Download ECON 317: ECONOMIC GROWTH AND DEVELOPMENT

ECON 317:
ECONOMIC GROWTH AND
DEVELOPMENT
CLASSIC THEORIES OF ECONOMIC
DEVELOPMENT: FOUR APPROACHES
 Development as growth and the linear-stages approach
The view that the process of development is a series of successive stages of economic
growth through which all countries must pass in order to develop.
 Structural-change models
Focused on emphasizing the internal process of structural change required for economic
growth and development
 The international-dependence revolution
Emphasized international and domestic institutional and political constraints on
development
 The neoclassical counter-revolution
The view that the lack of economic development is primarily the result of too much
governmental interference in the market and the lack of openness (trade-wise)
 The current thinking is eclectic, drawing on insights from the above approaches.
Development as Growth, and the LinearStages Approach
 Background: the success of the Marshall Plan and the historical
experience of the then industrial countries
 Rostow’s stages-of-growth model
Traditional society
Pre-conditions for take-off into self-sustaining growth
The take-off into self-sustaining growth
The drive to maturity
Age of high mass consumption
 Strengths and weaknesses of Rostow’s linear-stages model
Development as Growth, and the LinearStages Approach (II)
 The Harrod-Domar model of economic growth
𝑌=
𝐾
, 𝑤ℎ𝑒𝑟𝑒
𝑣
𝑌: 𝑜𝑢𝑡𝑝𝑢𝑡; 𝐾: 𝑐𝑎𝑝𝑖𝑡𝑎𝑙; 𝑎𝑛𝑑 𝑣: 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 − 𝑜𝑢𝑡𝑝𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
∆𝐾 = 𝐼 − 𝑑𝐾; 𝑎𝑛𝑑 𝑆 = 𝑠𝑌,
where s is the saving rate; and d is the rate of capital depreciation
(note: 0<s<1 and 0<d<1)
But, in equilibrium, 𝐼 = 𝑆
Thus, ∆𝐾 = 𝑠𝑌 − 𝑑𝐾
Given the above, the output growth rate is given by:
g=
∆𝑌
𝑌
𝑠
𝑣
= −𝑑
Development as Growth, and the LinearStages Approach (III)
 Lessons from the Harrod-Domar model
A very useful tool for economic policy making
In order to increase the growth rate of output, increase the saving
rate and/or use capital efficiently
 Strengths and weaknesses of the Harrod-Domar model
Structural-Change Models
 The “two-sector surplus labour” model of Arthur Lewis
The traditional sector
The modern sector
A major focus: the process of labour transfer and the growth in
output and employment in the modern sector
Figure 3.1
The Lewis
Model of
Modern-Sector
Growth in a
Two-Sector
Surplus-Labor
Economy
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
3-7
Criticisms of the Lewis Model
• Rate of labor transfer and employment creation may not
be proportional to rate of modern-sector capital
accumulation
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
3-8
Criticisms of the Lewis Model (II)
 The assumption of surplus labor in rural areas and full employment in
urban areas is highly doubtful;
 Institutional factors render the assumption of constant modern sector
wages unrealistic;
 The assumption of free geographical and occupational mobility of
labour can be questioned;
 In spite of the above drawbacks, the model is useful in highlighting
important aspects of the development process.
The International-Dependence Revolution
 The view that developing countries are faced with institutional,
political, and economic rigidities, and are caught up in a dependence
and dominance relationship with rich countries;
 Three main strands of the above view
The neo-colonial dependence model
The false-paradigm model
The dualistic-development view
The International-Dependence Revolution (II)
 The neo-colonial dependence model
A view that the global economic system is influenced mainly by
persistent and unequal relationships between rich (core) and poor
(periphery) countries;
The above is viewed as a legacy of colonialism
It’s also viewed as supported by influential elite groups in the
developing countries for whom such a relationship is rewarding;
This model thus, unlike the linear-stages and structural-change
models, sees underdevelopment as being externally induced.
The International-Dependence Revolution (III)
 The false-paradigm model
Attributes underdevelopment to the misapplication of developedcountry models
According to the model, the resulting policies can also serve the
interests of elite groups (domestic and international);
The role of higher education in the perpetuation of inappropriate
policy prescription.
The International-Dependence Revolution (IV)
 The dualistic-development thesis
Dualism, as a concept in development economics, refers to the
existence and persistence of two forms of a phenomenon, activity, or
entity, and where one of these forms can typically be viewed as being
“superior” and the other “inferior”;
Three main arguments of the concept of dualism:
Different sets of conditions can coexist in a given space
The coexistence is not temporary or transitional, but chronic;
There is a tendency for the degrees of superiority or inferiority to
widen.
The Neoclassical (Neoliberal) CounterRevolution - Market Fundamentalism
 Main argument: inefficient allocation of resources (via inappropriate
pricing policy and excessive state intervention) is the cause of
underdevelopment.
 Three strands of the neoclassical counter-revolution
Free market approach
Public choice (new political economy) approach
Market-friendly approach
The Neoclassical (Neoliberal) CounterRevolution - Market Fundamentalism (II)
 Free market approach
According to this approach, markets alone are efficient;
Assumes that markets in developing countries are efficient and that any
imperfections are minor;
Views any governmental/state intervention in the market as distortionary and
undesirable.
 Public choice theory
Assumes that politicians, bureaucrats, and citizens are primarily self-centred;
Highlights the failures of state-owned enterprises
It contends therefore that there is very little that governments can do right;
Advocates a very minimal role for the state.
The Neoclassical (Neoliberal) CounterRevolution - Market Fundamentalism (III)
 The market-friendly approach
Linked to the 1990s writings of the World Bank and its economists
Acknowledges the existence of many imperfections in LDC product
and factor markets;
Recognizes that governments have a key role to play in enhancing the
operation of markets;
Governments’ role must be market-friendly (non-selective)
Acknowledges that market failures are more widespread in LDCs in
areas such as investment coordination and environmental outcomes.
The Neoclassical (Neoliberal) CounterRevolution - Market Fundamentalism (IV)
 Traditional neoclassical growth theory (typified by Solow’s model)
A theoretical support to the neoclassical counter-revolution
The Solow growth model is an improvement on the Harrod-Domar
model via the significant roles given to labour and technology
𝑌 = 𝐹(𝐾, 𝐴𝐿)
Where Y is output, K is capital (physical and human), L is labour, and A
is the productivity of labour.
The Neoclassical (Neoliberal) CounterRevolution - Market Fundamentalism (V)
Output growth results from one or more of three factors:
Increases in labour (quantity and quality)
Increases in capital (via saving and investment)
Technological progress
The opening up of economies, by attracting foreign investment, has
the effect of increasing saving and investment rates, and
consequently per capita income;
Open economies tend to converge to higher per capita incomes,
compared to closed economies, especially since at lower capitallabour ratios, the returns on investments are higher.
Classic Theories of Development: Concluding Thoughts
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Governments do fail, but so do markets; a balance is needed
Must attend to institutional and political realities in developing world
Development economics has no universally accepted paradigm
Insights and understandings are continually evolving
Each theory has some strengths and some weaknesses