Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 3 Classic Theories of Economic Development.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Chapter 3

Classic Theories of Economic Development

Copyright © 2006. Pearson Addison-Wesley. All rights reserved. 3-2

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


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


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)


Ideas still relevant

Investment as a key proximate cause of growth

Today: Broadening the Definition of Capital: health and education as Human Capital


Structural-Change Models

The Lewis theory Evaluation


Figure 3.1


Figure 3.2


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?


The International-Dependence Revolution

The neocolonial dependence model The false-paradigm model The dualistic-development thesis Evaluation


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


False Paradigm

Intellectual Dominance of the west leads to irrelevant or harmful theories


Dualistic Development

Permanency of dualistic structures in and between countries


Evaluation

Coexistence of seemingly dualistic regions (Africa?, Latin America?) with regions leaving poverty (historically: Russia, presently: China, India)


The Neoclassical Counterrevolution

Challenging the state-driven model Traditional neoclassical growth theory Conclusions and implications


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


The (neo)institutionalist view

Wealth-creation is driven by deepening the division of labour


Division of Labor

Increased Specialization– = increasing use of economies of scale– = exploiting comparative advantages

Implication: increased exchange


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


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


Traditional growth theory

Solow Growth model


Figure A3.1


Figure A3.2


Evaluation


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


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


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



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



Surplus labor Traditional

neoclassical growth theory

Underdevelopment

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 3 Classic Theories of Economic Development.

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