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Chapter 3 Classic Theories of Economic Growth and Development

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Chapter 3: Summary Outline: Theories of Economic Growth & Development • • • • • • •

Linear Stage of Growth (Harrod-Domar Model Structural change theories (Lewis Model) International –dependence revolution (Marxist/Radical Model) Neoclassical-free market re-surgence Can differences in thinking be re-conciled? Explaining Growth- Application of Production Possibilities Curve (PPC) Illustrating growth using PPC, efficiency, trade offs ,technological change • New Growth Theory-Solow Model ( labor quality or human capital). • What about institutions. They are ignored in these models. • Measuring Development (Perkins chapter 2)

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Class Theories of Economic Development – Four Approaches • Linear stages of growth model • Theories and Patterns of structural change

• International-dependence revolution • Neoclassical, free market counterrevolution

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Development as Growth and Linear-Stages Theories • Rostow’s Stages of Growth: Historical stages • Harrod Domar Growth Model: Emphasis on Physical Capital.

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The Harrod-Domar Model S  sY

(3.1)

I  K

(3.2)

K  kY

(3.3)

SI

(3.4)

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The Harrod-Domar Model

S  sY  kY  K  I

(3.5)

sY  kY

(3.6)

Y s  Y k

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(3.7)

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Criticisms of the Stages Model • Necessary versus sufficient conditions

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Structural-Change Models • The Lewis two-sector model • Modern and traditional sector

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Figure 3.1 The Lewis Model of ModernSector Growth:Two-Sector SurplusLabor 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. Growth in modern sector may not draw enough labor. • Surplus labor in rural areas and full employment in urban? • Institutional factors? These assumptions are not correct. • Assumption of diminishing returns in modern sector

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Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications

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The International-Dependence Revolution: Radical/Marxist Model • The neoclassical dependence model – Unequal power, core-periphery

• The false-paradigm model – Using “expert” advisors

• The dualistic-development thesis – Superior and inferior elements can coexist;

– center-periphery (sociologist’s view)

• Conclusions and implications – No insight on development, empirical evidence Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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The Neoclassical Counterrevolution: Market Resurgence • Challenging the statist model – Free market approach – Public choice approach

– Market-friendly approach

• Traditional neoclassical growth theory – Solow model

• Conclusions and implications – institutional and political realities in developing world

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Theories of Development: Reconciling the Differences • Development economics has no universally accepted paradigm? But everything does not go? • Insights and understandings are continually evolving: Lessons from experience & history • Each theory has some strengths and some weaknesses: • But there are better theories tested with reality of evidence and experience Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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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 • Capital-output ratio • Center

• False-paradigm model

• Free market

• Closed economy

• Free-market analysis

• Comprador groups

• Harrod-Domar growth

• Dependence

model

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Concepts for Review (cont’d) • Lewis two-sector model

• Neocolonial dependence model

• Marginal product

• New institutionalism

• Market-friendly approach

• New political economy approach

• Necessary condition

• Open economy

• Neoclassical counterrevolution

• Patterns-of Development analysis

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Concepts for Review (cont’d) • Periphery • Production function • Public choice theory

• Savings ratio • Self-sustaining growth • Solow neoclassical growth model

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• Stages-of-growth model of development • Structural-change theory • Structural transformation • Sufficient condition • Surplus labor 3-18

Concepts for Review (cont’d) • Traditional neoclassical growth theory • Underdevelopment

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Appendix 3.1: Components of Economic Growth • Capital Accumulation, investments in physical and human capital – Increase capital stock – GNP= Q(L,K)= F(L,K)

• Growth in population and labor force • Technological progress – Neutral, labor/capital-saving, labor/capital augmenting – GNP= F(L, K, T)

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Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier (PPF)- Model

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Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier (PPF): Explaining Economic Growth

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Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier

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Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier

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Appendix 3.2: The Solow Neoclassical Growth Model: Considers human capital or labor quality & productivity

 1

Yi  AKi Li K Y  AK



   1

L

n g n  1      Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Appendix- Solow Growth Model k  sf (k )  (  n)k

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(A3.2.4)

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Appendix- Solow Growth Model sf (k *)  (  n)k *

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(A3.2.5)

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Figure A3.2.1 Equilibrium in the Solow Growth Model

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Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow Model

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Appendix 3.3: Endogenous Growth Theory: Accounts for labor quality, technology, productivity

• Motivation for the new growth theory • The Romer model  1

Yi  AKi Li K Y  AK



   1

L

n g n  1      Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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