ECO 102 Development Economics Aisha Khan Summer 2009 Section G & I Lecture eight

Classic theories of development Chapter Four

Most development literature was developed post World War II The linear stages of growth model Theories and patterns of structural change The international dependence revolution Neo-classical, free market counter revolution

Linear stages theories Rostow’s stages of growth Harrod-Domar Growth model

Rostow’s stages of Growth Traditional society Preconditions for take-off into self-sustaining economic growth Take-off The drive to maturity The age of high mass consumption Countries needed to follow the right steps to achieve the next stage

Harrod-Domar model Investment leads to more growth (necessary for takeoff) Capital stock (K) Total GNP (Y) Capital-output ration (k) Savings ratio (s)

Harrod-Domar model Constraint Necessary vs sufficient Increasing ‘s’ will increase GNP growth rate Main constraint  that even with increasing ‘s’  the capital output ratio is the same This is because of the low level of new capital formation Necessary vs sufficient More savings and investment is not a sufficient condition Lacking attitudes, managerial competence intelligent development

Structural change models Lewis theory of development “Two-sector surplus labor” Patterns of development

Lewis theory of development Surplus-labor countries Agricultural production function Only variable input  labor Capital and technology is fixed Assumptions Surplus labor allows MP to be zero All rural workers share equally  wage is determined by AP

Lewis theory of development Industrial production functions Only variable input  labor Capital and technology is fixed

Reinvestment from the industrialists causes capital to increase  TP curves move upwards Wages are fixed at a higher level than rural wages and employers can hire infinite numbers due to excess labor Labor employed will be where Wm = MP MP of the manufacturing sector is equal to the demand for labor More investment from the capitalists allows more capital stock and thus more labor employed Achieves self-sustaining growth

Criticism of Lewis Assumes that the rate of labor transfer is equal to the rate of modern-sector capital accumulation Much evidence that there is increasing returns in the industrial sector

Instead of investment in the same sort of capital as before we believe that investment goes into more labor-saving techniques which cause the demand for labor to pivot such that more total product can be produced but at the same time the same wage and same labor employed. This allows us to see that the greater surplus in earnings goes to the owners or few industrialists and does not actually change the status of the poorer.

Criticism of Lewis Assumes that there is surplus labor in rural areas but full employment in urban areas Assumes the guarantee that a constant wage will always be supplied in the industrial sector Assumes diminishing returns in the industrial sector

Patterns of development Sequential process -> set of interrelated changes Through cross-sectional and time-series analysis Include the shift from agricultural to industrial production steady accumulation of capital change in consumer demands from food to manufactured g&s growth of urban areas decline in family size and popn growth

International dependence revolution Neocolonial dependence model The false-paradigm model The dualistic-development thesis

Neocolonial dependence model Center  developed countries Periphery  LDC’s Organizations help reinforce this structure Perpetuation of underdevelopment

Case-Study: Pakistan What are the true statistics?

Reminder Quiz 2  Monday, May 25th 2009