Reconsidering Tourism As A Facilitator For Economic Growh In Less Developed Countries

The complicacy of economic growth theories postulated in extensive researches leaves tentative option to assume a simple approach towards direct impact of tourism on economic progress in

2008:125

M A S T E R ' S T H E S I S

Reconsidering Tourism as a Facilitator

for Economic Growth

in Less Developed Countries

Mitra Mahmoudi

Luleå University of Technology Master Thesis, Continuation Courses Tourism and Hospitality Management Department of Business Administration and Social Sciences

December 2007

University of Isfahan

APPROVAL

Growth in Less Developed Countries

This thesis is evaluated and approved by Examination Committee:

Prof Mahmood Ketabi Supervisor

Prof Metin kozak Supervisor

Prof Iran Ghazi Iranian Examiner Prof.Peter Dieke Foreign Examiner

International Scientific Cooperation office Isfahan University

Prof.Arash Shahin

The complicacy of economic growth theories postulated in extensive researches leaves tentative option to assume a simple approach towards direct impact of tourism on economic progress in less developed countries

The research sets out to assess the correlation between tourism and growth theories as well as the impacts of indicators like Geographical Zone, Gross National Product (GNP) per capita as an indicator of General Standard of Living

in a Country and Economic Classification of a country The data suggest that tourist exchange process is considerably intense among countries that are located

in the same Geographical Zone or in nearby zones and also among countries with close recorded Gross National Product (GNP) per capita which lie under the same

Economic Classification

Acknowledgements

I would like to express my gratitude to all those who gave me the possibility to complete this thesis I would like to thank the Department of marketing and eCommerce at Lulea University of Technology and International Scientific Cooperation Office at Isfahan University

I am deeply indebted to my supervisors Professor Mahmood ketabi and Professor Metin Kozak, for their valuable guidance, stimulating suggestions, patience and for encouraging me to go ahead with my thesis

And also I would like to thank Professor Esmail Salehi-Sangari and Professor Arash Shahin for their continuous help and support during my research

I would like to give my special thanks to my brother Mehrdad and my dear husband Pedram who their continuous encouragement enabled me to complete this work

Especially, I would like to give my special thanks to my parents for their love, patience, motivations and encouragements during my study and life

Mitra Mahmoudi

December 2007

Table of Contents

Abstract i

Acknowledgements ii

Table of Contents iii

List of Tables v

Chapter 1.Introduction 1

1.1 Research objectives 4

1.2 Outline of the thesis 5

Chapter 2.Litareture review 6

2.1Introduction 6

2.2 Tourism 6

2.3 Growth 13

2.3.1 International Growth Theories 14

2.3.2Growth and Economic Progress 17

2.3.3 Industrialized Economies 18

2.4 Economic Growth Theory 20

2.5 Modernization Theory 27

2.6 Dependency Theory 33

2.6.1The Interaction between Dependency Theory and Marxism 35

2.6.2The Interaction between Dependency Theory and Economic Progress 37

2.7 Post -Progress Theory 38

2.8 The Relationship between Tourism and Growth Concept 40

2.8.1 The Interaction between Tourism and Economic Growth 41

2.8.2The Interaction between Tourism and Modernization Theory 45

2.8.3 The Interaction between Tourism and Dependency Theory 46

2.8.4 The Interaction between Tourism and Economic Growth Theory 47

2.8.5The Interaction between Tourism and Post -Progress Theory 48

Chapter 3 Methodology 49

3.1Research Purpose 49

3.2 Research Approach 50

3.3 Research Strategy 52

3.4 Data Collection 53

3.5 Sample Selection 53

3.6 Data Analysis 54

3.7 Quality Standards 55

3.7.1Validity and Reliability 56

Chapter 4 Presentation of Findings 57

4.1 Major Discussion: Tourism as a Function of Growth Studies 57

4.2 Structural analysis and evaluation 58

4.3 Data analysis and results 62

Chapter 5.Conclusion and Recommendations 72

References 74

List of Tables

Table 4.1 Average Tourist Exchange Process from 2000-2004 per year 63

Table4.2 Global Tourist Exchange Process 68

Table 4.3 Shares of Global Tourist Exchange Process 69

Table 4.4 Regression output 70

of exotic destinations and products attractive to the fast expanding market-driven foreign travel companies Tourism's role in growth and progress has evolved considerably in the past 15 years It is increasingly considered a stimulant not just for foreign exchange, economic growth and employment, but also an opportunity for host community participation in biodiversity conservation, urban growth, and infrastructure overhaul and planning, rural growth, environmental restoration, coastal protection and cultural heritage preservation Couched in more socially and environmentally inclusive approaches today, tourism has a role to play in a greater number of developing economies than ever before and development agencies are progressively becoming involved in this sector However, despite this economic growth, there is no evidence that tourism is contributing to an overall growth in per capita GNP A central issue discussed in this research is whether enough has been done to truly include less developed countries in the value chains that comprise the delivery of tourism products and services In 1979, driven in part by the external debate around tourism and by its own changing approaches to

Chapter 1 Introduction

economic growth the World Bank, stopped financing the tourism growth activities

it had been engaged in for a decade Closing the tourism department at the World Bank was a significant milestone in the relationship between tourism and growth theory as it effectively sent a message to developing countries that tourism was strictly a private sector activity Governments could not get loans from the World Bank or other donors for tourism growth activities and tourism was marginalized

in the economic growth debate There is evidence that sector" did achieve short-term economic results, but not necessarily the desired beneficial long- term outcomes for the host country In most cases though, the success of tourism in developing countries is largely dependent on government-controlled policies, services, resources and investment climates, where the private sector has traditionally had little say Economic growth through the private sector works for growth and progress if there are mechanisms to capture and distribute the revenue generated beyond just the private sector Approaches to tourism are influenced by theories of economic growth, evidenced throughout the literature on tourism growth This was Butler s "Lifecycle Model" which dominated the thinking of tourism growth in the 1980s Butler was the first to warn that tourism may add to already apparent inequalities between" developed and less developed countries" He also was the first to discuss wider (and largely negative) social and environmental issues associated with tourism growth (Later taken up by many authors in the sustainability debate) He emphasized the degenerative nature of tourism growth in a developing world context, (Butler, 1980)

