Review of the Economic Development Theories in Africa - Essay Example

Review economic development theories in Africa Economic development theories and models are built on three main blocks; the saving function, the production function and labor supply function. Growth rate and saving function are equal to s/AY (where s is the saving rate and AY is the output ratio). This paper thematically describes the four development theories and their applications on the African Countries. As part of this paper a case study is carried out on Libya, Ethiopia and Kenya on how development processes have been affected by some internal and external factors to realize their set development goals. Generally, growth rates are only affected by the saving rates based on whatever was saved to be invested, and this is only applicable when the capital-output ration is assumed to be fixed. In this paper the four models of development are discussed and this includes Harrod-Domar Model, Exogenous Growth model, Surplus Labor Model, and Harris-Todaro Model. Harris-Todaro Model This is a theory of rural-urban migration and it is basically examined in the context of unemployment and employment in the third world countries. This theory strives to address the high rates of unemployment problem issue in the developing countries (Ezeala-Harrison,p3). Rural to urban migration is mainly fueled by the creation of more employment opportunities in the urban areas than the rural areas. This is the reason why most of the Africa’s developing countries such as Kenya have introduced policy of rural industrialization and development to help deal with the problem of high population and unemployment rates in the urban areas. Creation of more industries and other employment opportunities in the rural areas has attracted more people to the rural areas and this is one of the policies required for a balanced development in any country. In developing countries such as Algeria and Tunisia most of the citizens move from their rural homes to urban areas in search of education, employment and high living standards. Some people are also driven away by the poor status of their lands which are unproductive. The current surveys show that about 53 per cent of the populations of Kenya, Tunis, Algeria and South Africa reside in the urban areas. Rapid urban growth rate in the current economic status of the developing countries is a strain to the level of national and local governments to provide basic necessities such as electricity, sewerage, water and adequate health facilities. In such situations, squatter settlements and over crowded slums begin sprawling up. In a country like Kenya over-crowded slums are the homes to millions of the citizens. In most developing countries, this growth rate reflects rural crisis other than urban-based development (Ezeala-Harrison, p5). Harrod-Domar Model Harrod-Domar model outlines an economic function relationship in which the “growth rate of gross domestic product (g) depend directly on the national saving ratio (s) and inversely on the national capital/output ration ratio (k) (Jurgen & Paul, p257). Mathematically it is expressed as g= s/k. This equation derived its name from two economists (E.V Domar of U.S and Sir Roy Harrod of Britain) who proposed it. This theory has been majorly utilized by the developing countries in planning their economy in the early post wars. For a targeted growth rate to be realized, a required growth rate must be set. Countries which are unable to set this require savings can resort to a jurisdiction for borrowing from international agencies such as International Monetary Funds and World Bank. Most of the African countries are developing countries which are unable to set the required savings to meet the targeted growth rate. They therefore resort to borrowing from international agencies. Huge debts are disadvantages to developing countries because of the higher interest rates and poor credit (Jurgen & Paul, p257). Problems usually a rise when these countries make irregular loan payment and underestimate the project cost. Every country wants to create a good reputation before the global investors and this is why they strive to be debt free by settling the debts they borrowed from International Agencies as soon as possible. Most African countries are unable to settle their debts within the stipulated time and this has destroyed their reputations in the minds of investors. In turn they are barred from getting more loans whenever the need arises. Government debt defaults in developing countries may arise as a result of domestic politics, currency crisis, economic climate and mismanagement of debt yields. For example, in 2009, Nigeria failed to pay its debts because of the price fluctuations (Jurgen & Paul, p258). Surplus Labor Model It is also called the Lewis-Ranis-Fei (LRF) theory of surplus labor. It is specifically an economic development model but not an economic growth model (Michael & Stephen, p304). It is a model that addresses the economic development situations in the third world countries. It takes into account the underemployment and unemployment of resources (mainly human labor) and the bi-economic structure (traditional verses modern sectors).This theory proposes, that the development is mainly initiated by the shift of the surplus labor from the