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11. Models of Development

The document discusses the Solow Growth Model, which emphasizes that economic growth is driven by capital, labor, and technological innovation, with a significant portion of growth attributed to the 'Solow residual' from technological advancements. It contrasts with Keynesian models by asserting that stable equilibrium growth can be achieved through neoclassical assumptions and highlights the importance of ideas in the new growth theory, which posits that knowledge and technology are key drivers of economic progress. Additionally, it explores the implications of these theories on the development experiences of different countries, including the concept of the 'developmental state' in postwar economies.

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2 views

11. Models of Development

The document discusses the Solow Growth Model, which emphasizes that economic growth is driven by capital, labor, and technological innovation, with a significant portion of growth attributed to the 'Solow residual' from technological advancements. It contrasts with Keynesian models by asserting that stable equilibrium growth can be achieved through neoclassical assumptions and highlights the importance of ideas in the new growth theory, which posits that knowledge and technology are key drivers of economic progress. Additionally, it explores the implications of these theories on the development experiences of different countries, including the concept of the 'developmental state' in postwar economies.

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f20212931
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© © All Rights Reserved
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Keynesian models

Robert Solow
- Factors that determine the rate of economic growth for different countries ,Growth comes from adding
more capital and labour inputs and also from ideas and new technology.
- The Solow Growth Model is an exogenous model of economic growth that analyzes changes in the level of output
in an economy over time as a result of changes in the population.
- the real-world economy is not on a “knife-edge” except for the Great Depression
- When firms have excess capacity (excess investment), they substitute labor for capital- neoclassical factor
substitution in production.
- According to Solow, there can be stable equilibrium growth if the growth model is set up with this correct
neoclassical assumption.
- Solow picked one production functions- Cobb–Douglas production function- because it theoretically generated
stable equilibrium.
- The Cobb-Douglas production function represents the relationship between two or more inputs - typically physical
capital and labor - and the number of outputs that can be produced. It's a commonly used function in
macroeconomics and forecast production.
Solow argued that there exists a rate of investment—balanced investment—that keeps the growth of the capital
stock equal to the growth of the labor force.
If actual investment exceeds balanced investment, the amount of capital per worker grows until it reaches a level
consistent with full employment—what Solow called the steady-state point.
Hence, Solow showed that the neoclassical growth model is stable. It has the self-adjusting mechanism that
guarantees a return to equilibrium. Solow’s model was an attack on the Keynesian explanation of unstable economic
• Economics had believed that the main causes of economic growth were
increases in capital and labor. But Solow (1957) showed that half of economic
growth in the United States cannot be accounted for just by increases in capital
and labor.
• unaccounted-for portion of economic growth—the “Solow residual”—he
attributed to technological innovation in the absence of technological progress
the rate of growth is purely dependent on an increased supply of labor.
• Solow’s model pictured technology as a continuous, ever-expanding set of
knowledge that simply became evident over time—technological change was
“exogenous” rather than something specifically created by economic forces.
• Solow’s model became the mainstay of the economic analysis of growth.
• Robert Solow is one of the major figures of the neo-Keynesian synthesis in
macroeconomics.
• Together with Paul Samuelson, he formed the core of the Massachusetts
Institute of Technology (MIT) economics department, widely viewed as the
“mainstream” of the postwar period. The Solow model greatly affected the
What are the basic points about the Solow Economic Growth Model?
- a sustained rise in capital investment increases the growth rate only temporarily: because
the ratio of capital to labour goes up.
- A 'steady-state growth path' is reached when output, capital and labour are all growing at the
same rate, so output per worker and capital per worker are constant.
- Neo-classical economists believe that to raise the trend rate of growth requires an increase in
the labour supply + a higher level of productivity of labour and capital.
-Differences in the pace of technological change between countries are said to explain much of
the variation in growth rates that we see.
• Productivity growth: The neo-classical model treats productivity improvements as
an 'exogenous' variable – they are assumed to be independent of the amount of capital
investment.
• Catch up growth: The Solow Model features the idea of catch-up growth when a poorer
country is catching up with a richer country – often because a higher marginal rate of
return on invested capital in faster-growing countries.
• The Solow model predicts some convergence of living standards (measured by per capita
incomes) but the extent of catch up in living standards is questioned – not least the existence
of the middle-income trap when growing economies find it hard to sustain growth and rising
per capita incomes beyond a certain level
New growth theory:The source of economic progress is ideas.

- the Solow model has been critiqued


- The economist Paul Romer countered this by constructing mathematical
representations of economies in which technological change is the result
of the intentional actions of people, such as in research and
development.
- it is an “endogenous” growth theory because it internalizes technology
into a model of how markets function—
• It views technological progress as a product of economic activity; and it
holds that, unlike physical objects, knowledge and technology are
characterized by increasing returns that drive the process of growth
- ideas can be infinitely shared and reused, they can accumulate without
limit they are not subject to the eventual onset of “diminishing returns.
- No amount of savings and investment, no policy of macroeconomic fine-tuning,
and no set of tax and spending incentives can generate sustained economic
growth unless they are accompanied by the countless large and small
discoveries
- The most successful areas will be the ones with the most competent and
effective mechanisms for supporting collective interests, especially in the
production of new ideas
- “knowledge spillovers
- “death of distance” or the “end of geography”
• There are two types of knowledge: codifiable knowledge, which can be written
down; and tacit knowledge, learned from experience and not easily
transmittable from one individual to another
• New knowledge is the key driver behind economic growth, for the economy as
a whole and for particular areas. It also emphasizes the role that institutions
and policies can play in creating conducive circumstances for innovation and
the diffusion of knowledge
New growth theory suggests five broad strategies for governments:
1. Economic strategies should focus on creating new knowledge in universities
and laboratories and by businesses.
2. States and communities are not powerless to influence their economic
destinies.
3. The path-dependent quality of growth means that the possibilities of future
growth depend, in large part, on the current local base of knowledge and
expertise, which communities should try to enhance.
4. Ideas of all kinds, large and small, play a role in economic growth:
innovation by front-line workers is as important to the knowledge economy as
scientific research.
5. Knowledge-based growth can stimulate a self-reinforcing cycle in which
faster growth triggers additional knowledge creation and more growth.
• Why is there a great variation in the development experiences of
different countries?
• Growth miracle vs growth tragedy
• Convergence debate
• Divergence
Divergence
Convergence
in South Asia
The Developmental
State
• In the Third World, the “developmental state,” a parallel conception to
Keynesianism, was employed during the postwar years, following the example
of Japan.

• Case of Japan
• state-owned “model factories
• South Korea, Singapore taiwan
• postwar Japan and the East Asian newly industrialized countries

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