Case Study 2.0

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Chapter 3 Classic Theories of Economic Growth and Development

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3.1 Classic Theories of Economic Development: Four Approaches

Linear stages of growth model

Theories and Patterns of structural change

International-dependence revolution

Neoclassical, free market counterrevolution

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3.2 Development as Growth and Linear-Stages Theories

A Classic Statement: Rostow’s Stages of Growth

Harrod-Domar Growth Model (sometimes referred to as the AK model)

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The Harrod-Domar Model - Simplified Version

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The Harrod-Domar Model - Simplified Version

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Equation 3.7 is also often expressed in terms of gross savings, in which case the growth rate is given by

(3.7’)

where δ is the rate of capital depreciation

But there is now growing evidence of “per capita income convergence,” weighting changes in per capita income by population size

(Also, in chapter 3, we return to examine the concept of conditional convergence when we study the Solow model)

The Harrod-Domar Model – Incorporating Capital Depreciation

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Criticisms of the Stages Model

Necessary versus sufficient conditions

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3.3 Structural-Change Models

The Lewis two-sector model

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Figure 3.1 The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labor Economy

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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

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Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications

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Empirical Patterns of Development - Examples

Switch from agriculture to industry (and services)

Rural-urban migration and urbanization

Steady accumulation of physical and human capital

Population growth first increasing and then decreasing with decline in family size

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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

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3.5 The Neoclassical Counterrevolution: Market Fundamentalism

Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches

Free market approach

Public choice approach

Market-friendly approach

Main Arguments

Denies efficiency of intervention

Points up state owned enterprise failures

Stresses government failures

Traditional neoclassical growth theory - with diminishing returns, cannot sustain growth by capital accumulation alone

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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

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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

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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

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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

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Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier

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

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Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier

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Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier

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Appendix 3.2 The Solow Neoclassical Growth Model

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Appendix 3.2 The Solow Neoclassical Growth Model

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Appendix 3.2 The Solow Neoclassical Growth Model

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Figure A3.2.1 Equilibrium in the Solow Growth Model

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

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Appendix 3.3 Endogenous Growth Theory

Motivation for the new growth theory

The Romer model

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( ),Y F K L  =

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

()

,1 or ()YLfKLyfk= =

y Ak=

( ) ( )sf k n k = +

( ) ( )k sf k n k =  +

( )1( ) ( ) ( ) ( )Y t Y t A t L t  =

( ) ( ) (A3.2.4)k sf k n k =  +

( *) ( ) * (A3.2.5)sf k n k= +

Y AK L Ki i i=   1

Y AK L= +   1

[ ]1 N

g n   

 =  