31 Classic Theories of Economic Development Four Approaches Linear stages of growth model Theories and Patterns of structural change Internationaldependence revolution Neoclassical free market counterrevolution ID: 1028385
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1. Chapter 3Classic Theories of Economic Growth and Development
2. 3.1 Classic Theories of Economic Development: Four Approaches Linear stages of growth modelTheories and Patterns of structural changeInternational-dependence revolutionNeoclassical, free market counterrevolution
3. 3.2 Development as Growth and Linear-Stages TheoriesA Classic Statement: Rostow’s Stages of GrowthHarrod-Domar Growth Model (sometimes referred to as the AK model)
4. The Harrod-Domar Model - Simplified Version
5. The Harrod-Domar Model - Simplified Version
6. 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
7. Criticisms of the Stages ModelNecessary versus sufficient conditions
8. 3.3 Structural-Change ModelsThe Lewis two-sector model
9. Figure 3.1 The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labor Economy
10. Criticisms of the Lewis ModelRate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulationSurplus labor in rural areas and full employment in urban?Institutional factors?Assumption of diminishing returns in modern industrial sector
11. Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications
12. Empirical Patterns of Development - ExamplesSwitch from agriculture to industry (and services)Rural-urban migration and urbanizationSteady accumulation of physical and human capitalPopulation growth first increasing and then decreasing with decline in family size
13. 3.4 The International-Dependence RevolutionThe neocolonial dependence modelLegacy of colonialism, Unequal power, Core-peripheryThe false-paradigm modelPitfalls of using “expert” foreign advisors who misapply developed-country modelsThe dualistic-development thesisSuperior and inferior elements can coexist; Prebisch-Singer HypothesisCriticisms and limitationsDoes little to show how to achieve development in a positive sense; accumulating counterexamples
14. 3.5 The Neoclassical Counterrevolution: Market FundamentalismChallenging the Statist Model: Free Markets, Public Choice, and Market-Friendly ApproachesFree market approachPublic choice approachMarket-friendly approachMain Arguments Denies efficiency of interventionPoints up state owned enterprise failuresStresses government failuresTraditional neoclassical growth theory - with diminishing returns, cannot sustain growth by capital accumulation alone
15. 3.6 Classic Theories of Development: Reconciling the DifferencesGovernments do fail, but so do markets; a balance is neededMust attend to institutional and political realities in developing worldDevelopment economics has no universally accepted paradigmInsights and understandings are continually evolvingEach theory has some strengths and some weaknesses
16. Concepts for ReviewAutarkyAverage productCapital-labor ratioCapital-output ratioCenterClosed economyComprador groupsDependenceDominanceDualismFalse-paradigm modelFree marketFree-market analysisHarrod-Domar growth modelLewis two-sector modelMarginal productMarket failure
17. Concepts for Review (cont’d)Market-friendly approachNecessary conditionNeoclassical counterrevolutionNeocolonial dependence modelNet savings ratioNew political economy approachOpen economyPatterns-of-development analysisPeripheryProduction functionPublic-choice theorySelf-sustaining growthSolow neoclassical growth modelStages-of-growth model of developmentStructural-change theoryStructural transformationSufficient conditionSurplus laborUnderdevelopment
18. Appendix 3.1: Components of Economic Growth Capital Accumulation, investments in physical and human capitalIncrease capital stockGrowth in population and labor forceTechnological progressNeutral, labor/capital-saving, labor/capital augmenting
19. Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier
20. Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier
21. Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier
22. Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier
23. Appendix 3.2 The Solow Neoclassical Growth ModelKey change from HD (AK) model substitution between capital and labor and DMR K is stock of human and/or physical capitalA is productivity of labor, grows exogenously is a positive amount (say, 10%)Set to 1/L Y(t)
24. Appendix 3.2 The Solow Neoclassical Growth ModelF(k) is concave meaning increasing at decreasing rateF(k) exhibits DMR, not in HD modelwhere Everything measured in quantities per workerLabor productivity growth or Solor Residual, A, occurs at rate
25. Figure A3.2.1 Equilibrium in the Solow Growth Model
26. Appendix 3.2 The Solow Neoclassical Growth ModelK/L or k, grows when (s) > what is needed for capital widening (nk), which is providing the existing amount of k to net new workers joining the labor force + and the amount of capital needed to service depreciation (k) K, total capital stock, grows with savings (s) > depreciation ()
27. Appendix 3.2 The Solow Neoclassical Growth ModelSteady StateAssume A, labor productivity, remains constantk*, capital per work (K/L) stable equilibriumConclusion: final paragraph, page 156Then, set
28. Figure A3.2.1 Equilibrium in the Solow Growth Model
29. Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow Model
30. Appendix 3.3 Endogenous Growth TheoryMotivation for the new growth (endogenous) theoryMixed performance of neoclassical theoriesExternal shocks or technical change necessary (FDI, human investment, etc.)Rising output always temporary; Convergence to zero growthCannot analyze causes of technological advanceCannot explain large residual differences across countriesMarket reforms of LDCS and no convergence
31. Appendix 3.3 Endogenous Growth TheorySolow (exogenous, Neoclassical) vs. Romer (endogenous)Structural similaritiesDMR (Solow) vs. IR (endogenous)Spillovers impact rate of return (endogenous)(Y=AK) No force leading to equilibrium of growth ratesNo income catch-up based on savings rates (prolonged income gap)
32. Appendix 3.3 Endogenous Growth TheorySolow (exogenous, neoclassical) vs. Romer (endogenous)New growth theory explains technological change as an endogenous outcome of public and private investments in human capital and knowledge-intensive industries.
33. Appendix 3.3 Endogenous Growth TheoryThe Romer modelGrowth derives from the firm or industry, economy-wide capital stock, affects output at industry level, which leads to IRSCapital stock is knowledge and a public good, which spills over inter-industry
34. Appendix 3.3 Endogenous Growth TheoryThe Romer model - where = output growth rate and n = population growth rate- > 0, therefore g– n > 0