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CHAPTER SIX

ECONOMIC INTEGRATION AND CO-OPERATION

Meaning
Economic integration is the combination of selected economies so as to trade freely
among member countries.
Forms/stages of Economic Integration
Economic integration has the following stages:
1. Free Trade Area
It is the type of integration in which countries remove all the trade barriers, so as to trade
freely among member countries, but each member country maintains the unilateral right
to impose tariffs on goods from the rest of the world.
2. Customs Union
This is a type of integration in which member countries remove the trade barriers among
themselves, but have common tariffs against the rest of the world.
3. Common Market
In this type of integration, member countries have customs union, hence allow a free
movement of the factors of production from one member country to another member
country.
4. Economic Union
In this type of integration, member countries, besides having a common market, establish
joint institutions such as railways, roads, parliament etc.
5. Common Monetary Union
In this type of integration, member countries establish a common currency.
Stages of economic integration can be summarised using table 6.1 bellow:

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Table 6.1: Forms/stages of regional integration

Each member country maintains unilateral right to

Countries establish joint institutions such as railways,

impose tariffs on goods from the rest of the world

Member countries establish a common currency

Common tariffs against the rest of the world.
Countries remove all trade barriers on trade

Free movement of factors of production

roads, parliament etc

STAGE
Free Trade Area √ √
Customs Union √ √ √
Common Market √ √ √ √
Economic Union √ √ √ √ √
Common
Monetary Union √ √ √ √ √ √

The Necessary Conditions for a Successful Economic Integration

In order for an economic integration to be successful, the following conditions are
necessary:
(i) Good Infrastructure: In order for economic integration to be successful, countries in the
region of integration must be having good infrastructure that may facilitate the
movement of goods and people from one area to another.
(ii) Political Will and Commitment: For a regional integration to be successful the political
leaders must be willing and committed to implement the various resolutions that are
made. They must also have the political ability to make necessary decisions for the
betterment of the integration.
(iii) Common Language: Common language, ability among the people in an economic
integration, facilitates easy communication among the people in the region as they
engage in socio-economic and political activities.
(iv) Common Currency: In order to have a smooth exchange, a common currency is very
important for integration. Absence of a common currency makes exchange difficult.
(v) Differentiated Products: Exchange cannot take place if countries produce similar
products. Each country should, therefore specialize in a commodity which it has
comparative advantage.
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(vi) Trade Gains: For an integration to be successful, each member country must gain
from trade. If some member countries do not gain from trade or any other economic
activities, then the integration will not be successful.
(vii) Similar Level of Development: In order to reduce uneven distribution of gains among the
member countries, countries should have similar level of economic development, if
the difference in the levels of development is so wide; the rich members will gain
more than the poor countries.
(viii) Member Countries Must Be Neighbours: It is easier for member countries to engage in
economic activities and establish joint institutions if they are close neighbours, in
terms of geographical location, than when they are located far from each other.
(ix) Cultural Similarities: Cultural similarities facilitate the interactions among the people in
various economic activities such as trade and investments.
(x) Trade Creation: Trade creation is said to occur when a country, in an integration, now
imports goods, at a low cost, from a member country after abolition of tariffs.
Importance of economic integration
Economic integration has following importance:
(i) Enlargement in the Markets: Economic integration leads to abolition or reduction of
trade barriers among the member countries. The abolition of trade barriers increases
the size of the market for the goods produced by the member countries.
(ii) It enables member countries to specialize: Economic integration enables each member
country to specialize in the production of a commodity of its comparative advantage.
Specialization leads to increase in output and gain from trade.
(iii) Transfer of technology: Integration leads to exchange of technology among the member
countries.
(iv) Increase in employment: There are possibilities of attaining increase in employment due to
the free movement of the factors of production and expansion in investments.
(v) It reduces exchange difficulties: In monetary union, countries adopt a common currency
which eliminates all the difficulties that traders of different countries face when they
use different currencies.
(vi) Increase in political and social understanding: Economic integration promotes good political
relationships between the governments of the member countries and between the
people of the member countries.
Problems of economic integration
Economic integration faces the following problems:
(i) Uneven Distribution of Gains: The distribution of gains among the member countries
may differ due to the different levels of economic development among the member
countries and unfavourable terms of trade.
(ii) Political Instabilities: Civil wars and political misunderstandings between one member
country and another may hinder the development of economic activities, such as
trade, among the member countries.
(iii) Differences in Political Ideologies: The differences in political ideologies among the
member countries make it difficult for the member countries to have common
objectives and approaches in implementing their objectives.
(iv) Poor Infrastructures: For an economic integration to be successful, there must be a
reliable infrastructure in the region. The absence of roads, railways and other means

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of transport and communication hinder economic activities such as trade among the
member countries.
(v) Loss of Revenues: Economic integration leads to loss of revenues with the member
countries, due to the removal of tariffs.
(vi) Differences in Currencies: In case the member countries use different currencies,
exchange among them becomes difficult.
(vii) Differences in Language: In case the member countries have different national
languages, it causes difficulties in communication among people in various activities
such as trade.
(viii) Trade Diversion: Trade diversion is said to occur when a country stops buying goods
from a low cost producing non-member country and buys from a high cost
producing member nation, within the integration, because of the existing common
tariffs and quotas against goods from non-member countries.
Suppose, for example, we consider three countries, Tanzania, Kenya and the
United Kingdom, the first two have free trade, following the establishment of the
East Africa co-operation, and exercise common external tariffs against textile goods.
Both Kenya and the United Kingdom produce textile products, but the Kenya’s
textile is more expensive. Without tariffs, both Kenya and Tanzania would import,
from the United Kingdom, but the effect of the tariffs is that Tanzania now buys
Kenya’s textile even though they are more expensive, thus the pattern of trade is
distorted and Tanzania’s consumers suffer, same to the United Kingdom exporters

EXAMPLES OF REGIONAL INTEGRATIONS

The ECOWAS
ECOWAS is the Economic Community of West African States. It was formed in 1975,
and comprises of 16 West African states, namely, Ghana, Cameroon, Chad, Nigeria,
Togo, Benin and Niger. It also has Ivory Coast, Senegal, Sierra Leone, Gambia, Gabon,
Mali, Liberia, Burkina Faso and Mauritania.
Aims of the ECOWAS
The ECOWAS has the following aims:

To bring closer relationship in economic and social development.

To make good trading relationship in goods and services between the member states.

To create economic liberation among the member nations.

To cooperate in communication, transport, energy, agriculture, industries, trade and
other natural resources.
Achievements of the ECOWAS
ECOWAS had the following achievements:
- Some trade barriers in the region have been removed.
- Abolition of VISA for short-term residences among the member states.
- Improvement in telecommunication network.
- Proposals to introduce a common currency.
- Management of peace in conflict areas such as Liberia.
Problems of the ECOWAS
The ECOWAS face the following problems:
- Vastness of the area that is covered by the ECOWAS; it has many member stops.
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- Communication barriers among the member states.

- Differences in the languages that are spoken in the region.
- Deteriorating terms of trade between the member states and the rest of the world.
- Differences in currencies.
- Persistent civil conflict in the ECOWAS area such as Liberia.
- The division of the ECOWAS countries into Franco-phone and Anglo-phone.
The East African Community (EAC)
The origin of the East African community dates back to 1923, when governors of
Tanganyika, Kenya and Uganda formed the African governors’ conference. In 1948, the
East Africa high commission replaced the East African governors’ conference.
Aims of the East African High Commission
The EAC has the following aims:

To administer common services such as East African civil association, East African
posts and telecommunication etc.

To make laws relating to inter-territorial common services, peace and order and the
good governance of the colonies.
Establishment of the East African Community
On 6th June, 1967, the presidents of Kenya, Tanzania and Uganda signed the East African
co-operation treaty in Kampala, Uganda. The treaty came to be effective on1st December,
1967. The headquarters for the community was in Arusha Tanzania.
Aims of the Former East African Community (EAC)

To promote free trade in the area.

To provide common services such as railways, posts, telecommunication, airways etc.

To provide a wider and more secure market for the goods produced in the region.

To facilitate free movement of people in the region.

Running research services on sectors such as agriculture, medicine and population.
Reasons for the Collapse of the Former East African Community
The following are some of the reasons for the collapse of the former East African
Community.

Dissatisfaction among the member countries. Other member countries complained
that Kenya was gaining more than the other two member states.

Differences in political ideologies among the member countries hindered the
implementation of some objectives.

Political misunderstanding among political leaders, especially between the president of
Tanzania and the president of Uganda.

There were no clear and agreed patterns of industrial specifications, such that each
member country insisted working on its own plan, while expecting to enjoy the
benefits of the community.

The government of Tanzania restricted free transfer and exchange of currency. This
discouraged interstate transaction of goods. The restriction meant that, while in Kenya
and Uganda, Tanzanians could not purchase goods and services because their currency
was not acceptable in those countries. This discouraged interstate trade relationship
among the member countries.

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The failure of the East African development bank to provide enough credits to
economic sectors which were in need of funds.

The ousting of president Milton Obote of Uganda from power, by Iddi Amin in 1971,
created misunderstanding between Tanzania and Uganda

The volume of trade among the member countries was very low.
The New East African Community
The treaty of the new East African community was signed in Arusha on 30th November,
1999, and came into force in 7th July, 2000. This is the association of five countries, these
countries are: Tanzania, Kenya, Uganda, Burundi and Rwanda.
Goals and Objectives of the New East African Community
Widening and deepening co-operation among partner states in the following areas:
- Economic
- Political
- Education
- Science and technology
- Defence and security
- Health and
- Judicial and legal system.
These objectives may be achieved through the establishment of a custom union, as the
entry point of the community, a common market, subsequently a monetary union and
ultimately a political federation for the East African states.
Strategies for achieving the objectives
The following are the strategies for achieving objectives of the East African Community:
(i) Promotion of sustainable growth and equitable development of the whole region of
East Africa, including rational utilization of the available resources and protection of
the environment.
(ii) Strengthening and consolidation of the long standing political, economic, social,
cultural and traditions between the people of East Africa, in order to promote people-
centred integration.
(iii) Enhancing and strengthening of the participation of the private sector and the civil
society.
(iv) Mainstreaming of gender in its entire programmes and enhancing the role of women
in development.
(v) Promotion of good governance, including adherence to principles of democracy, rule
of law, freedom of expression, transparency and gender equality.
(vi) Promotion of peace, security and stability within the region and good neighbourhood
among the partner states.
Organs of the East African Community
The main organs of the East African community are:
- Summit of the heads of state of the member countries.
- Councils of ministers.
- Coordination committee.
- Sectoral committees.
- East African court of justice
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- East African legislative assembly

- A secretariat
Strategies of the East African Co-operation

The East African community operates on the basis of a five-year development strategy.
The strategy spells out the policy guidelines, priority programs and implementation
schedules.

