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Chapter 3
Classic Theories
of Economic
Growth and
Development
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
Classic Theories of Economic
Development – Four Approaches
1. Linear stages of growth models
2. Theories and Patterns of structural
change
3. International-dependence revolution
4. Neoclassical, free market
counterrevolution
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Observation:
•
•
•
•
LDCs have much less capital per worker
than rich countries.
“Capital” = machinery and equipment
Result: Lower productivity of labor
And thus Lower wages/incomes.
• LDCs are poor because they
lack capital
The Harrod-Domar Model
S  sY
(3.1) Savings rate s
I  K
(3.2) Invest = ΔCapital
K  kY
(3.3) Capital/Output = k
SI
(3.4) Closed Economy
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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
(3.7)
Growth rate of GDP = savings rate/capital-output ratio
=> To increase GDP growth, increase s (or foreign S)
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Criticisms of the Harrod-Domar
Model
• Necessary versus sufficient conditions
• Is Saving necessary for growth?
– Not if foreign investment or foreign aid (World
Bank Loans, etc.)
• Is Saving (Investment) sufficient for growth?
– Are there institutions to channel savings to
productive uses: a well-functioning financial
system or government plan?
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Observation:
LDCs often have two quite different sectors:
1. Traditional (subsistence) agriculture
Low K/L, low Land/L, “old” technology
(NOT: tractors or combines, hybrid seeds,
chemical fertilizer, pesticides, herbicides)
Result: VERY low productivity and
incomes
“Modern” Industrial Sector
• Higher K/L, more modern technology than
traditional sector (tho often low by rich
country standards)
• Result: Higher productivity and incomes
• Also: Large Urban-Rural gaps in income
result in migration to the cities
Urban-Rural Income Ratio:
China
3.0
2.8
2.6
2.4
2.2
2.0
1.8
1978
Chen (2002)
1983
1988
1993
1998
Constant (2004-05) Rupees
per Person per Month
Rural vs. Urban Consumption
1,200
Rural
1,052
Urban
1,000
NSSO
779
800
559
600
405
400
200
0
1972-73
2004-05
Figure 3.1 The Lewis Model of ModernSector Growth in a 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
• Surplus labor in rural areas (no) and full
employment in urban (no)?
• Institutional factors (unions, min wage)?
• Assumption of diminishing returns in
modern sector (agglomeration economies)
• BUT: Captures some elements of urbanrural divide. Chapter 7: Todaro Model
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The International-Dependence
Revolution
• The neoclassical dependence model
– Unequal power, core-periphery (exploitation)
• The false-paradigm model
– Using “expert” advisors who give wrong advice (true!)
• The dualistic-development thesis
– Superior and inferior elements can coexist (true)
• Implications
– Autarky (end exploitation by “neocolonialists”)
– State led development: SOEs, central planning,
regulation
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The Neoclassical
Counterrevolution
• Challenging the statist model of government led
development
– Central planning, SOEs, etc, not usually successful
– Free market approach
– Public choice approach (not: government is “bad;”
rather, what incentives for politicians/bureaucrats)
• Criticism of Neoclassical Counterrevolution:
– Institutional and political realities in developing world
differ from Western world
• assume property rights and functioning court systems
• ignore power relationships of traditional social systems based
on caste, gender, elites
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Theories of Development:
Reconciling the Differences
• Development economics has no
universally accepted paradigm
• Insights and understandings are
continually evolving
• Each theory has some strengths and
some weaknesses
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Case Study: South Korea and
Argentina
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Concepts for Review
•
•
•
•
•
•
•
•
Autarky
Average product
Capital-labor ratio
Capital-output ratio
Center
Closed economy
Comprador groups
Dependence
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• Dominance
• Dualism
• False-paradigm
model
• Free market
• Free-market analysis
• Harrod-Domar growth
model
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Concepts for Review (cont’d)
• Lewis two-sector
model
• Marginal product
• Market-friendly
approach
• Necessary condition
• Neoclassical
counterrevolution
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• Neocolonial
dependence model
• New institutionalism
• New political
economy approach
• Open economy
• Patterns-of
Development analysis
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Concepts for Review (cont’d)
•
•
•
•
•
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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
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Concepts for Review (cont’d)
• Traditional neoclassical growth theory
• Underdevelopment
• You are NOT responsible for the appendices
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