TodaroSmith_EconDev_ch043

7/24/2019 TodaroSmith_EconDev_ch043

1/42

Copyright 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 3

Classic Theories of

Economic Growth

and Development


2/42

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


3/42

Development as Growth and Linear-

Stages Theories

Marshall Plan:

US financial & technical assistance for Europe to

rebuild economy


4/42

Copyright 2009 Pearson Addison-Wesley. All rights reserved. 3-4

Development as Growth and Linear-

Stages Theories

Rostows Stages of Growth

Traditional Society

The pre condition for take off

The take off

Drive to maturity

The age of high mass consumption


5/42

Harrod Domar Growth Model

Mobilization of domestic and foreign saving

Investment leads to more growth can be

described in terms of Harrod Domar GrowthModel. It is also referred as AK model.

Every economy must save certain % of itsnational income.

Capital stock is necessary to increase economicgrowth.


6/42

Harrod Domar Growth Model

Assumption

Direct relationship between size of total stock

K and total GNP Y

K/Y ratio is 3


7/42Copyright 2009 Pearson Addison-Wesley. All rights reserved. 3-7

sYS =

KI =

(3.1)

(3.2)

YkK = (3.3)

IS = (3.4)

The Harrod-Domar Model



The Harrod-Domar Model

IKYksYS ==== (3.5)

YksY = (3.6)

k

s

Y

Y=

(3.7)



Criticisms of the Stages Model

Necessary versus sufficient conditions

Low savings

Low level of capital formation



Structural-Change Models

Underdeveloped economies transfer their

domestic structure from a traditional subsistence

agriculture to a more modern, urbanized sector It employees tools of neoclassical price and

resource allocation theory


11/42

Two Well-known Approach

The Lewis two-sector model ( surplus Labour)

by W. Arthur Lewis

Pattern of Development by Hollis B



Figure 3.1 The Lewis Model of Modern-

Sector Growth in a Two-Sector Surplus-

Labor Economy



Criticisms- Lewis Model

Rate of labor transfer and employment creationmay not be proportional to rate of modern-sectorcapital accumulation

Surplus labor in rural areas and full employmentin urban?

Institutional factors?

Assumption of diminishing returns in modernsector



Figure 3.2 The Lewis Model Modified by

Laborsaving Capital Accumulation:

Employment Implications


15/42


The International-Dependence

Revolution

Three major streams of thought:

The neocolonial dependence model

It is an indirect outgrowth of Marxist thinking. Underdevelopment is due to a highly unequal

international capitalist system of rich country- poor

country relationship.

Rich nations are intentionally exploitative or

unintentionally neglectful.


16/42


Revolution

Unequal power relationships between the Center

( Advanced countries) and Periphery ( LDCs)

Elite class who enjoys high income, social statusand political power whose principal interest is in

the perpetuation of the international capitalist

system of inequality and conformity in whichthey are rewarded.


17/42


Revolution

Directly and indirectly, they serve and are

rewarded by international special-interest power

groups ( WB, IMF, MNCs, Donor agencies) Agriculture income tax, RGST, Subsidy,

PIA, Railway, Pakistan Steel, KESC


18/42


Revolution

The false-paradigm model

Faulty and inappropriate advice ( privatization, SAP,

increase Taxes, MP, FP) Leading university intellectuals, trade unionist, high

level government economists, and civil servants get

their training in developed countries.

elegant concept but inapplicable model ( free market

economy, No govt. intervention)


19/42


Revolution

In economics courses irrelevant western

concepts

Too much emphasis on K/Y , S, I , Privatizationand increase GDP growth rates


20/42


Revolution

The dualistic-development thesis

World of dual societies, of rich nations and poor

nations. Dualism represents the existence and persistence

of substantial and even increasing divergence

between rich and poor nations as well as peoplesat various level.


21/42


Revolution

Four key arguments

Superior and inferior elements can coexist

It is not a temporary phenomenon

Increasing

It may actually serve to push it down.

Conclusions and implications

No insight on development, empirical evidence


22/42

The Neoclassical Counterrevolution:Market Fundamentalism

Supply side macroeconomic policies

Rational Expectation Theories

Free Markets

Privatization

Controlled Vote by IMF, WB, WTO


23/42


In conjunction with ILO, UNDP, UNCTAD

Central argument

Underdevelopment results from poor resourcesallocation due to incorrect pricing policies and

too much state intervention.

Sugar Prices, Wheat and rice support prices,PIA, Railway, KESC, WAPDA, Steel Mill


24/42


Underdevelopment is not because of developed

countries and international agencies.

Underdevelopment is because of the heavyhand of state and corruption, Inefficiency, and

lack of economic incentives


25/42


Challenging the statist model

Free market approach: Markets alone are

efficient. Competition is effective, if not perfect

Technology is freely available and costless to

absorb

Information is also perfect.


26/42



Public choice approach( new political economyapproach): Argue that government can donothing right.

Elites use political influence to obtain specialbenefits ( rents) from government policies thatrestrict to access important resources.

Politician use government resources toconsolidate and maintain positions of power andauthority.


27/42


Bureaucrats and public officials use their

positions to extract bribes from rent seeking

citizens and to protect businesses on the side. Misallocation of scarce resources CNG, Rental

Power


28/42


Market-friendly approach: Recognizes that there are

many imperfections in LDC product and factor

markets and governments do have a key role to play

in facilitating the operation of markets throughnonselective( market friendly) interventions.

Physical and social infrastructure

Health Care

Education


29/42


Traditional neoclassical growth theory

Argues that Liberalization ( oening up) of

national markets draws additional doestic andforeign investment

Solow model

Conclusions and implications institutional and political realities in developing

world


30/42


Theories of Development:

Reconciling the Differences

Development economics has no universally

accepted paradigm

Insights and understandings are continuallyevolving

Each theory has some strengths and some

weaknesses


31/42


Case Study: South Korea and

Argentina


32/42


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


33/42


Figure A3.1.1 Effect of Increases in Physical and

Human Resources on the Production Possibility

Frontier


34/42


Figure A3.1.2 Effect of Growth of Capital

Stock and Land on the Production

Possibility Frontier


35/42


Figure A3.1.3 Effect of Technological

Change in the Agricultural Sector on the

Production Possibility Frontier


36/42


Figure A3.1.4 Effect of Technological

Change in the Industrial Sector on the

Production Possibility Frontier


37/42


Appendix 3.2: The Solow

Neoclassical Growth Model

( ),Y F K L =

( ),1 or ( )Y L f K L y f k = =

y Ak=

( ) ( )sf k n k = +

( ) ( )k sf k n k = +

( )1

( ) ( ) ( ) ( )Y t Y t A t L t

=


38/42


Appendix- Solow Growth Model

( ) ( ) (A3.2.4)k sf k n k = +


39/42


Appendix- Solow Growth Model

( *) ( ) * (A3.2.5)sf k n k= +


40/42


Figure A3.2.1 Equilibrium in the

Solow Growth Model


41/42


Figure A3.2.2 The Long-Run Effect of

Changing the Saving Rate in the Solow

Model


42/42

Appendix 3.3: Endogenous

Growth Theory

Motivation for the new growth theory

The Romer model

Y AK L K i i i= 1

Y AK L= + 1

[ ]1N

g n

=

Documents

TodaroSmith_EconDev_ch043