Download Securing and Sustaining Economic Growth within an Open

Economics of Development
ASHESI UNIVERSITY COLLEGE , FALL 2011
Stephen E Armah
E-mail: [email protected]
Growth Measurement: Growth Rate of an
Economy

The growth Rate of an economy simply is a measure of movements in
both a positive or negative direction from any given time period, e.g.
GDP was 100 in year one, now its 105 in year two.

Mathematically growth rate of X is the change in X from the first year to
the second year, divided by the value of X in the first year.

Let t designate the first year and t+1 the second year.
Mathematically we can call the observations
X t and Xt+1 ,
This gives us an equation of:

Growth Measurement: Growth Rate of an
Economy

growth rate (g) = (Xt+1 – X
t
)/ X
t
IN-CLASS-EXERCISE

Using our example of year 1= 100 and year 2 = 105 calculate

The annual growth rate!= [(105-100) /100 ]*100 = 0.05* 100 = 5%

if year 1= 120 and year 2 = 135 calculate

The annual growth rate!

= [(135-120) /120 ]*100 = 0.125* 100 = 12.55%
Growth Measurement: Growth Rate of an
Economy






Compounding growth Rate:
This helps us to determine that is an economy is growing at a certain
average growth rate, then how long will it take that economy to double its
growth.
The mathematical approximation for dealing with growth rates is the RULE
OF 72.
THE RULE IS A FORMULA FOR ESTIMATING THE AMOUNT OF TIME IT
TAKES SOMETHING TO GROWING AT A GIVEN RATE TO DOUBLE.
FORMULA = doubling time = 72/g,
Where g is the percentage annual growth rate.
EXERCISE
 E.g. if an economy is growing at an annual rate of 2% it will double in
approx. 36 years!
 What is Ghana’s current PPP adjusted GDP? Ghana’s growth rate from
2000-2010 was roughly 5.5%. Assuming Ghana is growing at 5.5% now,
how long will it take for GDP to double
The Theories of Economic Development


1.
2.
3.
4.
Here we would historicize the concept of development and explore the
various theories propounded to explain how and why development does
or does not take place
There are 4 major competing theories:
The Linear-stages of Growth theories
Theories and patterns of structural change
International dependency theory
The Neoclassical, free market theory
1.



The Linear-stages of Growth theories
During the 1950’s and early 1960’s, Theorist viewed the process of
development as a series of successive stages of economic growth through
which all countries must pass
This approach followed an economic theory of development where the
right quantity and mixture of saving, investment, and foreign Aid were all
that was needed to enable countries proceed along a growth path
historically followed by the more developed economies
Development is here synonymous with rapid aggregate economic
growth!!!!
Economic Growth and Economic Development


If growth benefits a small number of people within the economy it cannot
be regarded as Development
World Development Report: The challenge of Development is to improve
the quality of life. A better quality of life encompasses as ends in
themselves better education, higher standards of health and nutrition,
less poverty, cleaner environment, more equality of opportunity (gender
balance).
Can there be development without growth? NO!
Economic Growth is a necessary but not sufficient condition for
development (improvement in welfare of people)
Development Economics is therefore a unique branch of the broader discipline of
Economics, with a broader scope.
This includes being concerned with the efficient allocation of scarce
resources as well as dealing with the economic, social, political and
institutional mechanisms necessary to bring about rapid and large scale
improvements in the levels of people
2.


Theories and patterns of structural change
This linear stages approach was strongly challenged in the 1970’s by
structural change thinking
This involved the use of modern economic theory and quantitative
techniques to explain the internal processes of structural change
that a typical developing country must undergo to sustain a process of
rapid economic growth



The structural change model focuses on the mechanism by which
underdeveloped economies transform their domestic economic
structures from a heavy emphasis on traditional subsistence Agric to
a more modern , urbanized and diversified economy
Here the accumulation of capital both human and physical are
deemed as important to the development process
This approach was championed by Lewis, Chenery et al.
3.


International dependency theory
Another strong but highly ‘controversial’ theory of development which also
evolved in the 1970’s was the Dependency Theory
The theory is political in orientation and views development in terms of
domestic and international power relationships, institutional and
structural rigidities.


Dependency theorist emphasized on external and internal institutional and
political constraints on economic development
Emphasis was placed on the need for new policies to provide for
egalitarian objectives, e.g. employment for all, importantly economic
growth is not given the exalted status as in the linear theory




In this theoretical conception the relationship between the developed
countries (Centre) and the developing countries (periphery) is assigned as
the main basis for underdevelopment
In Ghana this still enjoys an unfavourably high air time (couched in the
whole colonialism debate)
Whilst not discounting this theory, it’s a dangerous way of explaining
development since externalizes cause and effect
Champions include A. Gunder Frank, Cardozo
4.




The Neoclassical, free market theory
In the 1980’s and the 1990’s the neoclassical/neoliberal thinking prevailed
and reigned supreme
Their ethos was rooted in free markets, open economies, the privatization
of inefficient public enterprises
Here slow or the lack of development is not due to exploitative external
and internal forces but rather a case of excessive government
intervention in the economic growth process
Focus is to minimize the role of government in the economic process!!!
A middle Ground?

It is important to note that to a certain degree there is some inherent
wisdom in all theories discussed, however Analyzing contemporary
economies of developing countries, one can find strands or elements of each
theory in these countries