional cause. Growth slowed as reforms were retarded by complex political problems.1’
First Model – Ricardian
Ricardo was from the Classical school of economics, along with Adam Smith (Wealth of Nations: 1776) and Malthus (An Essay On The Principle Of Population: 1798). In 1817, he wrote ‘Principles of Political Economy and Taxation.’ His work was based in late eighteenth and early nineteenth century Britain. He assumed that the agricultural sector was subject to diminishing returns. This is the theory by which, as the population increases, more land comes into production, and as this is less fertile, so the production per area falls in comparison to the previous production cycle. It is also assumed that there is a labour surplus. This is when there are more people willing to work than there are jobs for. So, in theory, if this excess labour is removed, production will stay the same, as those previously working part time due to the ‘sharing out’ of work, will be able to work full time as they take the work of those removed. However, this is only a theory. ‘Models are simplifications of reality which focus on crucial variables and relationships.’
Ricardo’s work also suggests that by keeping population growth down, poorer soils will be used and so the supply of food stays sufficient, and avoids diseconomies of scale. He also believes that if wages were to rise, workers would have more children; this in turn cuts into the profit allocated to investment, which would have allowed the rural labour surplus to move to urban areas.
Unfortunately, his predictions failed regarding income distribution and economic growth. This was due to rent not taking a greater share of national income within industrial nations, and profits of capitalists have not been squeezed out. This can be explained further by the expected diminishing returns been offset by technological changes and advancements. Ricardo also over-estimated ‘Malthusian population mechanism,’ the theory by which population growth is reliant on the supply of food, and with wages at subsistence level.
The theory of the Ricardian Equivalence states that a cut in taxes leads to a counter saving by taxpayers in anticipation of future tax rises, and vice versa for tax rises. However, Barro’s research suggests that it is not in the ratio 1:1, but closer to 0.4-0.65:1 for increases in tax.
Furthermore, Ricardo’s solution assumes industrialisation leads to growth. This is assuming that: profits depend on wages, wages depend on food prices, and food prices depend on availability of land and food imports.3 He also suggested that by doing away with the Corn Laws in Britain, it would allow for imports, meaning a more competitive market, and speed up the industrialisation within the urban areas, and so any labour surplus from rural Britain would find work in the cities.
Critiques of Ricardo’s work point out that this is a specific model, only considering corn, in Britain, in the agricultural revolution. It also underestimates the impact technology would have on the whole economy, including agriculture.
Second Model – Rostow
Walt Rostow is a more recent economist than Ricardo, with his work taking place primarily during the 1950’s and 1960’s. In 1960 he wrote ‘The Stages of Development: A non – Communist Manifesto.’ This outlined five stages an economy goes through to reach industrialisation. This starts with a primitive state, moving forward to a modern, capitalist economy. The stages are;
i. Traditional society,
ii. Pre-conditions for take off,
iii. Take off,
iv. Drive to maturity,
v. Age of high mass consumption.
The developed world experienced take off at varying stages. For example, Britain took off in the early 1700’s during the industrial revolution, with countries in Europe not far behind. Then in the 1850’s, the US took off, and in 1910 Japan followed, with Mexico starting up in the 1940’s. It takes a long time for those countries who have not yet taken off to reach the required point, as due to technological advancements, the starting posts are moving. Again, it is important to remember that this is a simplified version of the truth, and in reality, these stages are hazed, and there may be intermediate stages some economies must go through before they can reach the required pattern Rostow produced.
This may be needed in such economies that have experienced communism for several decades, and must adapt to the capitalist world it has found itself in, for example, Russia in the early 1990’s, and more recently, china. However, China is taking a slow and steady movement into capitalism to avoid any major recession that may cripple the economy for generations. ‘One of the strategies necessary for any takeoff was the mobilisation of domestic and foreign saving in order to generate sufficient investment to accelerate economic growth.’
Put simply, traditional society is where all employment is subsistence with little to no savings, and the age of high mass consumption is where living standards are increased for all. It is the movement from the first to the last where development programs focus their study and work. The criticisms of this theory dwell on the facts that this work is ‘descriptive rather than prescriptive5’ and that those countries yet to develop are in a similar situation to that found by the developed countries before they themselves advanced through the stages. Therefore, it is unknown whether these currently developing countries will move in the same pattern as those already developed.
