0. Lecture 3: Growth Theories I
Economic Development
Lecture 3: Growth Theories I

1. Overview Development economics theory: A short history
Linear Stages Theory
Rostow’s Stages of Growth
Harrod-Domar Growth Model
Structural-change Model
Lewis Theory of Development
Patterns of Development Analysis

2. Development economics theory: A short history
Marshall Plan
Structural Change
Neoclassical Growth
Endogenous Growth
International Dependence
Linear-Stages
Contemporary Theories
WWII
50s
60s
70s
80s
90s
00s

3. Linear Stages Growth Rostow’s Stages of Growth 1/ Traditional
2/ Preconditions for take-off
3/ Take-off
4/ Drive to maturity
5/ High mass consumption
Principle strategy to move through the stages was capital accumulation

4. Linear Stages Growth S = sY I = ΔK k = ΔK / ΔY
Harrod Domar Growth Model (‘AK model’)
S = sY
I = ΔK
k = ΔK / ΔY
I = ΔK = kΔY = sY = S
Divide by Y and k:
ΔY/Y = s/k
Additional output growth from an additional unit of investment is 1/k

5. Case Study: Bhutanese Farmer

6. Case Study: Bhutanese Farmer

7. Case Study: Bhutanese Farmer

8. Harrod Domar Growth Model
Linear Stages Growth
Harrod Domar Growth Model
What is desirable?
High I
High savings rates
Lower capital to output ratios
better technology
lower capital transaction costs
Lower capital depreciation rates

9. Harrod Domar Growth Model
Linear Stages Growth
Harrod Domar Growth Model
What is problematic?
Low levels of technology
Little ability to save
Lack of FDI to plug savings gap
High S and I is a necessary, but not sufficient condition for growth

10. Structural-change Model
Lewis Theory of Development
‘Two-sector’ model
Agricultural/traditional
Modern/industrial
Transfer of labour from the traditional to the modern sector, accumulation of capital

11. Structural-change Model
Lewis Theory of Development
Assumptions
Large pools of surplus labour in agriculture
Wages constant (but different) in each sector
Owners of modern sector capital (‘capitalists’) reinvest all of their profits

12. Lewis Theory of Development

13. Structural-change Model
Lewis Theory of Development
Criticisms
What if capitalists invest in non-labour intensive industries?

14. Structural-change Model

15. Structural-change Model
Lewis Theory of Development
Criticisms
K not reinvested – conspicuous consumption
Increased income inequality
Is there surplus labour?
Increases in modern sector wages
Assumes diminishing returns in modern sector, but what about returns to scale?

16. Structural-change Model
Lewis Theory of Development
Conclusions
Consistent with the linear stages theory
Focus on investment and accumulation of capital
However, like linear stages theory, did not recognise that increased savings and investment were necessary but not sufficient conditions for growth