"leaving-it-to-the-private-However, it should be noted that he was writing at a time when tourism, and particularly mass tourism, was growing at an unbridled pace Under the mantra of promoting economic growth, tourism growth projects were financed almost exclusively by the World Bank in the 1970s.While the majority of these projects were very successful in catalyzing economic growth and tourism growth for the selected destinations, the explicit focus on economic growth in these projects tended to ignore environmental and social impacts Although the importance of tourism's contribution to less developed countries' foreign exchange earnings is acknowledged and the role of tourism in economic growth is recognized, with few exceptions, there was little discussion of the inclusion of host communities in the

Chapter 1 Introduction

process of developing tourism product; they are considered more of a difficult and expensive problem in the project input/output calculations A literature review from 1976 to the present reveals that authors have approached tourism and growth from several different perspectives Sharpley and Telfer, attempted to analyze and compare the parallel paradigms of tourism and growth from the context of tourism

as an agent of growth They draw from the literature in applying tourism growth initiatives along a continuum of respective growth theory models (Modernization; Dependency; economic progress and post progress) applied at various times in developing countries and concluding that the predominant economic theory governed the process of tourism growth Sharpley and Telfer explained the bulk of their analytical findings to an economic perspective where the prime motivation for tourism growth is as a contributor to economic growth (Sharpley& Telfer 2002)

(Sheryl M Elliott Associate Professor of Tourism Studies, The George Washington University)

(http://gstudynet.org/publications/OPS/papers/CSGOP-05-34.pdf)

The issue of capital inputs versus capital outputs (input-output ratios) is presented

as the major argument for the lack of support for tourism as a progress mechanism; and a facilitator for economic growth in less developed countries Examples of developed countries that had trusted on tourism as a facilitator for growth and progress and developed successfully seem to provide enough evidence to be accepted as role models and to spread the general assumption about tourism as the best answer and solution for less developed countries As a result; tourism has been recognized as a facilitator for economic growth without having strong evidence

The research aims to provide a more holistic view of tourism as a facilitator for economic growth in less developed countries and will shed light on this fact that less developed countries may achieve short-term economic results, but not

necessarily the desired beneficial long- term results

Chapter 1 Introduction

1.1 Research objectives

The research sets out to evaluate the relation between tourism and growth theories

as well as the impacts of indicators like Geographical Zone, Gross National Product (GNP) per capita as an indicator of General Standard of Living in a Country and Economic Classification of a country on tourism as a facilitator for economic growth in less developed countries The connection between the two concepts of tourism and growth will be evaluated and challenged by the research

in order to explore the implicit belief in tourism as a progress mechanism and facilitator for economic growth more thoroughly The research aims to reconsider tourism as a facilitator for economic growth in less developed countries

This dissertation sets out to answer the following questions:

(How can we evaluate the relationship between tourism and growth theories?)and (How can we consider tourism as a facilitator for economic growth in less developed countries?) Then the results on main theoretical suggestions will be used to shape the major part of the thesis The research will organize a dataset from the International Association of Scientific Experts in Tourism (IASET), World Tourism Organization (WTO) and National Tourism Organizations (NTOs) on international tourist exchange process and will evaluate tourist exchange process between sending-country and receiving-country

The research will measure international tourist exchange process in the time span

of 2000-2004 For each country, data on Geographical Zone, Gross National Product (GNP) per capita as an indicator of General Standard of Living in a Country and its Economic Classification will be used The collected data will be used by the research to study tourist exchange process and present tourist exchange rate in a more limited group During this procedure, it is expected to understand the tourists behavior regarding countries that are located in the same Geographical Zone and nearby zones with close recorded Gross National Product (GNP) per capita and the same Economic Classification

The dissertation will address the following research questions too:

(How can the indicators such as Geographical zone, General Standard of living in

a country (GNP) per capita and Economic Classification of a Country determine

countries

1.2 Outline of the thesis

This thesis consists of five chapters In this chapter, a relatively broad description

is given, providing the reader with a background and discussion of issues related

to the problem area Chapter two presents the literature review with theories relevant for the problem area In chapter three the methodology used for this research will be discussed In the chapter four, empirical data presentation and the data gathered from the International Association of Scientific Experts in Tourism (IASET), World Tourism Organization (WTO) and National Tourism Organizations (NTOs) will be analyzed against the conceptual framework, and the conclusion is finally presented in fifth chapter

Chapter 1 Introduction

Chapter 2 Literature review

Chapter 3 Methodology

Chapter 4 Presentation of Findings

Chapter 5 Conclusion and Recommendations

Chapter 2 Literature review

Chapter2.Literature review

This chapter looks at selected literature dealing with Tourism, Growth and International Growth Theories In order to drive the search of relevant literature about tourism and growth, the two fundamental domains of study, a number of keywords and key phrases were used in searches For example: Tourism, Growth, International Growth Theories, Geographical Zone, Gross National Product (GNP) per capita as an indicator of General Standard of Living in a Country and Economic Classification of a country These keywords have been sought in books,

journals and on the Internet

Chapter 2 Literature review

understand the composition and the dynamics of the sector and based on this knowledge, to be able to foresee future behaviors of the system s components This is the basis for a great number of decisions, involving single operators as well as governing bodies at different levels The task is not easy, tourism is difficult to measure and analyze The main reason resides in the fact that it is an industry with no traditional production functions, no consistently measurable outputs and no common structure or organization across countries or even within the same country Moreover, tourism activities traverse a number of traditional economic sectors and are generally not considered, as a whole, in national accounts The World Tourism Organization s definition of tourism as comprising: The activities of persons traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes (UNWTO, 1995)

It looks fuzzy if examined with the glasses of a scientist Too many different interpretations and too a broad series of elements fall into the terms contained into the official definition of tourism The best proof is that all the official bodies responsible for measuring this phenomenon face a real challenge when it comes

to identifying the units to be accounted for Moreover, this definition poses a great challenge to all those seeking to model the phenomenon in order to foresee its behavior The forecasting methodology of tourism demand has created numerous proposals over the past decades Classical regressions, time series analysis, econometric models, qualitative methods and more recently, neural network techniques, have been extensively explored and have generated innumerable attempts (Song & Witt, 2000)