Emphasises on economic co-operation and development with a strong focus on the
social dimension.

Enhancing the role of the private sector and civil society in collaboration with the
public sector in regional integration and development.

Establishment of an internationally competitive single market and investment area
alongside the development of regional infrastructure, human resource, science and
technology.
Areas of Co-operation in the East African Co-operation
The following are the areas of co-operation among the member countries of the EAC.
- Trade, investment and industrial developments.
- Monetary and fiscal affairs
- Infrastructure and social services
- Human resources
- Science and technology
- Free movement of the factors of production
- Agriculture and food security
- Environmental and natural resources management
- Tourism and wildlife management
- Health, social and cultural activities
- The role of women in socio-economic development
- Participation of the private sector and the civil society and
- Co-operation in political matters including defence, security, foreign affairs, legal and
judicial affairs.
Funding
The core budget of the East African Co-operation is funded by equal contributions from
the member states, Regional programmes are funded through the mobilization of
resources from both within and outside the region.
Problems of the East African Community
The East African Community is facing the following problems:

Poor transport and communication systems which discourage economic activities
among the member state.

Political instability within individual countries, for example, in Uganda, there are
frequent wars between the government forces and rebels.

There is a small size of the market in the region due to low income among the people

Lack of funds which limit the community’s to implement some projects.

Uneven distribution of gains among the member states due to different levels of
economic development.

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There are few goods for exchange and the volume of trade is low because all the East
African countries produce similar primary agricultural products and have a low level of
industrial development.

Weak private sector, in the region of East Africa the private sector is incapable of
utilizing the available resources and establishing large trade relationships.
Factors that Favour East Africa Co-operation
The following are factors that favour East Africa Co-operation:
(i) Common Language: People of East Africa speak the same language, Kiswahili. This
facilitates effective communication in various Economic, social and political
relationships among the people of East Africa.
(ii) Political Commitment and Will: The political leaders of the East African states are very
committed to implement various decisions and implement the objectives of the
community.
(iii) Political Stability: The region of East Africa is relatively more peaceful than other
regions of Africa. This provides a conducive environment for investment, by both
foreign and local investors. Also, it allows for free movement of people from one
state to another to engage in economic activities such as trade.
(iv) Abundance of Natural Resources: The region of East Africa is endowed with natural
resources such as minerals, fertile soil and good climatic condition which attract more
investments.
(v) Infrastructure of the Former East African Community: The current East African community
still enjoys some of the remaining infrastructure of the former East community, such
as its former Head quarter in Arusha, Tanzania, which was used as the ground for the
formation of the new East African Community.
Benefits of the East African Community to the member states
(i) Expansion in the Size of the Market: A combined population of all the countries of East
Africa makes a total population of about 80 million people. This creates a very big
chance of market for traders in the region.
(ii) Economies of Scale/Mass Production: Producers in the member countries are expected to
enjoy economies of scale due to expansion in the size of the market
(iii) Attraction of Foreign Investment: There is attraction of foreign investments as a result of
removal of some trade barriers, such as tariffs and creation of a wider single market.
(iv) Mobility of Resources: There is increase in the mobility of resources, such as labour and
capital, in the region from one member state to another. That mobility has increased
employment opportunities, reduced cost of labour and increased the utilization of
resources.
(v) Political and Social Understanding: East African co-operation has increased the
understanding among the leaders and the people of East Africa.
(vi) Technological Transfers: The community has opened chances for transfer of technology
from one member state to another. A technologically backward nation benefits from
the technologically advanced nation.

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Expected costs to member countries

Member countries in the East Africa Community, despite the gains, are likely to incur the
following costs:
(i) Uneven distribution of benefits: In this co-operation, a more economically strong nation is
likely to gain more than a less economically strong nation. A more economically
strong nation benefits from the increase in the size of the market and more
opportunities for investments in other countries. Nonetheless, these benefits are
unlikely to be obtained by economically weak nations.
(ii) Decline of infant industries: Due to the removal of tariffs, the infant industries in some
member country are likely to lose markets for their products, since they may not
compete against industries in other nations that are more advanced.
(iii) Loss of revenue: The government revenues, in form of tariffs, declines due to the
removal of tariffs.
(iv) Capital and brain drain: The factors of production, such as labour, tend to move from
where they are paid less to where they are paid much higher. This, again, is probable
to affect an economically backward member nation.
(v) Demerits of specialization: East African co-operation enables each member state to
specialize in the production of the commodity in which it has a comparative
advantage, however, specialization can cause serious problems to the member
countries in case of price fluctuation of the commodity of specialization.
What should Tanzania do in order to benefit from the EAC?
Tanzania is currently the least advantaged in the EAC as compared to Kenya and Uganda.
It is relatively poor, and faces a lot of challenges from her counterparts. The level of
education, as well as science and technology, are the crippling factors in her attempt to
enjoy the economic advantages that the EAC may bring. In order to realise economic
benefits from her membership in the EAC, the following should be done:
• The quality of education has to be improved in order to ensure the production of
competitive manpower that can be absorbed in various places in East Africa.
Currently, the quality of education in Tanzania is so disappointing to the point that it
does not instill confidence in the Tanzanians that they can compete with the
Ugandans and Kenyans in the job market.
• Health services have to be improved in order to have energetic manpower that can
effectively utilise the local resources for sustainable development.
• The country should continue maintaining peace and security in order to attract more
investors and tourists into the country.
• The government should strive to improve local industries and agricultural sectors in
terms of capacity and quality of goods produced, in order to compete in the regional
market.
• The country should also work hard to improve its infrastructure which is largely
dilapidated in many places. Infrastructure like road network and railway system, as well
as telecommunication system will facilitate transport and communication within the
country, which, in turn, will promote internal trade and industrial development. Trade
and industrial development will, in turn, lead to fast economic development to compete
with Kenya and Uganda.
• There should be improvement in the power supply system. Reliable power supply
system will stimulate industrial development and, in turn, propel the economic
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development of the country. Hence, various sources of energy and power have to be
put in place so as to do away with the current erratic power supply system that has been
hindering effective economic development.
• The country has to continue conserving the environment and ensuring proper
utilisation of the environmental resources.
• The government should work out the programme under which it will keep on
collecting public views on the fast-tracking of the regional political federation that the
member countries are struggling for.
• Mass awareness campaigns to sensitise Tanzanians on the need to support the EA’s
federation have to be conducted. In other words, the local people have to participate in
various activities that are geared towards realising the attainment of the EA’s political
federation.
The Southern Africa Development Community (SADC)
SADC is the association of seven countries from central and southern Africa, these
countries include Angola, Botswana, Lesotho, Malawi, Namibia, Mozambique, Swaziland,
Zimbabwe, Tanzania, Zambia, and the republic of South Africa, which joined in 1984.
The SADC was formed to replace the former Southern African Coordination Conference
(SADCC) which came into existence in April 1980 with the overall objectives of:
- Helping Southern African states to become self -reliant and reduce dependency on the
Republic of South Africa.
- Attaining regional integration
- Mobilizing resources
- Securing international understanding
In April 1993, the heads of states of the member countries held a meeting in Mbabane,
Swaziland, to ratify a treaty to change SADCC into SADC.
Objectives of the SADC
The SADC has the following objectives:
(i) To help member states to secure genuine and equitable regional integration.
(ii) To mobilize resources from the region and elsewhere that may be beneficial for all the
member states.
(iii) To foster international co-operation.
The above aims are to be achieved through:
• Improved trade arrangement among the member countries.
• Improved transport and communication links and systems.
• Development of agriculture and industries.
• Developing and harnessing of energy resources.
• Developing and training manpower.
• Use of appropriate financial policies.
• Reduction of dependency on other nations.
Problems Facing the SADC
The SADC is facing the following problems:
(i) The SADC states tend to cater for their own national interests first before those of
SADC
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(ii) Member nations have attained different levels of economic development; hence there
are uneven levels of development among the member nations.
(iii) Lack of qualified and skilled personnel to run the integration, hence they depend on
technical assistance from developed nations.
(iv) Weak financial base which forces the member states to depend on foreign assistance.
(v) Most of the member states produce similar agricultural products such as coffee,
cotton, maize and tobacco. Therefore, they fail to make exchange among them.
(vi) Deteriorating terms of trade in the world market.
The Common Market for Eastern and Southern Africa (COMESA)
Before 6thNovember, 1993, COMESA was known as the preferential trade area for
Eastern and Southern Africa (PTA).
Objectives of the COMESA
The COMESA was established to achieve the following objectives:

To promote and facilitate co-operation among the member states in trade, industry,
agriculture, transport and communication.

To harmonise and coordinate development strategies, policies and plans within the
region.

To improve the environment for investment and growth of the private sector.

To encourage co-operation in monetary affairs in order to facilitate sub-regional
integration.

To establish joint industrial and agricultural institutions with the aim of increasing the
sub-region's production capacity.

To make trade much easier within the region through a reduction, and eventually
reducing tariffs by 80% by the year 1996, and the introduction of a common currency
in the year 2005.

To build a strong economic base for its members as a step towards the economic
independence of the region.

