Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 3 Classic Theories of Economic Development
Dec 18, 2015
Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
Chapter 3
Classic Theories of Economic Development
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Development as Growth and the Linear-Stages Theories
Rostow’s stages of growth The Harrod-Domar growth model Obstacles and constraints Some criticisms of the stages model
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Rostows Stages of Growth
Traditional Society, Preconditions for take off, Take off, Maturity, Mass consumption
Idea still relevant: Take-off into self- sustained growth as a structural change in the dynamics of economic development
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sYS
KI
(3.1)
(3.2)
YkK (3.3)
IS (3.4)
The Harrod-Domar Model
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The Harrod-Domar Model
IKYksYS (3.5)
YksY (3.6)
k
s
Y
Y
(3.7)
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Ideas still relevant
Investment as a key proximate cause of growth
Today: Broadening the Definition of Capital: health and education as Human Capital
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Structural-Change Models
The Lewis theory Evaluation
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Figure 3.1
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Figure 3.2
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Evaluation
Key Ideas: – Development as Structural Change into „Modern“
sectors– Surplus labour, Dual Economy
Criticisms:– Surplus agricultural labour (vs. Surplus urban labour) ?– Competitive modern labour markets?– Labor saving technical progress!– Deminishing returns in Modern sector?
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The International-Dependence Revolution
The neocolonial dependence model The false-paradigm model The dualistic-development thesis Evaluation
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Neocolonial dependence
Rich, powerful center and poor, powerless periphery
Underdevelopment as dependent capitalism– Development depends on outside influences in
periphery– These may be negative, and prevent catching
up (Development of underdevelopment) Comprador Classes
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False Paradigm
Intellectual Dominance of the west leads to irrelevant or harmful theories
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Dualistic Development
Permanency of dualistic structures in and between countries
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Evaluation
Coexistence of seemingly dualistic regions (Africa?, Latin America?) with regions leaving poverty (historically: Russia, presently: China, India)
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The Neoclassical Counterrevolution
Challenging the state-driven model Traditional neoclassical growth theory Conclusions and implications
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Challenging the state driven model
Free market approach– Free markets allocate resources best to investment
(equipment, human capital, R&D)– Imperfections are of little consequence
Public choice approach– market failures (monopolies, externalities) have to be
compared to state failures (interest groups, bureaucratic self-interest, etc.)
Market-friendly approach– In LDC´s market failures are particularly heavy.– The states role is to make markets work
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The (neo)institutionalist view
Wealth-creation is driven by deepening the division of labour
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Division of Labor
Increased Specialization– = increasing use of economies of scale– = exploiting comparative advantages
Implication: increased exchange
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The division of property rights
E.g.– Rent (Property/ownership)– Joint Stock Co. (Property/Management)– Labor contract (Property/Ownership)
• contrast: slavery
– Loan (temporary separation) Idea: assignment of rights to the
“best” = “highest utility” user
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Evaluation
A general theory of economic wealth creation
No specific role for markets/state as a mechanism in principle at this level of generality
A guiding structure of thought, not a recipe book
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Traditional growth theory
Solow Growth model
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Figure A3.1
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Figure A3.2
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Evaluation
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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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Concepts for Review
Autarky Average product Capital-labor ratio Capital-output ratio Capital stock Center Closed economy Comprador groups
Dependence Dominance Dualism Endogenous growth False-paradigm model Free market Free-market analysis
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Concepts for Review (cont’d)
Harrod-Domar growth model
Lewis two-sector model
Marginal product Market-friendly
approach Necessary condition
Neoclassical counterrevolution
Neocolonial dependence model
New institutionalism New political economy
approach Open economy
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Concepts for Review (cont’d)
Patterns-of-development analysis
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
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Concepts for Review (cont’d)
Surplus labor Traditional
neoclassical growth theory
Underdevelopment