Hunziker and Krapf, in 1941, defined tourism as "the sum of the phenomena and relationships arising from the travel and stay of non-residents, insofar as they do not lead to permanent residence and are not connected with any earning activity" (Hunziker and Krapf, 1941)

In 1976 Tourism Society of England defined it as "Tourism is the temporary, short-term movement of people to destination outside the places where they normally live and work and their activities during the stay at each destination International Association of Scientific Experts in Tourism (IASET) defined

Chapter 2 Literature review

Tourism in terms of particular activities selected by choice and undertaken outside the home environment (IASET, 1981)

(http://arxiv.org/ftp/physics/papers/0701/0701063.pdf)

The United Nations world Tourism Organization (UNWTO) classified three forms

of tourism in 1994 in its Recommendations on Tourism Statistics: Domestic tourism, which involves residents of the given country traveling only within this country; Inbound tourism, involving non-residents traveling in the given country; and Outbound tourism, involving residents traveling in another country and also explained, economic nature of tourism (UNWTO, 1994)

These definitions seem to most perfectly represent the usage of the term for the aim of this research

In United Nations Conference on Trade and Development in 1998, The Expert Meeting examined ways and means of strengthening the capacity for expanding the tourism sector in developing countries, with particular focus on tour operators, travel agencies and other suppliers; it also considered the relation of air transport and global distribution systems to the tourism sector The experts reached the following agreed conclusions and recommendations:

2

(a)

Further liberalization commitments on trade in tourism should be negotiated under the General Agreement on Trade and Services (GATS) An annex on tourism services may be required, comprising, inter alia, regulatory issues such as

Chapter 2 Literature review

definitions, competitive safeguards, access to information, fair and transparent use

of global distribution systems, linkages between tourism and air transport, and security conditions for service contracts (b)

The relevant provisions of GATS should be fully implemented, or, if necessary, new provisions should be developed, to prevent unfair competition arising from discriminatory practices in the issuance of visas to tourists which favor certain tour operators and travel agents

(c)

Articles of GATS should be effectively applied to the tourism sector, by adopting measures which effectively foster greater participation by developing countries in international trade in tourism services

3

Effective mechanisms, including mechanisms for joint implementation, to deal with anti-competitive practices in the tourism sector and related sectors should be identified, in order to deal with the effects on trade of contractual practices relating to exclusive dealing, vertical integration and the abuse of dominance, particularly as regards new entrants to the industry

4

Multilateral and regional financing institutions should give priority to appropriate strategies for the environmentally and financially sustainable development of tourism and related sectors, in particular for financing infrastructure projects, the provision of modern telecommunications services under pro-competitive regulatory regimes, and human resource development activities

5

International organizations and donor countries should also increase their efforts

in training and capacity-building in the field of tourism in developing countries, including the effective use of computer reservation systems, global distribution systems and the Internet to maximize their earnings from tourism and to meet international standards

Chapter 2 Literature review

6

The problems of air access of developing countries, particularly the least developed countries, should be addressed with a view to preventing the marginalization of those countries

8

Governments are invited to adopt comprehensive policies to ensure environmental and economic sustainability and to increase the attractiveness and quality of tourism services, including such elements as exchange rates, improved image, human resource development, investment in infrastructure and so on

10

National Governments are invited to review the fiscal treatment of the Tourism Sector and take the necessary fiscal measures to foster its growth and development, and avoid taxing exports

Chapter 2 Literature review

11

Governments are invited to ensure that immigration regulations facilitate the movement of tourists and natural persons involved in the supply of tourism services

12

Governments are invited to develop and, where available, effectively apply competition policy in the tourism and related sectors, by, inter alia, prohibiting anti-competitive clauses such as exclusive dealing, import requirements in franchising contracts and the abuse of dominance in air travel

13

Developing-country Governments are invited to foster the development of regional tourism within the context of regional and sub regional agreements, including common tourism and air carry policies

14

Developed countries are invited to consider the adoption of mechanisms to encourage the export of tourism services by developing countries, including by facilitating the establishment of developing-country tourist offices, fiscal measures and so on

15

Developing countries are invited to seek the collaboration of tourism authorities and of private- sector experts in formulating their negotiating objectives in the tourism sector and following through the complete process of negotiations, through their respective consultative procedures

Chapter 2 Literature review

tour operators and other suppliers, which may include, inter alia, insurance against non-payment by intermediaries

20

UNCTAD, in collaboration with the World Tourism Organization and other relevant organizations, should conduct studies on specific issues of interest to developing countries, including: the issue of leakages from the sector; the impact

of all-inclusive tours on the financial sustainability of the tourism sector in developing countries; and the development of a model for integrating local communities in the formulation, implementation and management of tourism projects

21

UNCTAD, with the assistance of the appropriate international organizations, should conduct a study on the feasibility of alternative modalities for including air transport services in plurilateral or multilateral negotiations on services(including

a possible revision of the GATS Annex on Air Transport Services),considering, inter alia: the implications of adopting trade disciplines partially or completely; the incorporation of a sectoral protocol with trade disciplines; regulatory commitments; and other mechanisms of collective decision-making

22

Given the importance of air transport services for tourism, and taking into account the provisions of Article V of the GATS Annex on Air Transport

Chapter 2 Literature review

Services, the commission should consider convening an expert meeting on air transport services

(Expert Meeting on Strengthening the Capacity for Expanding the Tourism Sector

in Developing Countries Geneva, 8-10 June 1998)

(http://www.icrtourism.org/Publications/UN4.pdf)

It is reasonable to make the inference that, these Organizations pay particular attention to the interests of developed and developing countries in the field of tourism, and pay far too little attention to the less developed countries

2.3 Growth

The concept of "growth" cuts across many levels It refers to macro issues (such

as patterns of a nation's growth), as much as it refers to meso problems (such as river-basin plans), or to micro problems (such as local community development) All three levels, macro, meso and micro, are interwoven And at all levels, many different dimensions economic, cultural, religious and gender affect and are affected by growth