To improve the security and overall welfare of the people.
Achievements of the COMESA
Since its establishment, the COMESA has had the following achievements:

Tariffs has been reduced

The member states have become more co-operative in the field of trade, industry and
agriculture.

The organisation has launched a bank, which finances trade and development projects.
The Headquarters for the Bank is in Bujumbura, Burundi.

The volume of trade has increased among the member states.

The COMESA has its own currency.

The number of members has been increasing.
Problems Facing the COMESA
The COMESA is facing the following problems:

Uneven levels of economic development; some member states are poorer than other
member states.

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Differences in the values of currencies discourage trade among member states, since it
becomes more expensive for a country whose currency has a lower value, to import
from a country whose currency is stronger, in terms of value.

Lack of commitment among the members towards the implementation of the
objectives set by the organization. Some member countries are reluctant to reduce
tariffs.

Differences in languages used by member states, some of the different languages
which are used by member states include, Portuguese, English and French. These
differences in languages affect effective communication among the people when they
come in contact for economic activities such as trade.

Reluctance of some member countries, such as Rwanda, to reduce tariffs as agreed by
the other member states.
Achievements of the COMESA
Since its establishment, the COMESA has made the following achievements:

Member countries have become more co-operative in the field of trade, industry, and
agriculture.

The organization has launched a Bank, the trade and development bank, which
finances trade and development projects, its headquarters is in Bujumbura, Burundi.

The COMESA has created its own currency.
Tanzania and the COMESA
Tanzania officially pulled out of the COMESA in September 2000.
Reasons for Tanzania's Withdrawal from the COMESA
Tanzania pulled out of the COMESA due to following reason:

Tanzania was experiencing trade imbalances against other members; its balance of
trade had been unfavourable for some years.

More contributions due to multiple memberships of Tanzania in other regional
groupings such as East Africa co-operation and SADC which had similar objectives.

Tanzania depends much on revenues from import tariffs, which it was losing by being
a member of the COMESA.

The low level of industrial development made Tanzania to be only a market for goods
from other more industrialized members such as Zimbabwe and Kenya. This could
affect the development of the industrial sector.

There was problem of dumping of goods from more industrially developed countries.
Impacts of the Withdrawal from the COMESA
The following have been the impacts of Tanzania’s withdrawal from COMESA:
- Decline in the market of Tanzania's goods in other COMESA members
- Revenue through tariffs can be recollected
- Goods from COMESA countries are more expensive
- Transit charges through COMESA countries are high
The European Economic Community (EEC)
The Origins of the Community, as the common market, came into existence. Once again,
the UK participated in early negotiations but then withdrew.
After two earlier abortive attempts to join the EC, the UK finally became a member
in 1972, together with Ireland and Denmark. Norway decided, by a referendum, not to
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become a member. Greece became a member in 1981, and Spain and Portugal joined in
1986. The introduction of the single European Act, in 1987, completed the process by
which these twelve economies function as one.
The main features of the European Economic Community
There are two main features of the EC.
(a) Customs Union: The establishment of a full customs union involves both the abolition
of tariffs between the members and the erection of a common external tariff to the
rest of the world; if each country did not have the same external tariff, then imports
would simply flood the community through the member states with the lowest tariffs.
To arrive at the common external tariff, the general policy has to take the arithmetic
mean of the previous six tariffs. In some cases, e.g. the imports of products from
France's tropical ex-colonies, the lowest duty was adopted since there was no conflict
with domestic production. Several of the old colonial states have associated status
with the EC. The original arrangement for these states was superseded by the Lome
Convention in 1975. Under this, 46 developing nations in Africa, the Caribbean and
the Pacific (ACP states) are allowed to send all their industrial exports and most of
their agricultural exports to the EC duty free.
When the UK joined the EC, it was particularly difficult for her to agree to the
common external tariff because she wanted to protect Australia, Canada and New-
Zealand. The agricultural products of the highly efficient farmers in these temperate
countries were in direct competition with European farmers. The UK was not
allowed to join until she agreed to erect considerable tariff barriers against her
Commonwealth partners.
(b) Common Market: The EC is colloquially known as the Common Market, but this is
only one aspect of its organisation, although potentially the most important. The term
refers to the running of the economies of the members as if they were one, i.e. the
common prices and production policy of the ECSC was to be extended to all
industries. The common market agreement implies a free movement of labour, capital
and enterprise within the EC. So far, it is only in the Common Agricultural Policy
(CAP) that has a truly common policy. Despite the fact that the EC has been in
existence since 1957, it is only in 1992 that a true common market was created.
The structure of the European Economic Community
The Treaty of Rome envisaged that the EC would eventually lead to economic and
political unity although this has become more unlikely at present, than it seemed some
years ago, it is possible to discern the four essential components of state organisation.
(i) The Council of Ministers: This could be described as the executive or cabinet of the EC.
It consists of one minister from each state. The choice of minister depends on what is
being discussed. If, for instance, the issue is agriculture, then it would be the ministers
of agriculture who attend. Voting in the council is weighted; the U.K, for example,
has ten votes while Luxembourg has only two. The council is assisted by a committee
of permanent representatives.
(ii) The European Commission: This consists of 17 permanent commissioners; two from
each of the five largest countries and one from each of the other seven. The
commission is the secretariat of the EC. Behind the commission are staffs of about
2500 people working in the commission’s headquaters in Brussels. The commission is

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responsible for the day-to-day running of the community. It is also responsible for the
development of the EC policies.
(iii) The European Parliament: The institution which meets in Strasbourg is the embryonic
legislature of the EC. Originally, it consisted of MPs nominated by national
parliaments. However, since 1979, members have been elected directly to the
European Parliament. At present, there are 518 members of the European Parliament
(MEPs), of which the UK elects 81. As yet, the Parliament still has little authority or
power. Its main function is to monitor the activities of other institutions of the EC.
(iv) The European Court of Justice: Not to be confused with the European court of Human
Rights, the function of the European court of justice is to ensure that the law is
observed in the interpretation of the Treaty of Rome. It is the final arbiter on all the
questions involving interpretation of the EC treaties, and it deals with disputes
between member states and the commission, or between the commission and
business organisations, individuals or EC officials. It is, thus the judiciary of the EC.
Objectives of European Economic Community
European Economic Community was established to achieve the following objectives:

To harmonise policies for improving the living standards of the people of the member
countries.

Removal of traffic and non-traffic barriers among the countries.

To encourage coordination and co-operation in trade customs and to be harmonised
and standardised.

To ensure that national business policies do not harm other members to adopt the
common agricultural policy (CAP) for internal price support and variable import levies
aiming at protecting the farmer in the community from foreign competition.

Adoption of a common transport policy as regards development and the regulation of
road, rail and inland water transport.

Establishment of a common link with developing countries through other sub-
organizations like ECC-ACP agreements.

Establishment of a bank (European Investment Bank) to finance the economic
developments, give grants, loans, aids etc.
Success of the European Economic Community

It has emerged as the tightest association with well-stipulated policies.

It has progressed further into trade and the general economic integration. European
countries began using the EURO-Currency on 1st January, 2002. This is a great
achievement, though there are some of the people who still doubt the future use of
Euro-Currency.

By 1967, most restrictions on trade were removed and the common external tariff
could be into operation.

The farmers receive high prices for their products, which has encouraged the
promotion of agricultural performance in the European countries.
Failures/Problems facing the European Economic Community
The European Economic Community is facing the following problems:

Establishing a common currency has been achieved with many difficulties, and there
are some member countries, such as Britain, which have not joined the Euro-
Currency.
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There is a problem of aging of the population due to the strict policies on family
planning that focuses on birth control. This will lead to the problems of labour
scarcity, hence deceleration of the economic growth due to inefficiency in the
production process.

There are difficulties in integrating agricultural development because of the large
agricultural population of the member states.

There have been problems associated with overproduction due to the increase of
efficiency caused by the use of machinery. Overproduction has led to the decline in the
prices of agricultural commodities. Tanzania is related to the EEC through
membership in the Lome convention.
International Economic Co-operation
International economic co-operation refers to the relations which are established between
sovereign states. The relations are usually established at political, economic, diplomatic
and cultural levels. International Co-operation can take two forms
(i) Bilateral economic co-operation: This is the co-operation between two countries or
two independent organisations
(ii) Multilateral economic co-operation: This is the co-operation that involves more than
two countries.
Importance of Economic Co-operation
Economic co-operation has the following importance:

It leads to an increase in the volume of trade among the partner countries.

It leads to an increase in foreign investments.

Improves the welfare of the people through varieties of goods consumed at lower
prices.

Political understanding is enhanced through economic co-operation.

Transfer of technology increases through economic co-operation.

Countries enjoy comparative advantage through economic co-operation.

The size of the markets expands, thus enabling economies of scale to the firms in the
cooperating countries.

It increases mobility of labour and increases employment.
Disadvantages of Economic Co-operation
Economic co-operation has the following disadvantages:

It can create economic dependency.

In some cases, it may lead to capital drain.

Uneven distribution of gains may occur.

It can bring the effects of specialization if economic co-operation influences a nation
to specialise in a certain product, which often leads to problems when the demand for
the commodity declines in the world market.

Unequal exchange and exploitation of resources. Economic co-operation may lead to
massive exploitation of the country's wealth, which due to the unequal exchange and
expatriation of wealth abroad.

