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Economics Development Chapter 3

Growth Theories

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Shiena Nicol
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239 views

Economics Development Chapter 3

Growth Theories

Uploaded by

Shiena Nicol
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© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 3

Classic Theories
of Economic
Growth and
Development

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.


Classic Theories of Economic
Development – Four Approaches
1. Linear stages of growth models
2. Theories and Patterns of structural
change
3. International-dependence revolution
4. Neoclassical, free market
counterrevolution

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Observation:
• LDCs have much less capital per worker
than rich countries.
• “Capital” = machinery and equipment
• Result: Lower productivity of labor
• And thus Lower wages/incomes.
• LDCs are poor because they
lack capital
The Harrod-Domar Model

S  sY (3.1) Savings rate s

I  K (3.2) Invest = ΔCapital

K  kY (3.3) Capital/Output = k

SI (3.4) Closed Economy

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The Harrod-Domar Model

S  sY  kY  K  I (3.5)

sY  kY (3.6)

Y s (3.7)

Y k
Growth rate of GDP = savings rate/capital-output ratio
=> To increase GDP growth, increase s (or foreign S)
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Criticisms of the Harrod-Domar
Model
• Necessary versus sufficient conditions
• Is Saving necessary for growth?
– Not if foreign investment or foreign aid (World
Bank Loans, etc.)
• Is Saving (Investment) sufficient for growth?
– Are there institutions to channel savings to
productive uses: a well-functioning financial
system or government plan?

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Observation:
LDCs often have two quite different sectors:

1. Traditional (subsistence) agriculture


Low K/L, low Land/L, “old” technology
(NOT: tractors or combines, hybrid seeds,
chemical fertilizer, pesticides, herbicides)

Result: VERY low productivity and


incomes
“Modern” Industrial Sector
• Higher K/L, more modern technology than
traditional sector (tho often low by rich
country standards)
• Result: Higher productivity and incomes
• Also: Large Urban-Rural gaps in income
result in migration to the cities
Urban-Rural Income Ratio:
China
3.0

2.8

2.6

2.4

2.2

2.0

1.8
1978 1983 1988 1993 1998
Chen (2002)
Rural vs. Urban Consumption
Constant (2004-05) Rupees

1,200
Rural Urban 1,052
per Person per Month

1,000
779
800
559
600
405
400
200
0
NSSO 1972-73 2004-05
Figure 3.1 The Lewis Model of Modern-
Sector Growth in a Two-Sector Surplus-
Labor Economy

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Criticisms - Lewis Model
• Rate of labor transfer and employment
creation may not be proportional to rate of
modern-sector capital accumulation
• Surplus labor in rural areas (no) and full
employment in urban (no)?
• Institutional factors (unions, min wage)?
• Assumption of diminishing returns in
modern sector (agglomeration economies)
• BUT: Captures some elements of urban-
rural divide. Chapter 7: Todaro Model
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The International-Dependence
Revolution
• The neoclassical dependence model
– Unequal power, core-periphery (exploitation)
• The false-paradigm model
– Using “expert” advisors who give wrong advice (true!)
• The dualistic-development thesis
– Superior and inferior elements can coexist (true)
• Implications
– Autarky (end exploitation by “neocolonialists”)
– State led development: SOEs, central planning,
regulation
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The Neoclassical
Counterrevolution
• Challenging the statist model of government led
development
– Central planning, SOEs, etc, not usually successful
– Free market approach
– Public choice approach (not: government is “bad;”
rather, what incentives for politicians/bureaucrats)
• Criticism of Neoclassical Counterrevolution:
– Institutional and political realities in developing world
differ from Western world
• assume property rights and functioning court systems
• ignore power relationships of traditional social systems based
on caste, gender, elites
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Theories of Development:
Reconciling the Differences
• Development economics has no
universally accepted paradigm
• Insights and understandings are
continually evolving
• Each theory has some strengths and
some weaknesses

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Case Study: South Korea and
Argentina

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Concepts for Review
• Autarky • Dominance
• Average product • Dualism
• Capital-labor ratio
• False-paradigm
• Capital-output ratio
model
• Center
• Free market
• Closed economy
• Comprador groups • Free-market analysis
• Dependence • Harrod-Domar growth
model

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Concepts for Review (cont’d)
• Lewis two-sector • Neocolonial
model dependence model
• Marginal product • New institutionalism
• Market-friendly • New political
approach economy approach
• Necessary condition • Open economy
• Neoclassical • Patterns-of
counterrevolution Development analysis

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Concepts for Review (cont’d)
• Periphery • Stages-of-growth
• Production function model of development
• Public choice theory • Structural-change
• Savings ratio theory
• Self-sustaining growth • Structural
transformation
• Solow neoclassical
growth model • Sufficient condition
• Surplus labor

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Concepts for Review (cont’d)
• Traditional neoclassical growth theory
• Underdevelopment
• You are NOT responsible for the appendices

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