Growth theory and its interaction with the industrialized and modern society has always been the center for advanced studies discussion by theorists Growth should be understood as a process, not a product Societies are always changing; some improve, while others fail Growth theory aims at explaining both processes Growth practice intends to provide tools that can be applied to entire societies or specific communities Such interventions are intended to move communities or societies from a situation in which they are believed to be worse off to a situation

in which they are assumed to be better off Growth is an interdisciplinary field, which implements programs in various areas and deals with innumerable variables such as economic, social, political, gender, cultural, religious and environmental issues Growth practice is not new It dates back to the European colonies, when colonizers enforced a "civilized," ordered, white, male, Christian ethic Organized, ongoing progress aid followed during the post-colonial period Growth theory, however, came along much later, emerging as a stable, academic field of inquiry only after World War II, when European countries were trying to

Chapter 2 Literature review

keep their former colonies at arm's length Throughout these years, Growth theory and practice was strongly characterized by the transmission of moral values from industrialized countries to less-industrialized, rural countries The growth field has always been highly influenced by economic thought, as exemplified by the fact that growth has been primarily measured by increases in gross national product (GNP) According to Rondinelli, during the 1950s and 1960s, growth intervention assumed that "successful methods, techniques, and ways of solving problems and delivering services in the U.S or other economically advanced countries would prove equally successful in the developing nations."(Rondinelli, 2004)

Therefore, at the very start of growth theory, there was a notion of direct transferability, or a "one size fits all" type of growth assistance However, delivering aid was not just a technical matter; it also involved political concerns For example, during the Cold War, U.S provision of aid was largely directed to those countries that were, or could come, under Soviet influence

(http://www.beyondintractability.org/essay/development_conflict_theory) Contrary to this assumption that successful methods, techniques, and ways of solving problems and delivering services in the U.S or other economically advanced countries would prove equally successful in the developing nations, the research interprets; natural resources of a country are clearly playing an important role for achieving prosperity and growth Each society is faced with the decision

of how best to provide for the well being and quality of life of its citizens The choices involved span complex economic socio-cultural, political and environmental considerations And growth means the best decision making

process and ideal usage of natural resources of a country

2.3.1 International Growth Theories

To be able to challenge theories of growth, it is important to first identify measures of growth

GNI stands for Gross National Income, it is measured per capita, and it provides

a measure of national income per person annually in different countries, progress and growth of a country is based on GNI The countries that have less GNI per capita as compared to others then they are considered as less developed The most

Chapter 2 Literature review

common method for defining the rich is to single out the countries with the highest per capita incomes and together account for 20% of the world s population Likewise, the poor countries are those that have with the lowest per capita income and together account for 20% of the world s population UNWTO (1999) and some others use this method With this definition, the rich group consists of about 60 countries (according to the World Bank s GNP/c P$ measurements) The group includes the entire western OECD block as well as a large number of middle income countries, such as Mexico and Poland The weighted (by population size) average income in these 60 countries in 1999 was approximately 20,000 P$, ranging from about 7,000 to 38,000 P$ The group of the poorest countries accounting for 20% of the population in the world (i.e 1.2 billion)includes all of Africa south of the Sahara (excluding the South African Union),Indonesia, Pakistan and (half of) India

(http://www.iies.su.se/publications/seminarpapers/698.pdf) Another way for measuring the economic growth of a country is measuring GDP

of a country GDP is an economics term Gross Domestic Product (GDP) per capita is often used as an indicator of Standard of Living in an Economy It stands for Gross Domestic Product and is basically a measure of the value of goods and services produced in an economy in a year It's therefore a pretty good indicator of the wealth and economic growth of a country Developed countries typically have high GDPs and developing countries typically have low GDPs Income earned abroad, such as overseas investments or loans, is not counted in GDP, but it is counted in a country's Gross National Product (GNP) 'Per capita' just means 'for every head', so GDP per capita is the total GDP for a country divided by the population of that country This is a better indicator of wealth because it tells you how much wealth is enjoyed by each person, GDP per capita is often seen as an indicator of Standard of Living in a country A country with a high GDP per capita is better off than a country with a low GDP per capita, and this is generally true An increase in GDP per capita implies:

1-An increase in employment and incomes

2-An increase in output and hence, an increase in economic welfare

Chapter 2 Literature review

Levels of GDP per capita are obtained by dividing annual or period GDP at current market prices by population A variation of the indicator could be the growth of real GDP per capita which is derived by computing the annual or period growth rate of GDP in constant basic producers' or purchasers' prices divided by corresponding

population

Annual GDP data in current and constant prices are generally reported by national statistical offices or central banks in the United Nations (UN) National Accounts questionnaire and supplemented by estimates prepared by the UN as well as other international organizations such as the World Bank and the IMF The Organization for Economic Co-operation and Development (OECD) compiles quarterly GDP estimates for its Members Population data are mainly obtained either through censuses or surveys

(http://esl.jrc.it/envind/un_meths/UN_ME053.htm) The Gross Domestic Product (GDP) differs from another closely related concept, the Gross National Product (GNP) The two concepts are virtually the same except that GDP is a territorial concept and an indicator of Standard of Living in an Economy It measures the value produced in a given country irrespective of the nationality On the other hand, the GNP is a national concept, and an indicator of General Standard of Living in an Economy It measures the value produced by the factors of production from nationals of a given country only, whether they operate

in the country or not The GNP is therefore equal to the GDP plus or minus a figure known as Net Factor incomes from Abroad (NFA), i.e the income earned abroad by factors of production of the country whose product is being measured - this, at least, is the procedure recommended by the statisticians of the United Nations If there was no foreign investment and no labor migration, the two concepts would in practice be identical The existence of foreign capital or of foreign labor migrants in countries will tend to make the GNP smaller than the GDP Conversely, where a country has overseas investments, or when its citizens migrate to work elsewhere, the GNP will tend to be larger than the GDP Thus the GNP is a better measure of the value of production available to produce income for the citizens of the country

Chapter 2 Literature review

(http://www.who.int/vaccines-surveillance/Vaccine_Financing/documents/

GNP_GDP_PPP.pdf)

We can make a valid inference that most part of the world live in low income, and there are too many low income households Policy makers and economists generally agree that financial growth that is, well-functioning financial institution and markets contribute to economic growth These issues would have been an impact on choosing the design for financial policies and regulations Because Gross National Product (GNP) per capita is a national concept and it is often used as an indicator of General Standard of Living in an Economy, it is more appropriate indicator than Gross Domestic Product (GDP) per capita and Gross National Income (GNI) per capita for addressing the research aims In the following discussion international growth theories related to the research will be

challenged and evaluated

2.3.2 Growth and Economic Progress

Economic progress has been defined by Arthur Lewis as the growth of output per head of population (Lewis, 1991) In other words, economic progress refers to an increase in per cap international income It may be noted that the subject matter is growth and not distribution For example, during the Industrial Revolution in the U.K., there was economic progress But there was no improvement in the standard

of living of the working classes because they were exploited and made to work for long hours at low wages According to Arthur Lewis, economic progress is conditioned by (1) economic activity, (2) increasing knowledge and (3) increasing capital (Lewis, 1991)