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Differences between Economic Co-operations and Regional Economic

Integrations
Economic Integration and Economic Co-operation differ in the following ways:
(i) Regional economic integrations are confined to a certain geographical area of the
continent, while economic co-operations have no regional boundaries. Economic co-
operations involve countries of different regions in a continent or world.
(ii) It is necessary for countries in a regional economic integration to have similar levels
of economic development, but that is not a necessary factor for international
economic co-operation, since countries of different levels of economic development
can establish economic co-operation, as it is the case of Lome convention and
AGOA, which are co-operations between a group of poor countries and EEC, and
between America and African countries, respectively.
(iii) Regional economic integrations usually involve the removal or reduction of trade
barriers such as tariffs, while an economic co-operation may exist without eliminating
the existing barriers.
(iv) Trade forms an important area of co-operation in a regional integrations while, in an
economic co-operations countries can cooperate in non trade economic activities
such as joint investments and exchange of technology.
(v) There is a definite organisation structure in regional integrations, but it is not so
important in economic co-operations, since countries can cooperate without having
any formal organs or organisation structure.
(vi) Similar political and social background is very important for regional economic
integrations but it is not important for economic co-operations. Countries may still
have economic co-operations even if they have different social political backgrounds.
For example, one of the reasons for the success of the East Africa Co-operation is the
similarities in political, cultural and social background among the five member
countries. On the other hand, there may be no political and cultural similarities
between Tanzania and Japan, but there is a strong economic co-operation between
the two countries.
Examples of International Economic Co-operations
The Lome Convention
This includes a series of trade and economic co-operation agreements between EEC and
countries from Africa as well as Caribbean and the Pacific states (ACP). The first Lome
convention was signed in 1976 at Lome, in Togo, by EEC and 46 ACP countries. The
second signing was effected in 1979 with emphasis on agricultural development, energy
policy etc. The third Lome Convention came into force on 1st March, 1985, with the
emphasis on the EEC assistance to ACP, sectoral programmes and further emphasis on
some of the terms put forth in the earlier convention. The forth Lome Convention was
conducted in 1990 in Kampala, Uganda, with emphasis on the increased co-operation
between the EEC and ACP countries in areas of trade, industry, agriculture, fight against
HIV/AIDS etc. However, the countries are still rigid to allow free trade in textiles.
Basic Provisions of the Lome Convention
(i) Trade co-operation: Goods from ACP countries should have a free access into EEC; free
from customs duty and other charges. There is regular consultation on all matters
concerning trade between the EEC and ACP. Also, the EEC conducts basic training
and advanced vocational training in trade for ACP state staff.
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(ii) Protection of ACP Industries: The ACP countries may impose tariff against the industrial
products from the EEC to protect ACP industries. Also, the EEC provides technical
training and advice to the ACP group.
(iii) Stabilization of Export Earnings (STABEX): EEC countries guarantee the stability of the
earnings from the ACP exports. This covers the products, mostly raw materials, on
which the ACP countries depend on, under this convention; the ACP group has more
control over the EEC development Fund than before. The ACP may enter an equally
favourable agreement with other industrialised or even the developing countries.
- Any ACP country may opt out of the Lome Convention if the agreement is no longer
satisfactory.
Advantages of the Lome Convention
The Lome convention has the following advantages:
- ACP countries can earn more stable income from their exports of raw materials; hence
they are now less vulnerable to price fluctuations.
- Countries have more access to grants and aid from the EEC.
- Any member has been given freedom to leave the Lome Convention if there is wish to
do so.
- It does not promote neo-colonialism.
Achievements
Lome convention has made the following achievements:
- All ACP export of manufactured goods and agricultural products has been granted
duty-free access.
- Establishment of STABEX scheme to guarantee ACP countries a specific level of
income on selected commodity exports to EEC.
- To encourage industrial co-operation through the transfer of technology and
encouraging of EEC private investors to establish industries in ACP countries.
- To grant ACP countries with some soft grant from EEC, through the European
Development Fund and European Investment Bank.
- Attempts are being made to stabilize earnings from minerals through stabilization of
export earnings from mineral products.
- ACP countries have increased in number.
Problems
Lome convention has been facing the following problems:
- Low income among the ACP countries.
- There are poor transport and communication systems in the ACP countries. There
exist uneven levels of development among the member countries. This reduces
effectiveness and efficiency in the operation of the Lome Convention.
- The EEC members are still rigid to allow free trade in textiles.
- There are so many political conflicts among the ACP countries, leading to less
participation and contribution to the Lome Convention.
- The population in EEC is aging; hence European countries may in the long run fail to
facilitate the smooth operations of the Lome Convention due to having very old
people dominating the population.
- Low technology among the ACP countries.

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The African Growth and Opportunity Act (AGOA)

This is the economic co-operation between the African countries and United States of
America. It was promulgated in the USA and signed into law on 18th May 2000, as title
one of the trades.
- The act offers tangible incentives for African countries to continue with their efforts to
open their economies and build free markets.
- The government of USA announced the creation of $ 200 million over-seas private
investment support facility that would give American firms access to loans guarantees
and political risk insurance for investment projects in sub-Saharan Africa.
- The president of USA announced the establishment of a trade and development
Agency (TDA) with its regional office in Johannesburg, South Africa, for the aim of
providing guidance and assistance to the governments and companies which seek to
liberalize their trade laws, improve the investment environment and take advantage of
AGOA.
Achievements of AGOA
Lome convention has made the following achievements.
- During the first half of 2001, total trade between America with sub-Saharan Africa
rose by almost 17%.
- The US imports from the region exceeded $ 11.5 billion.
- Some countries, such as Eritrea, Seychelles, Madagascar and Senegal, saw their exports
to the USA increased by 100%.
- In Kenya, a public project, as a result of AGOA, created new 150000 jobs.
- In Lesotho, textile sectors expected to inject $122 in investment.
The World Trade Organisation (WTO)
This organisation was established in 1995 by the Marrakesh agreement. It was established
mainly to over-see the implementation of all the multilateral agreements that have been
negotiated in the Uruguay round and those that will be negotiated in future.

It has over 140 member countries and accounts for over 97% of the world trade.

Decisions are made by all the members through a consensus.

The top decision body of WTO is the Ministerial conference which meets at least once
after every two years.

Below the Ministerial Conference is the General council, which meets several times a
year at the Geneva headquarters. It is a trade policy review body, and dispute
settlement body. Under the general council, there is the goods council, the services
council and the intellectual property council which reports to it.

In 1997, an agreement was reached on the area of telecommunication services, in
which 69 the governments agreed to take trade liberalisation measures that went
beyond those of the Uruguay round. Also, negotiations for tariffs free in information
technology products were also concluded by some member countries.

In 2001 a meeting was held in Doha Qatar in which a number of issues were
discussed, including negotiations on non-agricultural tariffs, trade and environment,
anti dumping, subsidies etc. The objectives of WTO are similar to those of GATT,
which has ceased to exist as a separate institution and has become part of WTO. These
objectives have been expanded to give WTO a mandate to deal with:-

Trade in services.

Protect and preserve the environment.
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Functions of WTO
WTO has the following functions:
(i) To facilitate the implementation, administration and operation of Uruguay Round
legal instruments and of any new agreements that may be negotiated in the future.
(ii) It provides a forum for further negotiations among the member countries on matters
covered by the agreements as well as on new issues falling within its mandate.
(iii) Thirdly, it shall provide a forum for further negotiations among the member countries
on matters covered by the agreements as well as on issues falling within its mandate.
(iv) It is responsible for the settlement of differences and disputes among its member
countries.
(v) It is responsible for reviewing trade policies of the member countries.
(vi) It gives technical and financial assistance to developing countries.
Specialized Agencies in International Economic Co-operation
These are separate independent organisations that are related to the UNO by special
agreements. Their activities are coordinated the UNO through the economic and social
council
IFC
It is the International Fund/Finance for Co-operation. The fund was formed in 1956 as
an affiliate of the World Bank. It promotes investments in poor countries by assisting the
private sector enterprises. It has its headquarters at Washington, D.C.
IDA
It was formed in 1960 as an affiliate of the World Bank to promote economic
development through long term loans for less developed countries.
GATT
This is the General Agreement on Tariffs and Trade. The GATT came forward as a result
of the 1947 General Conference. It is a multi-national treaty encompassing 80% of the
World Trade.
Objectives of GATT
GATT was established to achieve the following objectives:
(i) To protect the domestic infant industries, basically through tariffs.
(ii) To control the powers and activities of multi-national enterprise/
agencies/organisations.
(iii) To encourage the growth, development and more equitable distribution of gains from
international trade.
(iv) To harmonize and liberalize both the tariff and non-tariff measures to negotiations.

UNCTAD
This is the United Nations Conference on Trade and Development. It was established in
1964 to handle LDCs' trade obstacles. It was a result of the unfavourable North to South
co-operation.
Objectives of UNCTAD
UNCTAD was established to achieve the following objectives:
(i) To give LDCs trade (tariff) preference through encouraging and promoting both
manufactured and semi-manufactured goods.
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(ii) Strengthen and promote capital inflow to LDCs for development.

