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

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. Figure A Effect of Increases in Physical and Human Resources on the Production Possibility Frontier

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

26. Figure A Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier

27. Figure A Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier

28. Appendix 3.2: The Solow Neoclassical Growth Model

29. Appendix 3.2 The Solow Neoclassical Growth Model

30. Appendix 3.2 The Solow Neoclassical Growth Model

31. Figure A3.2.1 Equilibrium in the Solow Growth Model

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

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