Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 3 Classic Theories of Economic Growth and Development

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Classic Theories of Economic Development: Four Approaches Linear stages of growth model; sometimes called “Capital Fundamentalism” Theories and Patterns of structural change International-dependence revolution Neoclassical, free market counter- revolution; sometimes called “Market Fundamentalism”

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Development as Growth and Linear- Stages Theories A classic statement: Rostow’s Stages of Growth A classic model: The Harrod Domar Growth Model (sometimes referred to as the AK model)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-4 The Harrod-Domar Model

Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-5 The Harrod-Domar Model

Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-6 Harrod-Domar Model: Including explicit treatment of depreciation And,

Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-7 So,

Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-8 Examples: Suppose s G =.125,  =.04, c =2.5 Then, But if s G =.175,  =.04, c =2.5 Then,

Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-9 Criticisms of the Stages Model Necessary versus sufficient conditions

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Structural-Change Models The Lewis two-sector model

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 3.1 The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labor Economy

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Criticisms of the Lewis Model Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation Surplus labor in rural areas and full employment in urban? Institutional factors? Assumption of diminishing returns in modern industrial sector

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Empirical Patterns of Development - Examples Switch from agriculture to industry (and services) Rural-urban migration and urbanization Steady accumulation of physical and human capital Change in consumption demand International trade Population growth first increasing and then decreasing with decline in family size

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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; Chronic, not transitional Criticisms and limitations –Does little to show how to achieve development in a positive sense; accumulating counterexamples (China, India, etc.)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved The Neoclassical Counterrevolution: Market Fundamentalism Challenging the statist model –Denies efficiency of intervention –Points up state owned enterprise failures –Stresses government failures (chapter 11) Traditional neoclassical growth theory –Solow model; with diminishing returns, cannot sustain growth by capital accumulation alone Conclusions and implications –institutional and political realities in developing world –Governments do fail, but so do markets; need balance

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Contributions and Limitations of the four schools Capital Fundamentalism –Points up importance of investment, and of efficiency of capital allocation –Investment may be necessary but is not sufficient. Broader context matters Structural/Empirical Patterns of Development –Careful empirical evidence can remove theories from contention –But, still need theory to interpret data, avoid cart-before-horse policies Dependency –Existing international relations/ trade/ investment can place constraints on pattern of development –But, growing number of counter-examples of stronger versions of dependency theory; good performance of “globally” integrated countries Market Fundamentalism –Governments fail (e.g. in SOEs, planning) and we must account for this –But, markets also fail in developing countries; the East Asia experience shows that government role can be constructive Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-17

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Appendix 3.1: Components of Economic Growth Capital Accumulation, investments in physical and human capital –Increase capital stock Growth in population and labor force

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Appendix 3.2: The Solow Neoclassical Growth Model

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure A3.2.1 Equilibrium in the Solow Growth Model

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow Model