In other words, these three factors are labor, technical improvements and capital

We may add land or resources to the list; economic progress has received a lot of attention in the 20th century

In an economy there must be balanced economic progress of all sectors agriculture, manufacturing industry and the service sector Only then, economic progress will benefit all sectors of the population Not only that, economic welfare depends not only on the growth of output but on the way it is distributed among different factors of production in the form of rent, wages, interest and profits In

Chapter 2 Literature review

the past, economic progress was used more or less with the same meaning For example, it used rate of growth of income per capita or per capita GNP as index of economic progress and they wanted to see whether the rate of growth of per capita income was greater than the rate of growth of population We have to note one more thing The wellbeing of population depends on the rate of growth of real' per capita GNP Real per capita GNP refers to the monetary growth of GNP per capita minus the rate of inflation In general terms, we may say if there is decline

in poverty, unemployment, and inequality, there is economic progress in the country Otherwise, even if per capita income doubled, we cannot say there is economic progress So when we say there is growth, there must be improvement

in the quality of life That means, people must have higher incomes, better education, better health care and nutrition, less poverty and more equality of opportunity So according to Michael P Todaro and Stephen C Smith, growth must be conceived of as a multidimensional process involving major changes in social structures, popular attitudes and national institutions, as well as the acceleration of economic progress, the reduction of inequality, and the eradication

of poverty (Todaro &Smith, 2005)

(http://www.textbooksonline.tn.nic.in/Books/11/Econ-EM/Chapter_1.pdf)

The research argues that political economy explanations of economic progress, focusing on the role of incumbents, income and wealth inequality and the evolution of economic institutions, are much more promising hypotheses but remain largely untested It calls for more work to test and develop further these ideas but warns against over-simplified notions of politics It ends by reviewing recent work on the political economy origins of financial growth and the politics

of financial reforms, which suggests that politics plays a greater and more complex role than has so far been recognized by the economics literature on

economic progress

2.3.3 Industrialized Economies

Economic growth is estimated by improving, Gross National Product Whereby it

is widely believed that regardless of different economic situations, all individuals

Chapter 2 Literature review

are expected to take advantage from these improvements This approach is generally known as globalization approach

Advocators of this approach mainly focused on growth and progress in less developed countries They pointed to the emergence of the middle-class in less developed countries, economic growth within peripheral economies, the continued expansion of global stock markets, democratization and the emergence of a global culture as indicators of the benefits of this process Critics of globalization pointed to the rising gaps of inequality between nations and within all nations of the global economy, increased environmental degradation, especially in the developing world, the loss of sovereignty, cultural imperialism and the rise in extreme nationalism as indicators of the downside of this process

(http://globalization.icaap.org/content/v3.2/02_ramsaran_price.html) The relationship between rich and poor countries has been an unequal one, global economic policy did not change this relationship but created a new atmosphere with the same structure: developed supremacy over less developed The research will systematically outline a structure for understanding some of the seemingly contradictory processes in our globalizing world

The most important critique was the United Nations Economic, Commission for Latin America (ELCA).While international economic theory discussed that global trade benefited both parties to the exchange and would result in equality between less developed and developed countries, some theorists and experts found that exporting goods and raw materials was not beneficial to this part of the world at the global level This was a revolutionary movement And the formation of Import Substitution Industries (ISI) represented a milestone development with the aim of achieving border penetration, independency and progress of the financial affairs of

a country Competitive pressure on industrialized countries particularly reduction

in real income which can be attributed to tariffs and import was key factor for protection of a country's own products This policy strategy and planning failed when less developed countries faced with the poor quality of Import Substitution Industries products

Theorist tried to find new ways because most of what they learned and challenged did not fit the reality they experienced in working life, and they discussed ways to

Chapter 2 Literature review

deepen international cooperation, while acknowledging the special importance of economic growth in less developed countries The old approaches have been severely criticized by theorists, they argued that these approaches are suitable for modern economic, and are not suitable for less developed societies, for achieving economic growth

A number of different approaches have been proposed for meeting the needs of less developed countries Therefore, it is important to mention two main approaches, related to economic growth On one hand, the American group of structuralist supported a global approach to economic progress; On the other hand, the European group of structuralist advocated independency, in the organizing of national growth strategies for less developed societies

(http://en.wikipedia.org/wiki/ECLAC)

2.4 Economic Growth Theory

Adam Smith s The Wealth of Nations is usually considered to be the founding work of modern economics Considerable portions of this work are spent rebutting the policies of mercantilism, with its emphasis on the importance of accumulating bullion For nations operating under mercantilist principles, gold and silver had inherent value and served as media of foreign trade In Smith s view, by contrast, bullion had the status of other commodities with value varying according to supply and demand Another line of criticism is directed against the mercantilist assumption that commerce is a zero-sum game (i.e., that every commercial transaction has a winner and a loser) As pointed out previously, this assumption was a factor in the trade wars that troubled Europe during the 16thand 17thcenturies Smith s position was that all parties benefit from well-informed transactions when freely undertaken If Portugal is better at making wine and England at producing cloth, then each country should be able to benefit by purchasing the other s goods A more radical divergence from mercantilism was Smith s view that economic prosperity should benefit society as a whole According to mercantilist ideology, the working classes had no rightful expectation of leisure time, education, or extra money to buy more than bare necessities Such amenities were the prerogative of financiers and merchants who