traditional sector to the modern sector where some noticeable economic activities had already begun (Michael & Stephen, p304). The modern sector investors can still afford to pay the transferred workers minimum wages due to the reduced supply of human labor to the traditional sectors. Increased investments and high profits in the modern sector will continue rising and this in turn will encourage economic growth rate in the modern sector. This process is expected to increase until the surplus labor in the traditional sector is exhausted. The implication of this is that, the employees in the traditional sector will be paid in relation to their marginal product other than subsistence wage. Availability of the surplus labor is advantageous to the modern sector since it guarantees continuous capital accumulation due to the following reasons: (a) since the employees are continuously paid subsistence salaries, the investments and profits are likely not to be eroded by the rising wages, and (b) “the average agricultural surplus (AAS) in the traditional sector will be channeled to the modern sector for even more supply of the capital” (Ozey, p98). Like the Harrod-Damar theory, this model mainly focuses on the investment and savings as the key driving factors of economic development although, in relation to the developing countries. Technological changes in the modern sectors increase the productivity which also increases high profit margins and enhances productivity in the traditional sector so as to make more labor surplus available for transfer. In Nigeria people have migrated from their rural farms to the urban centers in search of a formal employment in the industries. These people choose to be paid subsistence wages just like in the farms which make these industries to continue making more profits and investments (Ozey, p99). In addition, most of the farm produce in the rural farms are channeled into these industries in the form of raw materials. From the raw materials supplied to the industries, the government can earn revenue by imposing taxes on the produce or on the farmer’s savings in the banks. Although this theory promotes economic development of the urban centers, it is a strain to the balanced economic development in all regions in any developing country. And this is one phenomenon that is being practiced in most African countries and it has led to unbalanced economic development. Exogenous growth rate This model was developed by Robert Solow and others and it is also called the Neoclassic Growth Model. Contrary to the Harrod-Domar model, this theory suggests that the savings rate will specifically determine the level of income but not the rate of growth (Paul, p53). This model explains the importance of technological change (as in Neoclassic Model) and capital accumulation (as in Harrod-Domar Model) in an economic growth. According to Solow (1957) the technological change attributed to approximately 90 per cent of the United States economy in the late 19th and 20th centuries. This, however, have shown a different result in the developing countries. But according to the postindustrial economy studies, the economic development in the developing countries is mainly based on the knowledge and innovation (Paul, p53). In South Africa for example, the use of the automated machines and production soft wares in its production industries have increased the volumes of production and use of highly skilled labor which have greatly improved the country’s economic growth rate. Generally, developing countries which have embraced technology and the use of highly skilled labor have been observed to improve their economy. The economy of Ethiopia The economy of Ethiopia mainly depends on agriculture which accounts for 50 percent gross domestic product (GDP), 85 per cent of the total employment, and 43 per cent of exports. This is one of the African countries which have not allowed foreign banks in its regions and this makes it difficult for the local people to get loans for the small business start ups. There is an also high Youth unemployment rate which is about 70 per cent of the total population (Ndulu & Stephen, p116). The present government has formulated economic reform policies such as rationalization of government regulations and privatization of government enterprises. This policies and reforms have started attracting the foreign investors; however, Ethiopia still remains one of the poorest countries in the world with a very high population. Agriculture is the back bone of economy in this country and other economic activities including processing, marketing and export of agricultural products depends on it. The main crops grown include cereals, coffee, sugar cane, vegetables and oil seeds. Natural catastrophic such as draught and soil degradation have affected the levels of yield throughout the year, however, there is subsistence produce. Most of the export commodities are supplied by the small scale cash crop farmers with coffee being the largest foreign exchange earner. In addition, the flower and livestock industries are also some of the key areas in agriculture that largely contributes to the GDP (Ndulu & Stephen, p121). The country’s industrial and manufacturing sectors contributes to about 4 per cent of the GDP, however, it has exhibited some diversity and growth