(iii) Promoting self-reliance and economic co-operation among the developing countries.
(iv) Above all, promoting/encouraging/stimulating economic growth and development,
especially among the developing nations.
(v) To improve the terms of trade among the least developed countries by enlarging the
markets for their primary products, and also stabilize prices through international
commodity agreements.
(vi) The UNCTAD also aims at transfering technology rapidly to LDCs. This would
encompass capacity building, research and training for LDCs in and endeavour to
narrow the technological gap between the developed countries and the LDCs.
The World Bank
It is also known as IBRD, i.e. the International Bank for Reconstruction and
Development. It was established in 1945 as a sister institution of the International
Monetary Fund (IMF). Indeed, the IMF members are members of the World Bank. It has
the USA, UK, Germany, France and Japan, as its major shareholders.
Objectives of the World Bank
The World Bank was established to achieve the following objectives:
(i) To help in the restructuring and development of the member states through genuine
and adequate investment capital.
(ii) To encourage balanced growth in international trade and achieve a better B.O.P
position.
(iii) The World Bank further promotes foreign investment, since private capital is often
insufficient to fund productive projects.
(iv) To finance projects/programmes like roads, railways, power, telecommunications etc;
aimed at improving the general welfare, especially among the poor population in
LDCs.
The International Monetary Fund (IMF)
The IMF is an international financial institution which was formed after the
Brettonwoods conference of 1944 and came into operation in 1947.
Objectives of the IMF
The IMF was established to achieve the following objectives:
(i) To assist member countries with severe B.O.P problems through provision of loans,
technical, monetary advice and fiscal policies/ programmes.
(ii) To enhance foreign exchange stability and maintain orderly exchange
programmes/policies among the member states so as to avoid the competitive foreign
exchange depreciation.
(iii) To eliminate the unnecessary foreign exchange restrictions that may hamper trade
among countries.
(iv) The IMF also aims at providing technical assistance by sending experts to the
member countries that may need them.
(v) To promote international monetary co-operation as a basis of consultation and
collaboration on international monetary programmes.
(vi) To assist in the establishment of a multi-national system of payments in respect to
current transaction among the member states.
(vii) And, finally, to establish and expand a balanced growth of international trade.
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The IMF structural adjustment programmes (SAP)

These SAPs include a package of IMF conditions to LDCS for them to get the IMF’s
assistance. These conditions include:
(i) Reduction in the government expenditure, example on the social overhead
expenditure, i.e. infrastructure, health, education, social security, etc.
(ii) Devaluation. The IMF stresses that this would improve the B.O.P position of
developing countries by making imports more expensive them exports.
(iii) Improvement in tax collection. The IMF urges developing countries to expand their
tax base, so as to raise more revenues.
(iv) Strict monetary and credit policies. The IMF recommends credit restrictions and an
increase in interest rates, so as to reduce the money supply and reduce inflation.
(v) Trade liberalization. LDCs are being forced to liberalize their markets to foreign
imports through their manufactured products, because their exports are often faced
with restrictions by the developed countries.
(vi) Retrenchment of workers and demobilization. The IMF also recommends reducing
the number of civil servants and soldiers, though this is undertaken without proper
consideration of the manpower requirements of LDCS’ economies.
(vii) Wages freeze. This condition of the IMF, has, however, greatly affected the General
Welfare, especially among the working class.
(viii) Privatisation and encouragement of the private sector, where economic activities are
to be shifted from the state to the private sector in a bid to ensure profitability,
efficiency, proper management and accountability within the private sector.
(ix) Establishment of flexible foreign exchange rate policies. In this era of globalisation,
state control on economic activities has greatly been reduced. Quite often, forces of
demand and supply have been allowed to prevail, hence the need for a flexible/free
floating exchange rate system.
(x) In the case of LDCs, the IMF still recommends and encourages an increment
production in agricultural sector.
(xi) Where the state still controls the major means of production, the IMF emphasizes
efficiency in public sector enterprises.
Achievement of the International Monetary Fund
Since its establishment, the IMF has realised the following achievements:
(i) The fund has assisted the member states with balance of payments problems by
finding them so as to reduce the problem.
(ii) The fund has altered its original article according to the changing international
economic situation. For example. It has legalised free exchange rates, raised quotas
to increase capital resources, etc
(iii) The fund has provided financial support, especially under the special import
programme (SIP).This has led to an increase in varieties of commodities in the
market.
(iv) The liberation policies of the IMF, especially on trade, have reduced the problems of
scarcity of goods in many less developed countries.
(v) Policies, such as privatisation, have helped improve efficiency, accountability,
management, and have controlled corruption.
(vi) It has increased the inflow of foreign currencies to various countries.

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Failures of IMF
IMF has the following failures, despite its achievements:
(i) Controlling and restricting world trade still exists.
(ii) The funds lending rates are high and short term and indeed with high interest rates.
(iii) The IMF tends to discriminate against LDCs in favour of developed countries, who
are the major shareholders.
(iv) Following the collapse of the Brettonwoods system, under which the fund was
established, the IMF has failed to promote foreign exchange stability and orderly
exchange among the member states.
(v) The IMF has tended to interfere with the internal economic affairs/conditions of its,
member states. This is because the member countries have to fulfil the IMF
conditions before getting financial assistance.
(vi) The IMF policies have widened the gap between the poor and the rich in LDCs.
This is because such programmes have tended to favour the richer sections of the
populations.
(vii) Standards of living have deteriorated because of the strict IMF conditions of
increasing taxes, so as to widen the tax base.
(viii) Foreign exchange wastage has become a common problem in LDCs, due to the
IMF's liberation conditions, which has led to the importation of unnecessary goods.
(ix) Increased debt burden has occurred in a bid to stabilize the B.O.P position as
required by the IMF.
(x) Retrenchment has aggravated the problem of unemployment and this, too, has
affected the people's welfare.
(xi) The IMF polices have failed to protect the peasant farmers in LDCs because of the
abolition of price control programmes, e.g. the minimum price legislation.
(xii) Privatisation conditions of the IMF have greatly affected the locals, since they do not
possess enough capital to purchase expensive state enterprises that have been sold
off.
(xiii) Cost sharing in the education sector, as a condition of the IMF, has led to rampant
school dropouts resulting in many semi-illiterates and unemployed.
(xiv) Generally, the IMF policies have proved to be unpopular. This is because the former
the government’s pro-people expenditures have been stopped.

The International Children Education Fund (UNICEF)

The UNICEF was formed in December 1946 to help the governments to carry out
programmes for the benefit of children and youth. For this, UNICEF has the following
objectives:
(i) Gives permanent health services for mothers and children; control diseases of
children e.g. malaria, T.B.; yaws, leprosy etc. Provide food programmes by feeding
children, giving nutrition education etc.
(ii) Promotes child and family welfare by providing educational and vocational training
for the above areas.
(iii) To give technical aid in form of tools, food, money and short and long courses, etc.

UNESCO (The UN's Educational, Scientific & Cultural Organization)

Formed on 4th November, 1946, with its headquarters in Paris.

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Aims of the UNESCO

The major aim of the UNESCO is to contribute to peace and security in the world, by
promoting international collaboration in education, science, culture and communication.
Activities of the UNESCO
(i) It expands and guides education in order to enable each country to handle its own
development more effectively.
(ii) It trains teachers, educational planners and administrators, and also encourages
building and equipping of schools.
(iii) It promotes the scientific management of the environment and a better use of natural
resources.
(iv) It promotes the national cultural values and preserves the cultural heritage for
example, by preserving cultural identities, oral traditions, writing of books etc.
(v) To survey the needs of the poor countries to be assisted, e.g. in building their own
communication systems, promote teaching and learning of the social services so as to
realize human rights, peace and justice for all.
The International Labour Organization (ILO)
The ILO was established in 1919 by the Versailles peace Treaty, hence associated with the
League of Nations. In 1946, it was associated with the UN as a special Agency.
Aims of the ILO
• To raise the working and living standards of workers throughout the world.
• To eliminate social injustice, which leads to unrest and war.
• To advocate for full employment of workers.
Activities of ILO
- It encourages employment of workers in jobs that they fit most.
- It facilitates training and transfer of workers.
- It promotes the working conditions and ensures a fair distribution of the products of
labour.
- It advocates for the rights of workers to form trade unions, and encourages workers to
cooperate with their employers.
- It advocates for workers welfare health and safety at work places.
- It champions the provision of adequate nutrition, housing and recreational facilities to
the workers and their families.
FAO (Food and Agricultural Organization)
Founded on 16th October, 1945, and headquartered in Rome.
Aims of the Food and Agricultural Organization

To eliminate hunger.

To raise the levels of nutrition and standards of living.

To improve production, processing, marketing and distribution of food and other
products from farms, fisheries and forests.

To improve the living conditions of the rural population

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Strategies of achieving its aims

(a) Promotion of:
(i) Investment in agriculture, better soil and water.
(ii) Investment in better crops and livestock yields, marine and inland fisheries.
(iii) Investment in mechanization of agriculture and in development of agricultural
research in the developing countries.
(b) Fighting against animal diseases that massively kill cattle, e.g. trypanosomiasis.
(c) Conservation of natural resources such as forests.
(d) Helps countries to prepare food for emergency situations and provide food relief
where necessary.
(e) Improves the seed production and distribution in the developing countries
WHO (World Health Organization)
The WHO was founded on 7th April, 1947 with its headquarters in Paris, France.
Activities of the WHO (World Health Organization)
(i) To supply technical aid for fighting epidemics such as cholera, malaria, T.B. etc.
(ii) To support public health services in the developing countries by training the
personnel.
(iii) To promote research on health issues such as nutrition, mother/child care, control of
diseases etc.
(iv) To campaign for the immunization of 90% of all the children in the world by 2000.
Diseases in target are diphtheria, measles, tetanus, T.B, whooping cough etc.
(v) To direct and co-ordinate the global campaign against AIDS-to effect prevention and
control of infection.

Review Questions
1. What is regional economic integration?
2. Differentiate between regional economic integration and economic co-operation.
3. What are the advantages of economic co-operation?
4. Discuss the objectives and achievements of COMESA.
5. What is the impact of Tanzania withdrawing her membership from COMESA?
6. Examine the benefits that Tanzania gains from the East Africa co-operation
7. Explain the main problems of economic integration in Africa.
8. Discuss the main conditions for a successful economic integration.
9. Why has Tanzania not benefited much from the AGOA programme like the other
member African countries?
10. Discuss the Lome convention.
11. What are the benefits that the less developed countries gain through the world trade
organization?

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CHAPTER NINE

ECONOMIC GROWTH AND DEVELOPMENT

Economic Development
Economic development is the quantitative and qualitative improvement in the economy.
Economic development, therefore, involves increase in the Gross National product
(economic growth) and improvement of the welfare of the people.
Indicators of economic development
Economic development has the following indicators:

Increase in income per capita.

High standards of living and low cost of living.

Decline in illiteracy levels.

Improvements in technology.

Fair income distribution.

Low death rate.

Advanced infrastructure.

Large percentage of GNP from the manufacturing sector.

Social and political stability.

Low or absence of social cost, such as environment pollution.

Democratic and human rights such as freedom of expression, free and fair election,
freedom of association, freedom of worship etc.

Efficiency of labour.

Urbanisation.

High life expectancy.

High consumption and investment.