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brought wealth into the nation s coffers The role of working people was to produce goods for the consumption of others, rather than themselves to enjoy the goods produced Smith's rebuttal amounted to a fundamental rethinking of the mechanisms by which economies operate By nature, he believed, human beings tend to act for personal gain Although this may not be a good thing generally, in the context of a free and well-ordered economy self-interested action can work for the general well-being If producers and consumers are able to choose freely what they sell and buy, the marketplace will distribute goods at prices that are beneficial to the entire community Smith describes this tendency of the unfettered market in terms of the now-famous metaphor of the Invisible Hand " As he puts

it in The Wealth of Nations (Bk.IV, Ch II), when a man conducts his business with the motive of personal gain he is led by a an Invisible Hand to promote an end which was no part of his intention (Smith, 1776) That end, we are given to understand, is an optimal distribution of economic goods across all levels of society With respect to the relationship between landlord and laborer in particular, he remarks that, although the owner seeks only to gratify his own desires, he is led by an Invisible Hand to make nearly the same distribution of necessities among the poor as would have resulted if all parties had been allotted equal portions of land Rightly or wrongly, this rationale was used by subsequent economists to justify modern free-market capitalism For the invisible hand to operate in this manner, it is necessary that the producers of economic goods function in the role of consumers as well In the mercantile system, Smith observes (The Wealth of Nations, Bk IV, Ch VIII), the interest of the consumer

is almost constantly sacrificed to that of the producer (Smith, 1776)

Smith, on the other hand, considers it self-evident that consumption is the sole end and purpose of all production His most consequential departure from mercantilism may have been his account of growth in which expansion of consumption is necessary for an expanding economy Smith's account of economic growth begins in the first chapter of his book with a discussion of the division of labor When a complex productive task can be broken down into simple components, and each member of a work force assigned a specific subtask, production can be achieved more efficiently and cheaply than when each member

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is directly responsible for the finished product Smith s own example is the production of pins, which at that point involved a considerable number of distinct operations By his estimate, a single worker would have had difficulty making 20 pins a day, which would have amounted to less than 200 pins for a ten person work force When each person specializes in a particular operation, however, the same work force could produce close to 48,000 pins a day

Division of labor thus enables the production of larger numbers of goods that can

be sold at cheaper prices Yet unless there is ample demand for his goods on the market, no manufacturer will be motivated to expand his productive capacity The Division of Labor is limited by the Extent of the Market Large markets are required to absorb the large volumes of goods made possible by division of labor This means that the class of consumers has to be expanded beyond the elite few who benefited from the mercantile system Expansion of the consumer class is enabled in part by lower prices resulting from the cheaper production of goods by specialized labor Another factor is the ability of factory owners to share profits more generously with a productive work force A combination of these two factors brought consumer goods within reach of the common wage-earner The upshot is that workers responsible for producing goods joined the ranks of consumers by whom those goods are purchased

Division of labor increases labor productivity Increased productivity leads to higher wages Higher labor-income swells the consumer market With an expanded market comes a demand for more consumer products This demand then

is met with further increases in productivity, resulting in part from more efficient division of labor, and so forth Working together, this set of dynamics constitutes

a positive feedback loop Set off by a tendency toward worker specialization, increased productivity leads to yet higher productivity, improved worker income leads to yet higher income, and larger markets lead to yet larger markets

We may say that, for Adam Smith, economic growth amounts to an increase in consumption, which benefits all sectors of the economic community It should be noted in passing that there is nothing in Smith s account suggesting that economic growth can continue indefinitely Growth could be curtailed by government policies attempting to enhance profits or to hold down wages, such as the creation

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of monopolies or an excessive taxation of income Given his view on the importance of land as a source of food and revenue moreover, along with the obvious fact that land is limited, Smith may well have realized that economic growth is constrained ultimately by environmental factors

Classic growth theory following Adam Smith Beginning with Adam Smith, the development of classical economic theory continues with the work of, David Ricardo, and John Stuart Mill

David Ricardo (1973) and John Stuart Mill (1844) shared Smith s belief in private property, in competition, and in markets free from government supervision They also shared his confidence in the public benefit to be derived from the pursuit of private gain, which Smith epitomized in his metaphor of the Invisible Hand Malthus is best known for his book An Essay on the Principle of Population, published in 1798, in which he points out the dangers of unchecked population growth In briefest form, the problem he anticipated is that, while food supply would increase arithmetically at best, population would grow geometrically The result would be mass starvation which, along with war, crime, and epidemics, would reduce human population to sustainable levels Malthus s concern with the effects of overpopulation contributed to the reputation of economics as the dismal science Adam Smith had argued that expanding consumer markets led to increased production and higher wages, which in turn would result in yet further consumption For this positive feedback effect to continue Malthus pointed out, the work force would have to remain more or less fully employed But population increase tends to result in underemployment Another problem with Smith s doctrine, according to, Malthus had to do with what has come to be known as the law of diminishing returns In point of fact, Ricardo arrived at this principle independently

(http://cepa.newschool.edu/het/profiles/ricardo.htm)

As applies to production system with variable inputs and outputs, the general idea

is that increasing inputs leads to progressively smaller additional (so-called marginal) outputs With regard to Smith s agrarian-based production system, Malthus observed that increasing population would increase the supply of labor But inasmuch as productivity depends upon both labor and land (a fixed quantity);

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continual increase in supply of labor will not lead to continuously increasing levels of productivity In this case, diminishing returns show up as diminishing supplies of food in proportion to an increasingly hungry population In various publications from 1815 to 1821, Ricardo extended the principle of diminishing returns to other factors involved in land productivity One factor is the amount of capital applied per laborer Up to a point, return on capital will increase with amount of capital expended But bringing more capital to bear, other things being equal, requires bringing more land under cultivation Given limitations in fertile land available this leads to cultivation of progressively less productive land, and accordingly to decreasing returns on capital Another factor is technological progress in farm equipment On one hand, improvements in technology can make

a given piece of land more productive and thus allow for more growth On the other hand, Ricardo realized, introduction of labor-saving machinery tends to reduce employment While this does not automatically decrease returns on capital,

it leads to a decrease in consumer spending which Adam Smith conjectured must increase for economic growth to occur As a result of Ricardo s work, the model economy studied by theoretical economists provided roles for three classes of participants One is that of workers who spend most of their wages on necessities and whose income is under constant threat of erosion by pressure from the other classes Another is the class of landowners who, inasmuch as they follow the principle of self-interest, spend most of their revenue on luxuries Third are the capitalists, who tend to reinvest their profits in hopes of increasingly higher rates

of return This opened the door to class-warfare theoreticians like Karl Marx, who (in the Communist Manifesto of 1848) focused on the conflict between the capitalists and the working class The way this plays out historically, according to Marx, is for capitalists to pay their workers subsistence wages while retaining for themselves as much profit as the market allows In sociological terms, this amounts to powerful (capital) interests exercising force and fraud in taking advantage of the weak (workers) In economic terms, it amounts to undercutting the purchasing power of the consumer on whom Adam Smith s dynamics of growth was based In Marx s view, the fatal flaw of capitalist economies is their internal contradiction between improving technological efficiency, which drives

