Group 1

Reporting

PART II:
ECONOMIC
GROWTH
AND
DEVELOPM
Fostering responsible economic growth with
consideration of environmental constraints and

ENT
social equity
 “There are no magic silver bullets”–
the world is too complicated.”

- Robert Zoellick, Former President of World Bank 2007-2012

Economic Progress

- is an essential
component of
development, but it’s not
the only one.
 PROS CONS
Improved Living Social Inequality
Standards

Reduced Environmental
Porverty Degradation

Funding Social Human

Programs Development

Infrastucture Cultural
Development Preservation
proved Living Standards
FOUR MAJOR APPROACHES OF
CLASSIC THEORIES OF ECONOMIC
DEVELOPMENT

Linear Stages of Growth

Model
Theories and Patterns of
Structural Change

International-Dependence
Revolution
Neoclassical Free Markets Counter-
revolution
LINEAR STAGES OF
GROWTH MODEL
Walt W. Rostow- an American economic
historian who advocate the stages-of-growth
model for development.

The Stages of Economic Growth- a book wrote

by Rostow in 1960 that presents an economic
historian’s way of generalizing the sweep of
modern history.
 FIVE CATEGORIES OF
SOCIETIES ECONOMIC
DIMENSIONS:
01
The Traditional-Society - focused on
farming and basic survival.

The pre-conditions for take-off into self-

02 sustaining growth - starting to build
infrastructure and adopt new ideas.

The take-off - rapid industrial and economic

03 growth begins.

The drive to maturity - diversified industries

04
and modern technology.

The age of high mass consumption - wide

05
growth and consumption.
 HARROD-DOMAR GROWTH
MODEL
• a Keynesian model of economic growth, used to explain an
economy's growth rate in terms of the level of saving and of
capital.
• Developed independently by Roy F. Harrod in 1939, and Evsey
Domar in 1946.
• A functional economic relationship in which the growth rate of gross
domestic product (g) depends directly on the national net savings
rate (s) and inversely on the national capital-output ratio (c)
Capital-output ratio - A ratio that shows the units of
capital required to produce a unit of output over a given
period of time.

Net savings ratio- Savings expressed as a proportion of

disposable income over some period of time.
 SIMPLE MODEL OF ECONOMIC
GROWTH
1.Net saving (S) is some proportion, s, of National Income (Y) such that we have the
simple equation:

2.Net investment, I, is defined as the change in the capital stock, K, and can be
represented by K such that:

But because the total capital stock, K, bears a direct relationship to total national
income or output, Y, as expressed by the capital-output ratio, c,3 it follows that:

3.Finally, because net national savings, S, must equal net investment, I, we can write
this equality as:
S=I
(3.4)
But from Equation 3.1 we know that S = sY, and from Equations 3.2 and
3.3 we know that

It therefore follows that we can write the “identity” of saving equaling

investment shown by Equation 3.4 as

or simply as

Dividing both sides of Equation 3.6 first by Y and then by c, we obtain the
following expression:
Equation 3.7, which is a simplified version of the famous equation in the
Harrod-Domar theory of economic growth, states simply that the rate of growth
of GDP (Y / Y) is determined jointly by the net national savings ratio, s, and the
national capital-output ratio, c.

Equation 3.7 is also often expressed in terms of gross savings; in which case
the growth rate is given by:

where δ is the rate of capital depreciation.

To grow, economies must save and invest a certain proportion of

their GDP. The more they can save and invest, the faster they can
grow.
THREE COMPONENTS OF
ECONOMIC GROWTH

Investmen
t
Labor Force Growth

Technological
Progress
 NECESSARY VERSUS
SUFFICIENT
CONDITIONS
NECESSARY SUFFICIENT
CONDITION CONDITION
A condition that when present causes
A condition that must be
or guarantees that an event will or
present, although it need not can occur; in economic models, a
be in it-self-sufficient, for an condition that logically requires that
event to occur. a statement must be true (or a result
must hold) given other assumptions.
Necessary versus Sufficient Conditions: Some
Criticisms of the Stages Model

• Unfortunately, the mechanisms of development

embodied in the theory of stages of growth did not
always work. And the basic reason they didn’t work
was not because more saving and investment isn’t
a necessary condition for accelerated rates of
economic growth but rather because it is not a
sufficient condition.
STRUCTURAL CHANGE
THEORY
• Transformation of traditional subsitence economy
into a more structured and developed economy