Low or absence of economic instabilities such as inflation, deflation, budget deficit and
deficit in the balance of payments.
Therefore, economic development is a multi-dimensional concept; its indicators are
economic, social and political in nature
Economic growth
Economic growth is the quantitative increase in the national output, that is, it is the increase
in the volume of goods and services produced in an economy.
Economic growth differs from economic development in the sense that it covers only
the physical aspect of the economy, without considering the socio and political aspects of
the economy, therefore, its indicators are only economic in nature. Examples of such
indicators are: -

High growth rate of the Gross National Product

Improvement of the physical infrastructure

High income per capita

Increase in the manufacturing sectors (industrial) development

Expanding investments and consumption

Urbanization

Fall in unemployment
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Economic stability

Increase in the size of markets

Efficiency of labour.

Technological growth.

Favourable terms of trade and balance of payments

Large tax revenues

Increasing social costs, such as environment pollution

In some situation, growth may be seen by the growing income inequalities among the
people and regions.
Determinants of Economic Growth
Economic growth is determined by the following factors:
(i) Availability of natural resources: If a country is gifted in natural resources, such as
minerals and favourable climate, and they are well utilized, it can easily attain a high
economic level, but if a country has less natural resources it will be difficult for the
country to realize economic growth.
(ii) Size of the labour force: A country with enough and efficient labour force is able to
increase its national output than a country with shortage of labour force.
(iii) Stock of capital: If a country has a large stock of capital goods, such as machinery,
factories, buildings, infrastructures etc, it can easily achieve economic growth, unlike a
country with limited capital goods.
(iv) Entrepreneur capacity: Entrepreneurs are the owners and investors of various economic
enterprises. The growth of investment and the ultimate growth of the economy
depend much on the number and efficiency of entrepreneurs. A country with a large
number of efficient entrepreneurs may realize a rapid economic growth.
(v) Political and social stability: The growth of investments and the resulting economic
growth depend much on the social and economic stability of the country. A country
with political instability and social unrest hardly achieve any meaningful economic
growth.
(vi) Internal and External Market Size: A large growth of the economy depends much on the
market for the goods produced. Producers are encouraged to increase production if
there is a readily available market for the goods and services. In a situation when the
market size is so small, producers are discouraged from increasing production; as a
result, the country cannot achieve high economic growth.
(vii) Conducive Environment for Growth of Investments: Adequate and reliable infrastructure with
good the government economic policies on issues, such as tax, stabilization and
employment, attract both local and foreign investors in the country and, thus provide
the necessary condition for economic growth.
Positive impact of economic growth
Economic growth has the following impact:
(i) Raises the living standards: Economic growth leads to an increase in income per capita,
which increases the ability of the people to purchase goods and services and, thus
improve their living standards.
(ii) Creation of employment opportunities: Economic growth leads to more employment
opportunities to the people.

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(iii) Development of infrastructure: Economic growth enables a country to promote the

development of her social and economic infrastructure such as transport and
communication, energy, health, education etc.
(iv) Industrial development: Economic growth provides the necessary conditions for the
growth of the industrial sector such as market for industrial products. As a result, it
increases the purchasing power of the people, establishment of infrastructure such as
electrical power, transport and communication.
(v) Economic stability: A country that is experiencing a high economic growth has a stable
economy with low inflation rate, low unemployment and a high growth rate of the
national income.
(vi) High Income per capita: Economic growth leads to the growth of the national income
and, thus to an increase in the income per capita.
(vii) Increase in resource utilization: Economic growth precipitates an increase in the
utilization of the available resources such as capital and land.
(viii) Growth of towns: Economic growth leads to an increase in the economic activities in
certain areas, such as industrial production, which attracts immigrants of people to
the areas, hence construction of more residential buildings and infrastructure such as
roads, electricity, tap water system, recreation centres etc, which are the pre-
requisites for the growth of towns.

Negative Impacts of Economic Growth

Economic growth may sometimes lead to negative effects as follows:
(i) Environment Degradation: Economic growth stimulates the levels of industrialisation,
which often result to environment pollution, such as air pollution and water
pollution, by emitting poisonous gases to the atmosphere. Also, economic growth
may result into an increase in the demand for agricultural raw materials. This gives
pressure to the farmers to cultivate more land areas and clear more natural forests,
hence cause land degradation.
(ii) Over-exploitation of Resources: Economic growth results to excessive demand for a lot of
resources, such as minerals, soil, water, therefore, leads to the exhaustion of these
natural resources.
(iii) Rural to Urban Migration: Economic growth may lead to economic imbalances
between the rural areas and the urban areas. These imbalances between the rural
areas and the urban areas may be in the form of unequal employment opportunities
and unequal across to the social and economic services such as health, electricity and
education. As a result, people may be attracted to migrate to the urban areas.
(iv) Income inequalities: If the income is not fairly distributed and economic resources are
owned by few individuals. Economic growth may result to income inequalities.

Underdevelopment
This is a comparative term. It applies to countries which are developing but are lagging
behind in their process of development. Underdevelopment does not mean absence of
development. It applies to countries which are industrially, technologically, and scientifically
and economically less developed. Examples of countries with underdevelopment are
Tanzania, Kenya, Albania, Brazil and Bangladesh.

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Indicators of Underdevelopment
Some of the indicators of underdevelopment are;
(i) Low Income per Capita: In the underdeveloped countries, the income per capita is low
due to the low volume of production.
(ii) Low contribution of the manufacturing sector to the Gross National Product: In the less
developed countries, the contribution of the manufacturing sector is too low. The
economy is more dominated by the subsistence agricultural sector.
(iii) Low technological development: In the underdeveloped countries, the level of technology
is very low; most of the production activities are done by using backward
technology.
(iv) Underutilization of resources: There is underutilization of resources in the less developed
countries due to the poor technology and lack of capital to fully utilize the available
resources.
(v) Economic dualism: In the underdeveloped countries, there is existence of two sectors at
the same time; one is the modern sector and the other one is the traditional sector.
This causes lack of an integrated sector, thereby minimising the level of
development.
(vi) High death rates and short life expectancy: In the less developed countries, the rate of
deaths, especially infant mortality rate, is so high and the life expectancy is short due
to the poor health services and poor nutrition.
(vii) High illiteracy rate: Due to lack of adequate education facilities, many people in the less
developed countries are illiterate.
(viii) Poor housing: Most of the people in underdeveloped countries live in poor houses
(slums) due to their inability to buy the essential building materials such as iron
sheets and cement.
(ix) Economic instabilities: The underdeveloped countries are, frequently, faced with various
economic instabilities such as inflation, balance of payments problems,
unemployment and very slow economic growth.
(x) Political instabilities: Since political power is an alternative for making a living in these
countries, people often struggle to take political power, even by use of force, so that
they can control the resources of the country. This leads to endless conflicts in the
underdeveloped countries.
(xi) Lack of capital, skilled labour and entrepreneurs: The Less developed countries are
characterized by limited supply of efficient factors of production, such as modern
machinery, skilled labour and efficient entrepreneurs.
(xii) Economic dependence: Most of the less developed countries are not economically
independent. They depend on the developed countries for economic assistance.
Therefore, a large part of their budget depends on foreign aid.
(xiii) Large rural population: In the underdeveloped countries, the urban areas are very few
in number, and provide little opportunities for employment. Therefore, many people
live in the rural areas.
Causes of underdevelopment
Underdevelopment is caused by the following factors:
(i) Limited stock of factors of production: Underdevelopment is mainly a result of low
production in the country. Low production is often the consequence of a country’s
lack of the factors of production, such as labour, capital, land and entrepreneurs, and
poor organisation of these factors in the process of production.
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(ii) Poor technological development: If a country lacks the necessary technology to utilize the
available resources, such as minerals, soils, forests and water, its level of
development will be low.
(iii) Political instabilities: If a country is faced with political instabilities, due to wars and
civil conflicts, investors will be discouraged from investing in such a country. Also,
many of the country's resources will be used for non-productive expenditures, such
as buying weapons, instead of investing in the productive sectors such as the
industries and the economic services.
(iv) Poor infrastructures: Underdevelopment is caused by lack of well developed
infrastructure, such as roads, electricity, transport and communication, which are
very important for attracting of investments.
(v) Wastage of resources: Underdevelopment may also be caused by rampant corruption of
the government officials, and poor economic planning, in which the government
may allocate resources in non-profitable public enterprises.
(vi) Unfavourable terms of trade: Underdevelopment in the less developed countries is, to
some extent, caused by unfavourable terms of trade such that the goods which are
produced by these countries fetch lower prices in comparison to goods which are
produced by the developed countries. This results to a fall in the national income of
those less developed countries.
(vii) Population Pressure: In the less developed countries, the rate of population growth is
very high compared to the rate of economic growth. This leads to poor living
conditions given the low capacity of the economy and the government to provide
enough goods and services to the people.
(viii) Debts burden: Most of the less developed countries, due to low income, are forced to
borrow money from internal and external creditors. However, most of the money
borrowed is not used in productive projects, as a result, the governments of these
countries fail to get enough funds to pay back the debts, and therefore the debt
burden increases. This leads to underdevelopment.
Economic Dependency
This is a situation in which a country depends on other nations or donor institutions to
achieve its economic goals.
Types of Economic Dependencies
Economic development is divided into the following types:
(i) Trade dependence: This is a kind of dependency in which a country depend on
international trade to obtain goods and services
(ii) Capital dependence: A country depends on foreign capital to enable her run her
economic activities.
(iii) Technological dependence: A country depends on foreign experts to provide technical
know-how in the productive sectors of her economy.
(iv) Financial dependence: Financial institutions of foreign countries handle financial affairs
of a country, such as banking, insurance, etc.
(v) Direct dependence: Foreigners directly engage in the production activities of in the
dependent country. This takes the form of multinational investments in the major
sectors of the economy, such as mining, tourism, agriculture, transport etc.

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Effects of Economic Dependency

Economic dependency has the following effects:

Dependency may increase the debt burden of a country.

Dependency, on foreign aid may harm the economic, political and social interest of a
country.

