Wednesday, November 26, 2008

Theories of Development 1: Fisher-Clark Theory Of Structural Change

This theory was introduced by 2 economists, Fisher & Clark. They proposed that every economy will go through 3 stages of production

(1) First stage is agriculture. Related to the activities of extracting raw materials through mining, forestry, fishing & agriculture. This is the main economic activity for low-income countries

(2) Second stage is industrial. Related to construction & manufacturing sectors. This is the main economy of middle-income countries. As economies develop, income will rise. Since agriculture goods have low YED, demand for them will increase but at less than proportionate of income. Compared to manufacturing goods, relatively it has higher YED. Therefore as income increases, demand for it will also increase at a higher rate. This will lead to rapid industrialisation, thus the shrinking size of agriculture sector

(3) Third stage is services. Related to provision of services such as education, health, international travel, banking etc. This is the core economic activity of high-income countries. Logically, as people feel even much richer, they will now demand for more services e.g. giving their child good education, greater concern for health & travelling internationally. Tertiary sector has very high YED (could be more than 1)

Argument of Fisher-Clark model:

Misleading theory. There are many LDCs (less developed countries) where its core economic activity is tourism, without actually having a properly developed secondary sector. We can get lots of good examples by referring to African countries such as Kenya

What could happen to these countries?

By specialisation,

(1) Volatile income. Countries such as Kenya & many others which are too dependent on tourism sector are very susceptible to global economic uncertainties. In the period of boom, the demand for tourism will increase tremendously & this will lead to increase in government’s revenue. In the period of economic slowdown such as now, obviously there will be much lesser people who want to travel

(2) Risk of collapse. Tourism has very high YED (more than 1). If the consuming nations such as US & Western Europeans face recession like now, a fall in income will generally lead to a greater than proportionate fall in demand for international travel. This negative spill over effects will spread into countries that rely on tourism sector. As a result, airline firms, hotel industry, local F&B will be affected. Falling profits will force them to cut employment. The negative multiplier effect will then spread into the whole system

(3) Rise in debt. Many of these economies are heavily indebted to IMF, World Bank & developed countries. Economy which is on the brink of collapse will push them to borrow more which is deemed by economists as not favourable. Most of those aids given are conditional or some are tied aid. For instance, World Bank & IMF will impose strict conditions such as cut in public spending to repay loan. But very often, these austerity measures cause the indebted countries to be in much poorer state as less development takes place. For developed foreign countries, they impose condition that the recipient countries must spent it onto the exports of donor country

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