Classic Theories of Economic Growth and Development Chapter 3 Classic Theories of Economic Growth and Development

3.4 The International-Dependence Revolution The neocolonial dependence model Legacy of colonialism, Unequal power, Core-periphery The false-paradigm model Pitfalls of using “expert” foreign advisors who misapply developed-country models The dualistic-development thesis Superior and inferior elements can coexist; Prebisch-Singer Hypothesis Criticisms and limitations Does little to show how to achieve development in a positive sense; accumulating counterexamples

The Neocolonial Dependence Model Extension of Marxist thinking Attributes underdevelopment to the historical evolution of rich country – poor country relationship Center – periphery relationship makes poor countries attempt at self reliance difficult or impossible Are rich countries intentionally exploitive? Or are they unintentionally neglectful

The Neocolonial Dependence Model Elite groups in society perpetuate inequality of international system This includes landlords, entrepreneurs, rulers, merchants, trade union leaders and high salaried public servants They serve and are rewarded by MNCs, bilateral agencies and donor agencies such IMF and WB (these agencies are tied to rich countries)

The Neocolonial Dependence Model Elite activities inhibit reform efforts that may lead to development Underdevelopment and poverty is attributed to policies in industrial countries that are enforced by a small and powerful comprador group Underdevelopment is externally induced Revolution is needed to break indirect and direct controls

The False-Paradigm Model Underdevelopment results from faulty and inappropriate advice provided by misinformed, biased and ethnocentric international experts advisors from MNCs and donor agencies Advise based on neoclassical models serve only local and international power groups

The False-Paradigm Model University intellects, trade unionist, government economists got training in developed countries who are taught alien concepts and inapplicable models Too much emphasis on: Capital-output ratios, savings rate, investment ratios, privatization and deregulation

The Dualistic Development Thesis Dual society of rich and poor countries There are four main arguments: Different sets of conditions can coexist in a given space International inequality is growing and is not a historical phenomenon that will be removed with time The gap between developed and developing countries is widening Superior elements do nothing to help inferior elements

Conclusions and Implications Advocates of neocolonial dependence theory rejects the exclusive emphasis on neoclassical economic theories Questions Arthur Lewis’ model Rejects the empirical pattern of development that should be pursued by developing countries Place emphasis on the international power imbalances

Conclusions and Implications They advocate for: Expropriation of privately owned assets provided that public ownership will more effectively eradicate poverty Accelerated pace of growth through domestic and international reforms

Criticisms Theory gave no insight into how countries initiate and sustain growth Countries that have pursued revolutionary campaigns of industrial nationalization and state run production has been mostly negative

Counter Examples Theories suggest a policy of autarky China and India that pursued such policy had to open their economy after periods of stagnant growth Countries that emphasize export have grown strongly Taiwan and South Korea Many cases, cases with close ties to metropolitan during colonial period produced damaging outcomes Peru under Spain Congo under Belgium India under Great Britain West Africa under France

3.5 The Neoclassical Counterrevolution: Market Fundamentalism Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches In the 1980’s conservative governments in USA, Canada, Britain and West Germany came with neoclassical counter-revolution in economic theory and policy In developed countries it was about: Supply-side macroeconomic policies Rational expectations theories Privatization of public corporations

3.5 The Neoclassical Counterrevolution: Market Fundamentalism In developing countries Freer markets Dismantling public ownership, statist planning and government regulation Neoclassicists got controlling votes in WB and IMF ILO, UNDP, UNCTAD lost influence

3.5 The Neoclassical Counterrevolution: Market Fundamentalism Main arguments: Underdevelopment is from poor resource allocation due to incorrect pricing policy and too much state intervention Growth can ensue from the free market approach Privatizing state owned enterprises Free trade and export expansion Welcome investors from developed countries Eliminate government regulations Eliminate price distortions in factor product and financial markets

3.5 The Neoclassical Counterrevolution: Market Fundamentalism They believe that developing countries are poor because of: Heavy hand of the state Corruption Inefficiency Lack of economic incentives What is needed include: Promote free trade Allow the “bullet of the market place” and the “invisible hand” to guide resource allocation Pointed to the East Asia Tigers success and to the failure of the public interventionist economies of Africa and Latin America

3.5 The Neoclassical Counterrevolution: Market Fundamentalism Neoclassical counterrevolution can be divided into: Free market approach: markets alone are efficient competition is effective Technology is freely available and almost costless to absorb Information is perfect and costless to obtain Government intervention is distortionary and counterproductive

3.5 The Neoclassical Counterrevolution: Market Fundamentalism Public choice approach Governments do nothing right They act in self interest, using their power to satisfy their own needs Misallocation of resources and reduction in personal freedom results from: People using political influence to gain favours Public officials exacting bribes State consfiscating private property

3.5 The Neoclassical Counterrevolution: Market Fundamentalism Market-friendly approach Associated with the 1990s writings of the World Bank Identify the imperfections in factor and product markets in developing countries Governments have a role to play through non selective interventions Investing in education, healthcare and suitable investment climate Acknowledge that market failures are wide spread in developing countries There are also missing and incomplete information

3.6 Classic Theories of Development: Reconciling the Differences 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

Concepts for Review Autarky Average product Capital-labor ratio Capital-output ratio Center Closed economy Comprador groups Dependence Dominance Dualism False-paradigm model Free market Free-market analysis Harrod-Domar growth model Lewis two-sector model Marginal product Market failure

Concepts for Review (cont’d) Market-friendly approach Necessary condition Neoclassical counterrevolution Neocolonial dependence model Net savings ratio New political economy approach Open economy Patterns-of-development analysis Periphery Production function Public-choice theory Self-sustaining growth Solow neoclassical growth model Stages-of-growth model of development Structural-change theory Structural transformation Sufficient condition Surplus labor Underdevelopment

Appendix 3.1: Components of Economic Growth Capital Accumulation, investments in physical and human capital Increase capital stock Growth in population and labor force Technological progress Neutral, labor/capital-saving, labor/capital augmenting

Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier

Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier

Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier

Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier

Appendix 3.2: The Solow Neoclassical Growth Model

Appendix 3.2 The Solow Neoclassical Growth Model

Appendix 3.2 The Solow Neoclassical Growth Model

Figure A3.2.1 Equilibrium in the Solow Growth Model

Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow Model

Appendix 3.3: Endogenous Growth Theory Motivation for the new growth theory The Romer model