Classic Theories of Economic Growth and … Theories of Economic Growth and ... 3-2 Classic Theories of Economic Development – Four Approaches 1. ... Michael P. Todaro
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Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
Chapter 3
Classic Theories
of Economic
Growth and
Development
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-2
Classic Theories of Economic
Development – Four Approaches
1. Capital accumulation (Harrod-
Domar)
2. Theories and Patterns of structural
change (Lewis)
3. International-dependence revolution
4. Neoclassical, free market
counterrevolution
Observation:
• LDCs have much less capital per worker
than rich countries.
• “Capital” = machinery and equipment
• Result: Lower productivity of labor
• And thus Lower wages/incomes.
• LDCs are poor because they
lack capital
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sYS
KI
(3.1) Savings rate s
(3.2) Invest = ΔCapital
YkK (3.3) Capital/Output = k
IS (3.4) Closed Economy
The Harrod-Domar Model
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The Harrod-Domar Model
IKYksYS (3.5)
YksY (3.6)
k
s
Y
Y
(3.7)
Growth rate of GDP = savings rate/capital-output ratio
=> To increase GDP growth, increase s (or foreign S)
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Criticisms of the Harrod-Domar
Model
• Necessary versus sufficient conditions
• Is Saving necessary for growth?
– Not if foreign investment or foreign aid (World
Bank Loans, etc.)
• Is Saving (Investment) sufficient for growth?
– Are there institutions to channel savings to
productive uses: a well-functioning financial
system or government plan?
Observation:
LDCs often have two quite different sectors:
1. Traditional (subsistence) agriculture
Low K/L, low Land/L, “old” technology
(NOT: tractors or combines, hybrid seeds,
chemical fertilizer, pesticides, herbicides)
Result: VERY low productivity and
incomes
“Modern” Industrial Sector
• Higher K/L, more modern technology than
traditional sector (tho often low by rich
country standards)
• Result: Higher productivity and incomes
• Also: Large Urban-Rural gaps in income
result in migration to the cities
Urban-Rural Income Ratio:
China
1.8
2.0
2.2
2.4
2.6
2.8
3.0
1978 1983 1988 1993 1998Chen (2002)
Rural vs. Urban Consumption
405
559
779
1,052
0
200
400
600
800
1,000
1,200
1972-73 2004-05
Co
ns
tan
t (2
00
4-0
5)
Ru
pe
es
pe
r P
ers
on
pe
r M
on
th Rural Urban
NSSO
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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 - 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 (no) and full employment in urban (no)?
• Institutional factors (unions, min wage)?
• Assumption of diminishing returns in modern sector (agglomeration economies)
• BUT: Captures some elements of urban-rural divide. Chapter 7: Todaro Model
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The International-Dependence
Revolution • The neoclassical dependence model
– Unequal power, core-periphery (exploitation)
• The false-paradigm model
– Using “expert” advisors who give wrong advice (true!)
• The dualistic-development thesis
– Superior and inferior elements can coexist (true)
• Implications
– Autarky (end exploitation by “neocolonialists”)
– State led development: SOEs, central planning,
regulation
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The Neoclassical
Counterrevolution • Challenging the statist model of government led
development
– Central planning, SOEs, etc, not usually successful
– Free market approach
– Public choice approach (not: government is “bad;”
rather, what incentives for politicians/bureaucrats)
• Criticism of Neoclassical Counterrevolution:
– Institutional and political realities in developing world
differ from Western world
• assume property rights and functioning court systems
• ignore power relationships of traditional social systems based
on caste, gender, elites
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Theories of Development:
Reconciling the Differences • 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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Case Study: South Korea and
Argentina
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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
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Concepts for Review (cont’d)
• Lewis two-sector
model
• Marginal product
• Market-friendly
approach
• Necessary condition
• Neoclassical
counterrevolution
• Neocolonial
dependence model
• New institutionalism
• New political
economy approach
• Open economy
• Patterns-of
Development analysis
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Concepts for Review (cont’d)
• Periphery
• Production function
• Public choice theory
• Savings ratio
• Self-sustaining growth
• Solow neoclassical
growth model
• Stages-of-growth
model of development
• Structural-change
theory
• Structural
transformation
• Sufficient condition
• Surplus labor
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Concepts for Review (cont’d)
• Traditional neoclassical growth theory
• Underdevelopment
• You are NOT responsible for the
appendices
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