Lewis' Two sector model

Patterns of development
THE LEWIS THEORY OF
DEVELOPMENT
• Formulated by Nobel laureate W. Arthur Lewis in the mid
1950s and later modified, formalized, and extended by
John Fei and Gustav Ranis.
• Taking out manpower from subsistence economy to be
more productive on a developed country where labor force
is more needed.
• Surplus labor- The excess supply of labor over and above
the quantity demanded at the going free-market wage
rate.
• Production function- relationship between production and
quantity of inputs reequired to produce.
This process of modern-
sector self-sustaining
growth and employment
expansion is assumed to
continue until all surplus
rural labor is absorbed in
the new industrial sector.
Thereafter, additional
workers can be withdrawn
from the agricultural sector
only at a higher cost of lost
food production because the
declining labor-to-land ratio
means that the marginal
product of rural labor is no
longer zero. This is known
as the “Lewis turning
point.”
CRITICISMS OF THE LEWIS
MODEL
• The model implicitly assumes that the rate of labor transfer
and employment creation in the modern sector is
proportional to the rate of modern sector capital
accumulation.
• Surplus labor exists in rural areas while there is full
employment in the urban areas.
• The notion of a competitive modern sector labor market
that guarantees the continued existence of constant real
urban wages up to the point where the supply of rural
surplus labor is exhausted
• Lewis model is its assumption of diminishing returns in the
PATTERNS OF DEVELOPMENT
ANALYSIS OF STRUCTURAL
CHANGE
• Focuses on the sequential process through which the
economic, institutional structure of an
underdeveloped economy is transformed overtime to
permit new industries to replace traditional
agriculture as the engine of economic growth
• An attempt to identify characteristic features of the
internal process of structural transformation that a
“typical” developing economy undergoes.
Accumulation of Capital - set of interrelated
changes in the economic structure of a country
are required for the transition from a traditional
economic system to modern one.

Empiral Structural Change analyst - emphasize

both domestic and international constraints on
development.
Structural Change Model - recognizes the fact
that developing countries are part of an
integrated international system that can promote
(as well as hinder) their development.

Best Known Model of Structural Change -

based largely on empircal work of Harvard
economist Hollis B. Chenery and his colleagues.
• built on research by Simon Kuznets on modern
economic growth of developed countries
 THE INTERNATIONAL-DEPENDENCE
• REVOLUTION
Transformation of traditional subsitence economy into a
more structured and developed economy
• Developing countries are engaged in dependency and
domination relationship with developed countries.

Dependence. The reliance of developing countries on

developed-country economic policies to stimulate their own
economic growth.
Dominance. In international affairs, a situation in which the
developed countries have much greater power than the less
developed countries.
THE THREE MAJOR STREAMS OF
THOUGHT:

The Neo-Colonial Dependence Model

The False-Paradigm Model

The Dualistic-Development Thesis

The Neo-Colonial Dependence Model

• Is an indirect outgrowth of Marxist thinking. It attributes the

existence and continuance of underdevelopment primarily to the
historical evolution of a highly unequal international capitalist
system of rich country–poor country relationships.

Underdevelopment - An economic situation characterized by

persistent low levels of living.
Center - In dependence theory, the economically developed world.
Periphery - In dependence theory, the developing countries.
Comparador Group - In dependence theory, local elites who act as
fronts for foreign investors.
The False-Paradigm Model

• It attributes underdevelopment to faulty

and inappropriate advice provided by well-
meaning but often uninformed, biased, and
ethnocentric international “expert” advisers
from developed- country assistance
agencies and multinational donor
organizations.
The Dualistic-Development Thesis

Dualism
• The coexistence of two Key Arguements
situations or phenomena 1.Coexistence of Superior and
(one desirable and the Inferior Elements
other not) that are 2. Chronic Disparities
mutually exclusive to 3.Widening Inequality Gaps
different groups of 4. Exploitative Interdependence

society.
THE NEOCLASSICAL
COUNTERREVOLUTION
• In the 1980s, countries like the US, UK,
Canada, and West Germany shifted toward
free-market policies.
• Focused on reducing government control
and promoting competition.
• Aimed to solve poverty by letting markets
work freely.
Core Problem: Too much government
control causes poverty
Solutions
Proposed:
Allow free markets to operate without
interference.
Privatize government-owned
businesses.
Encourage free
trade.
Remove unnecessary government rules
and regulations.
The Three Approaches

1.Free Market Approach - believes markets are efficient

without government interference. o Competition,
accurate pricing, and innovation thrive in free markets.
2.Public Choice Theory - Governments act in self-
interest, leading to corruption and inefficiency. o Less
government is better to avoid misuse of power.
3. Market-Friendly Approach - Recognizes markets can
fail in some areas (e.g., infrastructure, education). o
Supports limited government action to fix market
failures.
Global Impact
Key Supporters:
• World Bank and IMF pushed for free-market policies.
Main Belief:
• Governments in developing countries cause inefficiency
and corruption.
• Free-market policies promote growth and attract
investment.
Decline of Opposing Organizations:
• Groups like the ILO and UNDP, which represented
developing countries, lost influence.
Conclusion

• The Neoclassical Counterrevolution

emphasized the need for free markets and less
government control to promote economic growth.
It argued that markets are more efficient at
allocating resources and driving development.
However, while free markets are important, some
government involvement is still necessary to fix
market failures and address social needs.