Download Development Theory and Growth Strategies

Objectives today
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Discuss how potential
sources of growth are
used in theories of
economic
development
Economic Growth and
Development Theories
Classical model
 Growth stage theories
 Dual economy models
 Dependency theories
 Exogenous growth theories
 Endogenous growth theories
 Transactions costs/collective action
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Classical Model (late 1700’s & early 1800’s)
(Malthus)
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Wages are at subsistence level
Favorable event leads to capital accumulation
Increased demand for labor
Wages in short run
Population growth
Demand for food
Land fixed so food prices , real wages
population
This (Classical) Model failed to
consider the following factors and
therefore did not predict correctly:
Factors which lower birth rates
 Technological progress
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Therefore, in Classical model, law of
diminishing returns constrains
growth in the long run
Growth stage theories
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Fred List (mid 1800’s) – stages based on
shifts in occupational distribution
 Savage
 Pastoralism
 Agriculture
 Agriculture
and manufacturing
 Agr., manufacturing, and commerce
He called for import substitution
Growth stage theories (continued)
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Karl Marx (late 1800’s) – stages based on changes in
technology, property rights, and ideology
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Primitive communism
Ancient slavery
Medieval feudalism
Industrial capitalism
Socialism and communism
He felt class struggles drive classes through these stages.
One class has land and capital. Other class has labor.
Growth stage theories (continued)
W. W. Rostow (1950’s)
 Traditional society
 Precondition for takeoff
 Takeoff
 Drive to technological maturity
 Age of high mass consumption
*Sectors decline due to declining income and
price elasticities of demand
*Capital accumulation and technological change
will lead to emergence of leading sectors
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Growth stage theories (continued)
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Colin Clark (1930’s)
 Agriculture
 Manufacturing
 Tertiary
or services
Growth results from:
 Increased
output per worker in any sector
 Workers moving from sectors with low
output per worker to high output per worker
Technological change important
Harrod-Domar model (1950)
Savings leads to economic growth
 Output per unit of capital up leads to
economic growth
Led policymakers to focus on capital-led
industrial growth
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The H-D model: g=s/k where:
g = rate of growth in national income
s = savings rate
k = ratio of capital to output
Main features of labor-surplus
dual-economy model
2 sectors – agriculture & industry
 Marginal product of labor in agriculture
 Wage rate in agriculture equals average
product of labor in agriculture
 Land fixed
 Wage rate higher in industrial sector
 Marginal product of labor in industry
equals the wage rate
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(features continued)
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Labor moves from agriculture to industry
Profits reinvested in capital items resulting in
greater M P & demand for labor
Shifts in M P of labor creates more profits, etc.
This happens as long as marginal cost of labor
is constant
If marginal cost of labor (wage rate) goes up,
profits stop increasing as fast and eventually
the process stops.
Traditional (Ag.) Sector
Agricultural
Total
Product
Modern (Ind.) Sector
Industrial
Total Product
Redundant labor
0
Labor
Agricultural
Marginal
Product
0
Labor
Industrial
Marginal
Product
Marginal
product
curve
P1
P0
P2
Q
P3
Profit
P
W
Wages
0
N3
N2
N1
N0 Labor
0
L0
L1
L2
L4
Labor
Why might the marginal cost(supply)
curve of labor turn up?
Surplus labor used up so industry must
offer higher wages
 Supply of food does not keep up with the
demand for food so wages must rise
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What does this say about the need for
technological progress in agriculture?
Weaknesses in the model
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Says nothing about the cost of moving people
and food
May not have excess labor in some countries
Says nothing about cost of and how to
develop the agricultural sector
Assumes profits reinvested in labor-intensive
industries (what if not invested or invested in
capital-intensive industries due to subsidies)?
Ignores international trade
Can extend model to open
economy
If natural resources are poor: can export
labor-intensive industrial goods (examples:
Taiwan & Korea) and import food
 If natural resources rich: can export
agricultural products and use foreign
exchange to develop industry
(examples: Thailand
& Malaysia)
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Dependency theories (1950’s, 60’s,
70’s
Center – developed countries and elites
within developing countries
 Periphery – poor in developing countries
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Center develops at the expense of the
periphery
Why dependency?
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Center has monopoly power
Low price and income elasticities for goods
produced by the periphery
High price elasticity of demand for goods
imported by the periphery from the center
Result: periphery receives less and less for
exports and pays more and more for imports
Dependency theory
suggests that countries
become self-sufficient
What do you think?
Lessons from each theory
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Classical theory – savings & capital investment
important
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Growth stage theories – structural change with
development
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Class struggles over distribution
Dual economy theories – food is important wage good
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Diminishing returns to labor
Surplus labor may facilitate capital formation
Technological change in agriculture important
Dependency theories – interdependent world
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History important
Political and social power important
More Recent Development
Thinking
Role of Human capital
 Importance of Institutional differences
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 Rule
of law
 Enforceable property rights
 Need to minimize policy distortions
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Importance of freely flowing information
Transactions costs, Collective
Action, and Institutions
Costs of transacting are key obstacles
holding countries back from developing.
 Transactions costs include the costs of
adjustment, information, measuring
attributes, and negotiating, monitoring, and
enforcing contracts
 Because of these costs, people take
advantage of others
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Transactions costs, Collective
Action, and Institutions (continued)
People often act collectively to influence
public decisions in ways that help them but
hurt society at large
 Therefore with transactions costs and
collective action, institutions and asset
distribution matter
 Need institutions to control behavior
through property rights, laws, and policies
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Conclusions
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Agriculture can provide labor, food, and capital
for overall economic development
Rising food prices relative to industrial prices is a
symptom of the need to invest in new
technologies for agriculture
In light of transactions costs and collective
action, and societies that become less personal
as development occurs, institutions are needed
that establish and enforce the “rules of the
game”