1. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 3 Classic Theories of Economic Development

2. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-2 Development as Growth and the Linear-Stages Theories n Rostow’s stages of growth n The Harrod-Domar growth model n Obstacles and constraints n Some criticisms of the stages model

3. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-3 Rostows Stages of Growth n Traditional Society, Preconditions for take off, Take off, Maturity, Mass consumption n Idea still relevant: Take-off into self- sustained growth as a structural change in the dynamics of economic development

4. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-4 (3.1) (3.2) (3.3) (3.4) The Harrod-Domar Model

5. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-5 The Harrod-Domar Model (3.5) (3.6) (3.7)

6. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-6 Ideas still relevant n Investment as a key proximate cause of growth n Today: Broadening the Definition of Capital: health and education as Human Capital

7. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-7 Structural-Change Models n The Lewis theory n Evaluation

8. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-8 Figure 3.1

9. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-9 Figure 3.2

10. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-10 Evaluation n Key Ideas: –Development as Structural Change into „Modern“ sectors –Surplus labour, Dual Economy n Criticisms: –Surplus agricultural labour (vs. Surplus urban labour) ? –Competitive modern labour markets? –Labor saving technical progress! –Deminishing returns in Modern sector?

11. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-11 The International-Dependence Revolution n The neocolonial dependence model n The false-paradigm model n The dualistic-development thesis n Evaluation

12. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-12 Neocolonial dependence n Rich, powerful center and poor, powerless periphery n Underdevelopment as dependent capitalism –Development depends on outside influences in periphery –These may be negative, and prevent catching up (Development of underdevelopment) n Comprador Classes

13. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-13 False Paradigm n Intellectual Dominance of the west leads to irrelevant or harmful theories

14. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-14 Dualistic Development n Permanency of dualistic structures in and between countries

15. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-15 Evaluation n Coexistence of seemingly dualistic regions (Africa?, Latin America?) with regions leaving poverty (historically: Russia, presently: China, India)

16. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-16 The Neoclassical Counterrevolution n Challenging the state-driven model n Traditional neoclassical growth theory n Conclusions and implications

17. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-17 Challenging the state driven model n Free market approach –Free markets allocate resources best to investment (equipment, human capital, R&D) –Imperfections are of little consequence n Public choice approach –market failures (monopolies, externalities) have to be compared to state failures (interest groups, bureaucratic self-interest, etc.) n Market-friendly approach –In LDC´s market failures are particularly heavy. –The states role is to make markets work

18. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-18 The (neo)institutionalist view n Wealth-creation is driven by deepening the division of labour

19. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-19 Division of Labor n Increased Specialization –= increasing use of economies of scale –= exploiting comparative advantages n Implication: increased exchange

20. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-20 The division of property rights n E.g. –Rent (Property/ownership) –Joint Stock Co. (Property/Management) –Labor contract (Property/Ownership) contrast: slavery –Loan (temporary separation) n Idea: assignment of rights to the “best” = “highest utility” user

21. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-21 Evaluation n A general theory of economic wealth creation n No specific role for markets/state as a mechanism in principle at this level of generality n A guiding structure of thought, not a recipe book

22. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-22 Traditional growth theory n Solow Growth model

23. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-23 Figure A3.1

24. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-24 Figure A3.2

25. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-25 Evaluation

26. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-26 Theories of Development: Reconciling the Differences n Development economics has no universally accepted paradigm n Insights and understandings are continually evolving n Each theory has some strengths and some weaknesses

27. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-27 Concepts for Review n Autarky n Average product n Capital-labor ratio n Capital-output ratio n Capital stock n Center n Closed economy n Comprador groups n Dependence n Dominance n Dualism n Endogenous growth n False-paradigm model n Free market n Free-market analysis

28. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-28 Concepts for Review (cont’d) n Harrod-Domar growth model n Lewis two-sector model n Marginal product n Market-friendly approach n Necessary condition n Neoclassical counterrevolution n Neocolonial dependence model n New institutionalism n New political economy approach n Open economy

29. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-29 Concepts for Review (cont’d) n Patterns-of- development analysis n Periphery n Production function n Public choice theory n Savings ratio n Self-sustaining growth n Solow neoclassical growth model n Stages-of-growth model of development n Structural-change theory n Structural transformation n Sufficient condition

30. Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-30 Concepts for Review (cont’d) n Surplus labor n Traditional neoclassical growth theory n Underdevelopment