Application of Ricardo’s Model within India
As Ricardo based his model largely on agriculture, it seems appropriate to choose India, where there is still over 70% of the population based in rural areas. The model assumes there are three classes: landlords; labourers, and capitalists, using three factors of production: land; labour, and capital. It is important to remember that this is only a model, a simplified version of the truth.
Indian agriculture is ‘central to all strategies for planned socio-economic development of the country. Rapid growth of agriculture is essential not only to achieve self-reliance at national level but also for household food security and to bring about equity in distribution of income and wealth resulting in rapid reduction in poverty levels.6’ This is in line with Ricardo’s theories of development in agriculture would lead to sustained growth. It also points out that agriculture is at the heart of Indian economics, and therefore any investment in the area can only boost the economy. However, the same article points out that this growth has not been universal throughout all regions in the vast country. It has brought uneven development, low levels of productivity, and degradation of natural resources, which Ricardo warned of through diminishing returns. It also goes on to mention that capital has not been available, and has been taken away from the area, which Ricardo believed would happen as capitalists became greedy.
Agriculture seems to have become less rewarding, leading to migration from the rural areas into the urban areas in the hope of better standards of living and better paid jobs. This is again, one of Ricardo’s key beliefs; as the labour surplus moves out, the situation will improve for those left to work the land as there is less competition for jobs, land etc. But, this is yet to come to fruition.
However, it does warn that the future of Indian agriculture hangs in the balance due to global competition.
Application of Rostow within India
India is already far more advanced than many other countries classed as developing nations. This however, does not prevent India from been exempt to international aid programs and development studies. Rostow believed in five steps to development, and it is difficult to pinpoint at which stage India is currently at. Some may say that it is still making it pre take off preparations. However, in some aspects of the economy and infra structure, India is already at an advanced stage, but has other, larger areas which are not ready for take off to the international platform.
Following India’s independence in 1947, India followed two five year plans; the first’s primary objective was to unify its agricultural policy, and the second on its industrial policies. Both were done with the help of international assistance. According to Dr Vsrs, the Rostow theory failed in India due to ‘the productivity aspect of development was not taken into account, and in the management decisions for development, the influences of intangible factors were never considered.7’
It is also important to note that, in theory, each country can reach the same level of development, but in practice, this will never be achieved. The global effect of each individual in the developing world having the same resources available as those in the developed world would never be achieved. The developed world relies on some of its goods and services to come from the developing world where labour and materials are cheaper. So where would the current developing world find goods and services produced cheaper if they were at the same stage of development as the whole world. It has been predicted that if the level of consumption of the average American was applied to India, they would consume enough for 50Billion people in the one country alone.
Therefore it is unlikely India, or any other developing nation, will reach, or be allowed to reach, the same level of mass consumption as the West currently enjoys.
Between the two models, the theory of Ricardo applies itself best to India. This is due to the similarities India has with Britain. Among other things, this may be down to the fact that India is part of the British Commonwealth and so much of India’s infrastructure, Government practices, policies and beliefs stem from those of British Governments throughout its rule. Aside from that, India seems to have evolved from a subsistence country to one who now makes enough food it can export any excess. This allows for investments to be made, and hence travel towards development. This is the theory behind Rostow’s work, with countries moving along a path to development. It can be argued that the flaw in Rostow’s methods of current developing nations not the same as current developed nations, falls down when the example if India is brought into context. Again, this is due to India previously been a colony of a now developed nation.
The major flaw in Rostow’s work doesn’t allow for the increased consumption that would come with India moving along the five stages of development. Although India may well develop in the next few decades, not every developing nation will achieve such levels, if theory and common sense were to be used together. Also, as Dr Vsrs points out, the model does not allow for India’s ‘fairly high level of tangible wealth / intelligentsia as well as intangible social and economic disparities.’
Therefore, it is safe to say that the model suggested by Ricardo is better suited to the economic structure and workings of India than Rostow’s is, for the reasons outlined above.