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up profits, and declining purchasing power of the so-called proletariat, who consume the products of an expanding economy The summary work of classical economic theory was John Stuart Mill s Principles of Political Economy Although Mill is best know outside economics for his more broadly philosophical works, Utilitarianism and On Liberty, his Principles remained the most widely used textbook in economics for some 40 years after its publication in 1848 In this treatise, Mill synthesized and expanded upon the contributions of Smith and Ricardo to the theory of free markets, and added original work of his own on taxation, foreign trade, and the distribution of income Like other classical economists before him, Mill was an outspoken advocate of the market system (http://en.wikipedia.org/wiki/John_Stuart_Mill)

The transition from classical to neoclassical economics began late in the 19th century A brief story of the transition might focus on a variety of themes One theme concerns the basis of economic value In classical economics, a product s value was thought to depend mainly on the costs of producing it

(http://en.wikipedia.org/wiki/Neoclassical_economics)

The neoclassical approach, on the other hand, tends to locate a product s value in its perceived utility to a potential consumer Utility here boils down to benefits the consumer receives from its use roughly the sense of the term in ethical utilitarianism Another theme is the emergence of a highly abstract conception of the individual consumer According to this conception, individuals maximize utilities in much the manner that firms maximize profits As with firms, individuals have preferences among possible outcomes of their economic activity that can be optimized on a rational basis A third transitional theme was an attempt to make economics scientific in the manner of physical science In this context, a discipline was deemed scientific to the extent that its subject matter could be formalized in mathematical terms, enabling it to proceed on an axiomatic basis Other axioms brought into play as this approach developed have to do with the interplay between supply and demand, and with various factors influencing return on capital

Followers of Adam Smith believed that when the economy is depressed, government should encourage private investment and expand its own

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expenditures, even if this leads to budget deficits When the economy is flourishing, on the other hand, government should reign in its expenditures and in the process make up its budget losses

Since early in the 20thcentury, the conventional measure of an economy s growth has been its GDP (Gross Domestic Product) Due to the prevailing assumption that GDP per capita is directly correlated with standard of living, it is generally taken for granted that growth in economic production is a desirable thing Research into the causes of growth has been motivated by the aim of maintaining long-term growth in production, and of moderating the effects of short-term recessions The basic model of economic growth during this period was articulated in a paper by Robert Solow, for which he won the 1987 Nobel Prize in Economics In keeping with its classical antecedents, Solow s model deals with the interaction between capital and productive output It assumes a fixed-sized labor force and a fixed proportion of depreciation in capital stock over time This depreciation is compensated in varying degree by savings that change in constant proportion with overall income The model assumes that rate of return on capital decreases as capital investment increases (the principle of diminishing return on capital) It also assumes a constant progression of technological innovation, which means that technology is external ( exogenous ) to the model When savings equal depreciation, capital is in equilibrium (unchanging in amount) The dynamics of the model hinges around this point of equilibrium When savings are greater than depreciation, and when capital per worker is relatively low, capital investment generates a relatively large increase in future income and yields a relatively high rate of return A consequence is that capital continues to rise Because of diminishing returns on capital, however, additional increments of capital generate decreasing amounts of additional income and thus a falling rate of return on investment By the time depreciation catches up with savings (i.e., capital returns to a state of equilibrium), the rate of return on investment will have declined to a point where there is no incentive to accumulate more capital In Solow s model, equilibrium is a state of zero economic growth Due to diminishing returns on capital, there is no additional investment and economic growth and progress comes to a halt This means, in effect, that no economy can

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grow indefinitely merely by accumulating capital One factor that can induce additional growth once an economy has reached equilibrium is technological progress As the level of technological sophistication increases, a given quantity

of input can yield greater quantities, or improved qualities, of output In effect, technological innovation raises the rate of return on capital, thus counteracting the diminished rate of return that otherwise would lead to economic stagnation As already noted, Solow s model treats technological innovation as exogenous This

is an obvious limitation of that model in today's economic climate Economists working in the 1980s undertook to rectify this shortcoming by developing growth models that included mathematical explanations of technological advancement In addition to making technology thus endogenous, this more recent approach to growth theory also downplays the principle of diminishing returns on capital The sense is that increasing productive efficiency stemming from technological innovation can work instead to enhance the marginal product of capital investment This supposedly enables continuing growth as capital increases (http://ocw.nd.edu/philosophy/environmental-philosophy/unearthed/chapter-10-history-and-theory-of-economic-growth)

History might teach us that economic growth is necessary to support political and military expansion, or to maintain borders against growing threats from outside enemies But there is scant historical evidence to back up the common assumption among mainstream economists that continued economic health depends upon

continual growth

2.5 Modernization Theory

Modernization theory seeks the answer to the question: what condition leads to modernization since modernization facilitates democratization and is beneficial to less developed societies for achieving progress and economic growth

In The Stages of Economic Growth Rostow suggested that an economy moves

from a primary stage where the economy is described as subsistence agriculture; the secondary stage is where the economy grows into a manufacturing based economy; and the tertiary stage that is a service-based economy (Rostow, 1960)

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The sad reality of unnecessary poverty and gross violations of human rights in many less developed countries is viewed by "constitutional economics" as proof

of "constitutional failures" that are due to inadequate constitutional protection of

civil, political, economic and social human rights, including economic liberties,

property rights, monetary and competition safeguards necessary for a mutually beneficial division of labor Modern theory believes that there is a causal relationship between modern institutions, modern values, modern behavior, modern Society and economic growth

(http://www.jeanmonnetprogram.org/papers/01/012301-08.html)

in the economic part, modernity meant essential step in bringing political stability and economic progress to the society, with economic growth has also come a new political confidence, in part of socio-spatial institution, modernization has identified with developing mega cities, mobility, flexibility and the educational improvements ; in part of the politic, modernization meant respecting democracy and the weakening of hierarchical power ; in part of the culture, modernization meant respecting and identifying value systems