Due to the dependency on assistance from other countries, a country may be given
goods of poor quality or which have side effects.

Dependency on foreign technology and capital may discourage local initiatives from
inventing and discovering new local technology.

It leads to a good political and social relations between the donor country and the
dependent country
Theories of Economic Development
An Overview
Development theories have to deal with two challenges. On one hand, development
theories analyze the social economic phenomena of Underdevelopment and development.
On the other hand, they should be based on problem analysis, and offer strategies for
development opportunities. The focus of these different approaches is on economic,
social, political or cultural factors. In some measures, these approaches overlap. These
theories are divided into classical and modernization theories.
1. Classical Theories
Classical theories include;
(a) Harrod-Domar model
(b) Dual sector model
(c) Marxist theory
(d) Dependency theory
(a) Harrod – Domar Model
This model is used in development economics to explain an economy’s growth rate in
terms of the level of savings and productivity of capital. It suggests that there is no natural
reason for an economy to have balanced growth. The model was developed independently
by sir Harrod in 1939 and Eusen Domar in 1946. It was the precursor to the exogenous
growth model. According to the model, there are the following three concepts of growth:
- Warranted growth
- Natural growth
- Actual growth
Assumptions of the Model
Harrod-Domar model makes the following priori assumptions:
(i) Economic growth depends on the amount of labour and capital, expressed as:
Y = F(L, K), output is a function of capital stock
(ii) The marginal product of capital is constant, and the production function exhibits
constant returns to scale. This that implies the marginal and average products are
equal.
(iii) Capital is a very necessary input in the process of production
(iv) The product of the savings rate and output is equal to savings which is equal
investment, S=I
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(iv) The change in capital stock equals investment, less the depreciation of capital stock.
In summary, the saving rate times the marginal product of capital, minus the depreciation
rate, equals the output growth rate. Increasing the saving rate, increasing the marginal
product of capital or decreasing the depreciation rate, increases the growth rate of output.
These are the means of achieving growth on Harrod-Domar model.
Conclusion
Although the model was initially created to help analysing the business cycle, it was later
adapted to explain economic growth. Its implication was that growth depends on the
quantity of labour and capital. More investment leads to capital accumulation which
generates economic growth. The model also had implications for the less economically
developed countries, where labour is in plentiful supply but physical capital is not, thus
slowing the economic growth.
The less developed countries do not have sufficient average income to enable high
rate of savings and, therefore a slow accumulation of capital stock for making
investments.
The model implies that economic growth depends on policies for increasing
investments, by increasing saving and using that investment more efficiently through
technological advancements. The model concludes that an economy cannot find full
employment and stable growth rates naturally, similar to Keynesian beliefs.
Criticisms against Theory
(i) The main criticisms of the model are the level of assumptions. For example, that
there is no reason for growth to be sufficient to maintain full employment. This is
based on the belief that the relative price of labour and capital is fixed, and that they
are used in equal proportions. The model explains economic boom and bust by the
assumption that investors are only influenced by output (known as accelerator
Principle), which is widely believed to be false.
(ii) In terms of development, critics claim that the model considers economic growth
and development as the same, whereas in reality, growth is only a subset of
development.
(iii) The model implies that poor countries should borrow order to finance investment in
to trigger economic growth. However, history has shown that this often causes
repayment problems later.
(iv) According to the model, saving is the most important endogenous parameter. But
the challenge is; can the parameter be easily manipulated by policy makers? It
depends on the much control that the policy maker has over the economy. In fact,
there are several reasons to believe that the rate of savings may itself be influenced
by the overall level of per capita income in the society, not to mention the
distribution of that income within the population.
(b) Dual Sector Model
The dual sector model, in development economics, explains the growth of a developing
economy in terms of labour transition between two sectors; the traditional agricultural
sector and the modern industrial sector.
Surplus labour, from the traditional agricultural sector, is transferred to the modern
industrial sector whose growth, with time, absorbs the surplus labour, promotes
industrialization and stimulates a sustainable development.
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In the model, the traditional agricultural sector is typically characterized by low wages,
abundance of labour and low productivity, through labour intensive production process.
In contrast, the modern manufacturing sector has higher wage rates than the agricultural
sector, higher marginal productivity and demand for more workers, initially. Also, the
manufacturing sector is assumed to use the production process that is capital intensive. So
investment and capital formation in the manufacturing sector is possible, overtime, since
the capitalists profits are reinvested in the capital stock.
Improvement in the marginal productivity of labour in the agricultural sector is
assumed to be a low priority, as the hypothetical developing nation’s investment goes
towards the physical capital stock in the manufacturing sector. Since the agricultural sector
has a limited amount of land to cultivate, the marginal product of an additional farmer is
assumed to be zero since the law of diminishing marginal returns has run its course due to
the fixed input, land. As a result, the agricultural sector has a number of farm workers
who do not contribute to the agricultural output, since their marginal productivity is zero.
The group of farmers, that are not producing any output, is termed surplus labour.
Since this cohort could be moved to other sectors without any effect on agricultural
output, therefore, due to wage differential between the agricultural sector and the
manufacturing, workers will tend to move from the agricultural sector to the
manufacturing sector, overtime, to reap the reward of higher wages. If a number of
workers move from the agricultural sector, equal to the quantity of surplus labour in the
agricultural sector regardless of who actually transfers, general welfare and productivity
will improve. Total agricultural product will remain unchanged while total industrial
product increases, due to the additional labour, but the additional labour may also drive
down marginal productivity and wages in the manufacturing sector. Overtime, as this
transition continues to take place and investment results in increase in capital stock, the
marginal productivity of workers in the manufacturing will be driven up by capital
formation and driven down by additional workers entering the manufacturing sector will
by equal to workers leaving the agriculture whilst driving productivity and wages in
manufacturing. The end result of this transition process is that the agricultural wage equals
the manufacturing wage, the agricultural marginal product of labour equals the
manufacturing marginal productivity of labour and no further manufacturing sector
enlargement takes place as workers no longer have a monetary incentive to move.
Criticism against the Dual Sector Model
This theory is complicated in reality by the fact that surplus labour is both generated by
the introduction of new productivity, enhancing technology in the agricultural sector and
the intensification of work. Also, the migration of workers from the countryside to the
cities is an incentive towards those two phenomena as the relative bargaining power of
workers and employers varies and thus raises the cost labour.
The wage differential between industry and agriculture needs to be a sufficient
incentive for the movement between the sectors and, whereas the model assumes any
differential will result in a transfer of workers from rural agricultural sector to
manufacturing sector.
The model assumes rationality, perfect information and unlimited capital formation in
industry. These do not exist in practical situations, and so the full extent of the model is
rarely realised. However, the model does provide a good general theory on labour
transitioning in developing economies.

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Practical Application
The model has been applied quite successfully in Singapore
(c) Marxist Theory by Ernest Mandel
According to the Marxist school of thought, human societies have passed through five
stages of development, namely, primitive communalism, slavery, feudal, capitalism and
socialism. Theory is analysed by Ernest Mandel as follows:

