Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 3 Classic Theories of Economic Growth and Development

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-2 Chapter 3: Summary Outline: Theories of Economic Growth & Development Linear Stage of Growth (Harrod-Domar Model Structural change theories (Lewis Model) International –dependence revolution (Marxist/Radical Model) Neoclassical-free market re-surgence Can differences in thinking be re-conciled? Explaining Growth- Application of Production Possibilities Curve (PPC) Illustrating growth using PPC, efficiency, trade offs,technological change New Growth Theory-Solow Model ( labor quality or human capital). What about institutions. They are ignored in these models. Measuring Development (Perkins chapter 2)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-3 Class Theories of Economic Development – Four Approaches Linear stages of growth model Theories and Patterns of structural change International-dependence revolution Neoclassical, free market counterrevolution

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-4 Development as Growth and Linear-Stages Theories Rostow’s Stages of Growth: Historical stages Harrod Domar Growth Model: Emphasis on Physical Capital.

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-5 (3.1) (3.2) (3.3) (3.4) The Harrod-Domar Model

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-6 The Harrod-Domar Model (3.5) (3.6) (3.7)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-7 Criticisms of the Stages Model Necessary versus sufficient conditions

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-8 Structural-Change Models The Lewis two-sector model Modern and traditional sector

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-9 Figure 3.1 The Lewis Model of Modern- Sector Growth:Two-Sector Surplus- Labor Economy

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Criticisms- Lewis Model Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation. Growth in modern sector may not draw enough labor. Surplus labor in rural areas and full employment in urban? Institutional factors? These assumptions are not correct. Assumption of diminishing returns in modern sector

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications

Copyright © 2009 Pearson Addison-Wesley. All rights reserved The International-Dependence Revolution: Radical/Marxist Model The neoclassical dependence model – Unequal power, core-periphery The false-paradigm model – Using “expert” advisors The dualistic-development thesis – Superior and inferior elements can coexist; – center-periphery (sociologist’s view) Conclusions and implications – No insight on development, empirical evidence

Copyright © 2009 Pearson Addison-Wesley. All rights reserved The Neoclassical Counterrevolution: Market Resurgence Challenging the statist model – Free market approach – Public choice approach – Market-friendly approach Traditional neoclassical growth theory – Solow model Conclusions and implications – institutional and political realities in developing world

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Theories of Development: Reconciling the Differences Development economics has no universally accepted paradigm? But everything does not go? Insights and understandings are continually evolving: Lessons from experience & history Each theory has some strengths and some weaknesses: But there are better theories tested with reality of evidence and experience

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Case Study: South Korea and Argentina

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Concepts for Review (cont’d) Lewis two-sector model Marginal product Market-friendly approach Necessary condition Neoclassical counterrevolution Neocolonial dependence model New institutionalism New political economy approach Open economy Patterns-of Development analysis

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Concepts for Review (cont’d) Periphery Production function Public choice theory Savings ratio Self-sustaining growth Solow neoclassical growth model Stages-of-growth model of development Structural-change theory Structural transformation Sufficient condition Surplus labor

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Concepts for Review (cont’d) Traditional neoclassical growth theory Underdevelopment

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Appendix 3.1: Components of Economic Growth Capital Accumulation, investments in physical and human capital – Increase capital stock – GNP= Q(L,K)= F(L,K) Growth in population and labor force Technological progress – Neutral, labor/capital-saving, labor/capital augmenting – GNP= F(L, K, T)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier (PPF)- Model

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier (PPF): Explaining Economic Growth

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Appendix 3.2: The Solow Neoclassical Growth Model: Considers human capital or labor quality & productivity

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Appendix- Solow Growth Model

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Appendix- Solow Growth Model

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure A3.2.1 Equilibrium in the Solow Growth Model

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow Model

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Appendix 3.3: Endogenous Growth Theory: Accounts for labor quality, technology, productivity Motivation for the new growth theory The Romer model