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Lectures 3 and 4
Development Theories:
A way to Organize our Ideas
or an Ideology ?
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Questions for Theory to Answer
• 1. What do you want a theory of
development to explain ?
– Income per capita, social stability,equality
• 2. Why do some countries grow and then
decline?
– Theory must explain both directions
• 3. Why do some poor countries 'take-off'
and continue to grow?
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More Questions to Ponder
• 4. Why do some poor countries remain in
a low level trap?
– Trap defined as constant Yp
• 5. What arguments should be included in
development theory?
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More Questions to Ponder
• a. Population growth: does it hinder or
accelerate growth?
• b. Capital accumulation:
– How do you accumulate when you are
already poor?
• c. Technical Change:
• i. Where do you access technical change if you
are already poor?
– Via trade or indigenous adaptation ?
• ii. What does Canada's historical experience with
the wheat and the reaper tell us about technical
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change and trade ?.
Questions for you to answer
• 6. Find an example of a poor country
which has
–
–
a. Taken off in last 20 years
b. Remained stagnant for last twenty
years
–
c. Grew and then declined in last twenty
years
• 7. How did your country of choice do
with respect to the categories a to c and
why ?
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Lecture 4: Theories
• A. Linear-Stages Theory (1950s and early
1960s)
• 1. It views economic development as a series of
successive stages of economic growth through
which every nation must go through.
• 2. It emphasizes that more investment leads to
more growth.
• 3. It can be described by an economic mechanism
known as the Harrod-Domar Growth model.
•
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The Harrod -Domar Growth
Model
– 1. Rate of GNP growth is a function of
• national savings ratio (s)
• and rate of national capital-output ratio (k).
• GNP growth is positively related to the savings
ratio and negatively related to the capital-output
ratio.
– 2. It could explain the massive transfers of
capital and technical assistance from
developed to less developed nations.
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More Harrod -Domar Growth
Model
• 3. Is investment a sufficient condition for
economic growth?
– No.
– It is necessary but not sufficient condition
for economic growth.
• Necessary: one of many ingredients
• Sufficient; minimum set required to grow
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II. Structural- Change Theory
• 1. It emphasizes on the mechanism by
which underdeveloped economies alter
their domestic economic structures from
a traditional subsistence agriculture to a
more urbanized, industrially diversufued
economy.
• 2. It employs tools of neoclassical price
and resource allocation theory.
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Lewis Two-Sector Model
• i. It became the general theory of the
development process in surplus-labor
Third World nations during the 1960s
and early 1970s.
• ii. It focuses on the process of labor
transfer from the traditional economy to
the urbanized, industrial sector and the
growth of output and employment in the
high-productivity sector
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Assumptions
• i. Marginal product of labor is zero
(surplus-labor).
– This implies that labor can be removed
from the agricultural sector without any loss
of output in that sector.
• ii. Rural supply of labor to industrial
sector is perfectly elastic.
• iii. Full employment in the urban sector.
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More Assumptions
• iv. Constant urban wage- premium over
a fixed average subsistence wage.
• v. Capitalists reinvest all profits.
• vi. Rate of labor transfer and job
creation is proportional to the rate of
capital accumulation.
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Agricultural Sector
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Industrial Sector
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Conclusions for Lewis Model
• i. Employment growth and labor
transfer is induced by output expansion
in which the speed of expansion depends
on the rate of industrial investment and
capital accumulation in the industrial
sector.
• ii. The self-sustaining growth and
employment expansion process continues
until all surplus labor is exhausted.
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Comments
• This
• Or This
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