(i) Primitive Society and the Origins of the State

In this stage, the state did not always exist. Certain sociologists and other representatives
of academic political science err when they speak of the state in primitive societies. They
are actually confusing the state with the community. In so doing, they strip the state of its
special characteristic, that is, the exercise of certain functions is removed from the
community as a whole to become the exclusive prerogative of a tiny fraction of the
members of this community. In other words, the emergence of the state is a product of
the social division of labour.
As long as this social division of labour is only rudimentary, all members of the
society, in turn, exercise practically all its functions. There is no state and any special state
functions. In connection to the Bushmen, Father Victor Ellenberger writes that this tribe
knew neither private property nor courts, neither central authority nor special bodies of
any kind. Another author writes about this same tribe: “The band, and not the tribe, is the
real political body among the Bushmen. Each band is autonomous, leading its own life
independently of the others. Its affairs are as a rule regulated by the skilled hunters and
the older, more experienced men in general.”
The same holds true for the people of Egypt and Mesopotamia in remote antiquity:
“The time is no riper for the patriarchal family with paternal authority than it is for a really
centralized political grouping. Active and passive obligations are collective in the regime
of the totemic clan. Power and responsibility in this society still have an indivisible
character. We are here in the presence of a communal and egalitarian society, within
which participation in the same totem, the very essence of each individual and the basis
for the cohesion of all, places all members of the clan on an equal footing.”
But to the extent that social division of labour develops and society is divided into
classes, the state appears, and its nature is defined: the members of the collectivity as a
whole are denied the exercise of a certain number of functions; a small minority, alone,
takes over the exercise of these functions. In general, writing is unknown to primitive
society. Thus, there are no written codes of law. Moreover, the exercise of justice is not
the prerogative of particular individuals; this right belongs to the collectivity. Apart from
the quarrels that are resolved by the families or the individuals themselves, only collective
assemblies are empowered to render judgments. In primitive Germanic society, the
president of the people’s tribunal did not pass judgment: his function based in seeing that
certain rules and certain forms were observed. The idea that there could be certain men
detached from the collectivity to whom would be reserved the right of dispensing justice,
would seem to citizens of the society based on the collectivism of the clan or the tribe,
just as nonsensical as the reverse appears to most of our contemporaries.
To sum up at a certain point in the development of the society, before it is divided
into social classes, certain functions such as the right to bear arms or to administer justice
are exercised collectively - by all adult members of the community. It is only as this society
develops further, to the point where social classes appear, that these functions are taken
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away from the collectivity to be reserved to a minority who exercise these functions in a
special way.
What are the Characteristics of This “Special Way”?
Let us examine the Western society, at the period when the feudal system begun to
dominate. The independence (not formal, not juridical, but very real and almost total) of
the great feudal estates can be shown by the fact that the feudal lord, and only he,
exercises throughout his domain all the functions enumerated above, functions that had
devolved on the adult collectivity in primitive societies.
This feudal lord is the absolute master of his realm. He is the only one who has the
right to bear arms at all times; he is the only policeman, the only constable; he is the sole
judge; he is the only one who has the right to coin money; he is the sole minister for
finance. He exercises, throughout his domain, all the classic functions performed by a
state, as we know it today.
Later, an evolution takes place. As long as the estate remains fairly small, its
population is limited, the “state” functions of the lord are rudimentary and not very
complicated, and as long as exercising these functions takes only a little of the lord’s time,
he handles the situation and exercises all these functions in person. But when the domain
grows and the population increases, the functions for which the feudal lord is responsible
become more and more complex, more and more detailed and burdensome. It, therefore,
becomes impossible for one man to exercise all these functions.
What Does the Feudal Lord Then Do?
He partially delegates his powers to others, but not to free men, since the latter belong to
a social class in opposition to the seigniorial class. The feudal lord delegates part of his
power to people who are completely under his control: serfs who are part of his domestic
staff. Their servile origin is reflected in many present-day titles: “constable” comes from
comes stabuli, head serf of the stables; “minister” is the serf ministrable, i.e., the serf
assigned by the lord to minister to his needs - to act as his attendant, servant, assistant,
agent, etc.; “marshal” is the serf who takes care of the carriages, the horses, etc. (from
marah scalc, Old High German for keeper of the horses).
The more the extent that these people, these non-free men, these domestics, are
completely under his control, does the seigneur partially delegate his powers to them.
This example leads us to the following conclusion - which is the foundation of the
Marxist theory of the state:
 The state is a special organ that appears at a certain moment in the historical
evolution of mankind, and that is condemned to disappear in the course of this same
evolution. It is born from the division of the society into classes and will disappear
at the same time that this division disappears. It is born as an instrument in the
hands of the possessing class for the purpose of maintaining the domination of this
class over the society, and it will disappear along with this class domination.
Coming back to feudal society, it should be noted that state functions exercised by the
ruling class do not only concern the most immediate areas of power, such as the army,
justice, finances, but also under the seigneur’s thumb are ideology, law, philosophy,
science and art. Those who exercise these functions are poor people, who in order to
live, have to sell their talents to a feudal lord who can take care of their needs. Heads of
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the proprietor of vast landed estates. Under such conditions, at least as long as
dependence is total, the development of ideology is controlled entirely by the ruling
class: it alone orders “ideological production”; it alone is capable of subsidizing the
“ideologues”.
These are the basic relationships that we have to keep in mind, if we don’t want to
get lost in a tangle of complications and fine distinctions. Needless to say, in the course
of the evolution of the society, the function of the state becomes much more complex,
with many more nuances, than it is in a feudal regime such as the one we have just very
schematically described.
Nevertheless, we must start from this transparently clear and obvious situation in
order to understand the logic of the evolution, the origin of this social division of labour
that is brought about, and the process through which these different functions become
more and more autonomous and begin to seem more and more independent of the
ruling class.
(ii) The Modern Bourgeois State
Bourgeois Origin of the Modern State
Here, too, the situation is fairly clear. Modern parliamentarism finds its origin in the battle
cry that the English bourgeoisie. Hurled at the king, “No taxation without
representation!” In plain words this means: “Not a cent will you get from us as long as we
have no say on how you spend it”.
We can immediately see that this is not much more subtle than the relationship
between the feudal lord and the serf assigned to the stables. And a Stuart king, Charles I,
died on the scaffold for not having respected this principle, which became the golden rule
all representatives, direct or indirect, of the state apparatus have had to obey since the
appearance of modern bourgeois society.
The bourgeois State, a class State
This new society is no longer dominated by feudal lords but by capitalism, by modern
capitalists. As we know, the monetary needs of the modern state, the new central power,
more or less absolute monarchy, become greater and greater, from the fifteenth to the
sixteenth century onwards. It is the money of the capitalists, of the merchant and
commercial bankers, that in large part fills the coffers of the state.
Ever since that time, to the extent that the capitalists pay for the upkeep of the state,
they will demand that the latter place itself completely at their service. They will make
this quite clearly felt and understood by the very nature of the laws they enact and by the
institutions they create.
Several institutions which today appear democratic in nature, for example, the
parliamentary institution, clearly reveal the class nature of the bourgeois state. Thus, in
most of the countries in which parliamentarism was instituted, only the bourgeoisie had
the right to vote. This state of affairs lasted in most Western countries until the end of the
last century or even the beginning of the twentieth century. Universal suffrage is, as we
can see, of relatively recent invention in the history of capitalism.
How is this explained?
In the seventeenth century, when the English capitalists proclaimed, “No taxation without
representation”, it was only representation for the bourgeoisie that they had in mind; for
the idea that people who owned nothing and paid no taxes could vote, seemed absurd and
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ridiculous to them. Isn’t parliament created for the very purpose of controlling
expenditures made with the taxpayers’ money?
This argument, extremely valid from the point of view of the bourgeoisie, was taken
up and developed by the Doctrinaire bourgeoisie at the time of the demand for universal
suffrage. For this bourgeoisie, the role of parliament consisted of controlling budgets and
expenditures. Therefore, only those who pay taxes may validly exercise this control,
because those who do not pay taxes would constantly have the tendency to increase
expenditures, since they do not foot the bill.
Later on, the bourgeoisie regarded this problem in another way. Along with universal
suffrage, was born universal taxation, which weighs more and more heavily on the
workers. In this way, the bourgeoisie re-established the inherent “justice” of the system.
The parliamentary institution is a typical example of the very direct mechanical bond that
exists, even in the bourgeois state, between the domination of the ruling class and the
exercise of state power.
There are other examples of the jury in the judicial system. The jury appears to be an
institution eminently democratic in character, especially when compared to the
administration of justice by irremovable judges, all members of the ruling class over
whom the people have no control.
But from what social layer were, and still in very large measure today, are the
members of the jury chosen? From the bourgeoisie, there were even special qualifications,
comparable to property-holding requirements for voting, for being able to sit on the jury.
A juror had to be a homeowner, pay a certain amount of tax, etc. To illustrate this very
direct link between the machinery of the state and the ruling class in the bourgeois era, we
can also cite the famous Le Chapelier law, passed during the French Revolution, which,
under pretext of establishing equality among all the citizens, forbids both employers’
organizations and workers’ organisations. Thus, under pretext of banning employers’
corporations, when industrial society has gone beyond the corporation stage, trade unions
are outlawed. In this way, the workers are rendered powerless against the bosses, since
only working-class organization can, to a certain extent (a much too limited extent), serve
as a counterweight to the wealth of the employers.
(d) Dependency Theory
Underdevelopment is seen as the result of unequal relationships between the rich
developed capitalist countries and the poor developing ones. In the past colonialism
embodied the inequality between the colonial powers and their colonies. When the
colonies became independent, the inequalities did not disappear. Powerful developed
countries, such as the US, Europe and Japan, dominate the dependent powerless LDCs
via the capitalist system that continues to perpetuate power and resources inequalities.
Dominant developed countries have technological and industrial advantage that
ensures the global economic system works in their own self-interest. Organisations such
as the World Bank, the IMF and the WTO have agenda that benefits the firms, and
consumers of primarily the developed countries freeing up world trade. One of the main
aims of the WTO is to benefit the wealthy nations that are most involved in world trade.
Creating a level playing field for all countries assumes that all countries have the necessary
equipment to be able to play. For the world's poor countries, this is often not the case.
In this model, the lack of development within the less developed countries rests on
the developed countries. Advocates of the dependency theory argue that only substantial
reform of the world capitalist system and a redistribution of assets will 'free' the less
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developed countries from poverty cycles and enable development to occur. Measures that
the developed countries could take would include the elimination of world debt and the
introduction of global tax such as the Tobin Tax. This is tax on foreign exchange
transactions, named after its proponent, the American Economist, James Tobin, would
generate large revenues that could be used to pay off debt or fund development projects.
Problems
• Power is not easily redistributed as countries that possess it are unlikely to surrender it
• It may be that it is not the governments of the MDCs that hold the power, but large
multinational enterprises that are reluctant to see the worlds resources being
reallocated in favour of the LDCs
• The redistribution of assets globally will result in slow rates of growth in the
developed countries and this might be politically unpopular.
Theory of uneven and combined development
This is a Marxist concept that describes the overall dynamics of human history. It was
originally used by Russian revolutionary Leon Trotsky around the turn of the 20th when he
was analyzing the developmental possibilities that existed for the economy and civilization
of the Russian empire and the likely future of the Tsarist regime in Russia. It was the basis
of his political strategy of permanent revolution which implied a rejection of the idea that
a human society inevitably developed through nonlinear sequence of necessary stages. At
first, Trotsky intended this concept only to describe a characteristic evolutionary problem
in the worldwide expansion of the capitalist mode of production from the 16th century
onwards through the growth of world market which connect more and more people and
territories together through trade, migration and investment. His focus was also, initially,
mainly on the history of the Russian empire where the most advanced technological and
scientific developments co-existed with extremely primitive superstitious cultures.
However, in the 1920’s and 1930’s, he increasingly generated the concept of uneven and
combined development to the whole of human history and even processes of evolutionary
biology, as well as the formation of human personality.
2. Modernization theory
Is the theory of development which states that, development can be achieved through
following the process of development that was used by the currently developed countries.
Modernization theory, in contrast to classical liberalism, viewed the state as a central
actor in modernizing the backward or the underdeveloped societies.
Talcolt Parsons functional sociology defined the qualities that distinguished modern
and traditional societies. Education was key to creating modern individuals. Technology
played key role in this development theory, because it was believed that technology
developed and was introduced to the less developed countries.
One key factor in modernization theory is the belief that development requires the
assistance of developed countries; to aid the developing countries to learn from their
development. In addition, it was believed that the lesser developed countries would
develop and grow faster than developed countries. Thus, this theory is built upon theory
that it is possible for equal development to be reached between the developed and the
lesser developed countries.

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Review Questions

1. How does economic growth differ from economic development?

2. What are the main features of economic development?
3. Describe at least two theories of development.

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