(http://www.hse.ru/data/161/436/1235/Modernisation_Yasin.pdf)

According to Johannes Berger: "Modernization" is the internal achievement of a society; the particular processes of modernization support each other in combination; the leading nations do not impede the followers; the processes of modernization are converging in a common goal, modern society and modernity (Berger, 1996)

This means that growth cannot be explained by exploitation nor can it be accomplished by simply copying institutions Despite the basic fact of rising differentiation there is the parallel process of rising interdependence Jeffrey Alexander (1994), a critical American sociologist, has outlined the story of the modernization discourse in his essay: "Modern, Anti, Post, and Neo: How social theories have tried to understand the 'New World' of 'Our Times'" (Alexander, 1994) He distinguishes four stages which coincide roughly with the last four decades of the 20th century: the 1960s, 1970s, 1980s and the 1990s Early modernization theory reconstructed Western development and, in its liberal belief

of granted progress and the universalization of American values, projected them

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world-wide, especially on the developing countries One popular model combines political progress (state- and nation-building, participation, redistribution), economic growth, and social mobilization with cultural rationalization, psychic mobilization and international transformation (Zapf 1969: 23; Berger 1996: 53) Against this doctrine a radical Marxist criticism of capitalism arose independencia theory and in world-systems theory Both explained underdevelopment at the periphery by exploitation through the capitalist centre The Dependencia School believes that dependency is an external condition, that the centre nations get all the benefits from unequal exchange, and that the peripheral countries should sever their ties with the core countries The world-system school adds the concept of semi-peripheries with an economic emphasis on import-substitution; this school shifts its focus from the nation-state to the whole world; long-term historical trends are its units of analysis (So, 1990) Both theories predicted the transition, already underway, of late capitalism into socialism However, when this transition failed to occur and when some developing countries, especially in East Asia, made spectacular progress, the controversy lost its momentum Several theories of post-modernism tried to "de-construct" liberal modernization theory as well as the Marxist alternatives Post-modernists ridiculed these approaches as out-dated

"great narratives" and tried to substitute them with multiple cultural and constructivist contingency theories But with the breakdown of Communism and with the success of some Asian and South American countries attention again turned toward the preconditions and achievements of democracy and the market economy Since 1987/8 the number of democratic regimes has increased from 66

to 121 states This stage is called by Jeffrey Alexander, Edward Tiryakian and others as neo-modernism or modernization II which indeed relies on democracy and free economic growth, this time however without the concept of convergence to Western cultural patterns and without underestimating nationalist and fundamentalist counter-movements Tiryakian has summarized neo modernization - analysis (NMA) as follows:

"1 Modernization is the result of actions by individuals and collectives, not an automatic development of systems

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2 They seek new ways to achieve their goals and fulfill their values; but whether these aims can be accomplished, will depend on their resources

3 Modernization is not a consensual process, but a competition between modernizers, conservatives and bystanders

4 Science is a major driving force, but religion and tradition must not be underestimated

5 The general criterion for the success of modernization is the welfare development of the whole population

6 Centres of modernization may change and move

7 Modernization is not continuous-linear; it has also cycles and regressive crises

" (Tiryakian, 1998)

According to theorists, the modernization of the West was already the subject of the classics of sociology around the turn of the 20th century: industrialization and the growth of productive forces in Marx, differentiation as specialization and, at the same time, new forms of solidarity in Durkheim, rationalization in Max Weber But Weber, other than Marx, stated that the encompassing process of rationalization was a speciality of the "occident", the West, and he asked, "What linkage of circumstances has led to the result that just in the occident and only here, cultural phenomena appeared which represented a developmental direction

of universal importance and validity?" Weber's explanatory variables, as you also know, were the drive to capital accumulation in conjunction with the rational ethics of ascetic Protestantism (Weber, 1958)

As to the early modernization theory of the 1950/60s one must remember that this theory was designed as a program explicitly directed to the non-Western world, that is, it was devoted to the "export" of Western institutions and values An early classic, Daniel Lerner's "The Passing of Traditional Society" from 1958, states (p 51): "Our concern is with large historical movement, now becoming visible in the Middle East, of which an enlarged capacity for empathy is the distinctive psychic component Our interest is to clarify the process whereby the high empathizer tends to become also the cash customer, the radio listener, the voter" (Lerner1958)

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The data in this study came from early survey research of 1950/51 in Lebanon, Jordan, Egypt, Syria and Iran Dependencia and world-systems theories by definition concentrate on the non-Western world, as the periphery of a capitalist centre which, according to proponents of these theories, gained its leading position by exploitation, that is, by the development of underdevelopment During the stage of culturalism and constructivism, which still has influence today, the non-Western world was considered to have committed the same fallacies as the West by not being aware that there is no reality outside our interpretations of it, and that even" tradition" is invented or constructed (As an aside, the merit of the cultural or constructivist view is the distinction of modernization qua process and modernity qua civilization, and the discussion of the "dark side", namely, the violence, social cost and alienation produced in this civilization;( Mergel, 1997) The neo-modernism stage was also challenged, for example, by theories of globalization, even "cosmopolitization",on the one hand, and bynon-estern resistance/opposition, which Huntington described as a "clash of civilizations", or even shorter as the "West against the rest".(Huntington,1993)

Theoretically, health, elementary and further education, economic resources from basics to mass consumption, are the elementary building blocks of any modernization theory According to the following findings:

"1 The Arab states are in a middle position in the world ranking, having made impressive improvements over the last 25 years If we go back further, since about

1950, the Arab states have evolved from mostly illiterate populations to mostly literate ones, as Lerner predicted (Russett, 1964)

2 The gap between the Arab states and the OECD states, in terms of the HDI, is around 30%, but the former nearly equal Eastern Europe with Russia, and they surpass most of Africa

3 The change among OECD states is limited because they are near the ceilings The change in some post-Communist countries is negative and even Germany still shows the burden of unification

It was not just the ideas of Huntington that dashed the hopes of neo-modernism which had been so welcomed by many post-Communist countries, their politicians and social scientists" (http://bibliothek.wzb.eu/pdf/2004/p04-003.pdf.)