in the recent years. Its main industries include food and beverage which is about 40 percent of the sector, leather and textile industries. The services sector in this country is mainly dominated by tourism. Others include retail traders, communication, and transportation. It has two main ports, Asseb and Massawa in Eritrea which are connected to Addis Ababa by rail way line (Stephen & Zawiah, P37). Ethiopia mainly draws its power from hydropower, an indication that power generation and agriculture depends on the rainfall. Some of its industries still rely on the fire wood as the source of energy. High population and the failure to attract more investors are some of the key factors which have strained this country to achieve its development plans. Small scale farmers sell their produce to the industries and from which the government collect the revenues from them. This, according to the surplus labor model of economic development, ensures both modern and traditional sector developments. The economy of Libya The economy of Libya is generally planned. Petroleum sector is the backbone of the economy from where the government earns revenue and it contributes to 50 percent of the GDP. Its small population and high oil revenue returns have given it the highest nominal per capita GDP in Africa (Waniss & Erling, p102). Libya holds the largest oil fields in the African continent followed by Algeria and Nigeria. Oil is the chief earner of foreign exchange. The country’s revenue have been lost to conventional armaments purchases, attempts to develop WMD and the funding of the Gadhafi’s influence on the African continent. In spite of the country’s high per capita GDP, most of the people still have low living standards due to the mismanagement of funds. The present uprising in Libya have caused shortage of world oil and the international bodies have imposed economic sanctions on Libya which have led to the decline in the economic activity (Waniss & Erling, p102). In addition to the oil industry, hydrocarbon and mining industries in 2007 accounted for over 95 percent of the Libyan economy. It should be understood that agriculture is the second largest sector in the economy. Its poor climatic conditions result into poor yields and this is the reason why it imports most of its foods. 86 percent of the Libyan total populations are urban dwellers. This has led to poor urban planning which has led to the sprawling of slums and squatters. Only 5 percent of the total work forces are experts (Peter & Elizabeth, p34). The economy of South Africa South Africa is the most developed country in Africa. Recently the World Bank ranked it as an upper-middle economy. Significant developments are localized around Port Elizabeth, Cape Town, Pretoria-Johannesburg and Durban. Approximately 25 percent of its total population still leaves below one dollar per day. South Africans agriculture, mining, manufacturing, service, trade and investment sectors are generally well developed. Mining sector is the key facilitator of South Africa’s advanced development and richest economy. Some of the minerals mined include diamond, gold, platinum, manganese, vanadium, chrome, rutile, zirconium and ilmenite (Frederick & Agnes, 97). Currently, mining contributes to 3 percent of GDP and 2.3 percent of employment. Its agricultural sector is the largest in Africa and it is the chief exporter of farming products. Agriculture contributes to 8 percent of this country’s total exports, 10 percent of formal employment and approximately 2.6 percent of the nations GDP. Although the farms are highly mechanized some small scale farmers still depend on the subsistence agriculture. The manufacturing industry provides 13.3 percent of employment and 15 percent of the nations GDP. Wages are low but the costs of communication, transportation, and living costs are much higher. South Africa’s major trading partners include Japan, China, U.S.A, Germany U.K, and Spain (Frederick & Agnes, 98). Conclusion In conclusion, it was established that the four theories of development greatly vary from one developing country to another. For example South Africa is one of the developing countries in Africa that has implemented the Exogenous Growth Model since it has acknowledged the inclusion of technology and innovation in its development plans. In Ethiopia Harrod-Domar model applies where high population growth rate is constrain to the rate of technological change. Libya is one of the developing countries in Africa that has the highest income per capita GDP, however, most of its population still remain poor and unemployed because of the rural-urban migration in accordance to the Harris-Todaro Model. Works Cited Ezeala-Harrison, F. Economic development: theory and policy applications. West Port: Greenwood Publishing Group, 1996. Frederic P M, Agnes F. V, John M,. Economy of South Africa. Beau-Bassin : VDM Publishing House Ltd, 2010. Jurgen B, Paul D,. Arms trade and economic development: theory, policy, and cases in arms trade offsets. London: Routledge, 2004. Michael P. T, Stephen C. S,. Economic development. Boston: Addison-Wesley, 2009. Ndulu B.J, Stephen A. O', Jean P,. The Political Economy of Economic Growth in Africa, 1960- 2000. Cambridge: Cambridge University Press, 2008. Ozay M. 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