Transcript Development Economics

Development Economics
III
Prof. Dr. Hans H. Bass
Jacobs University, Spring 2010
Development Economics
Agenda Feb. 18
1.
Causes of and Strategies for Development: Traditional ...
1.1 Creating preconditions for take-off
1.1.1 Stages of growth
1.1.2 Harrod/Domar growth model
1.2 Structural change and modernization
1.2.1 Dual labor market model
1.2.2 Patterns of development
1.3 Overcoming dependency
1.4 Getting the prices right
2.
... and New
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1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.1 Stages of growth
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Stages of Economic
Growth
historical analogy
traditional society
pre-conditions for take-off into self-sustaining growth
take-off
drive to maturity
age of high mass consumption
“These stages are not merely descriptive. [...]
They have an inner logic [...]” (W. W. Rostow 1960)
 “Theory of Economic Growth”
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1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.1 Stages of growth
Take off (Rostow)
 I / GNP* > 10 %  I = S domestic + S external
Example Japan 1880  1930: 12%  25%
 At least one leading sector ( unbalanced growth with linkages)
above average growth of demand and supply
 income elasticity of demand εD,Y and ... supply εS,Y both > 1
significant share in the economy
transmittance of technological key innovations to other industries
strong backward and forward linkages
Example Japan: railways, textiles (cotton)
 Establishing the political, social and institutional framework conditions for
a modern industrial society
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1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.2 Harrod-Domar growth model
Harrod-Domar
growth model
national income Y = f (K, L), gY = ∆Y / Y
savings  investment (Y=C+S and Y=C+I)
savings S = s Y (attitudinal relation)
net investment I = ∆K
capital-output ratio k = K / Y (technical relation)
or: k = ∆K / ∆Y
or: ∆K = k ∆Y
S=I
or: S = s Y = k ∆Y = ∆K = I
or: s Y = k ∆Y
∆Y / Y = s / k
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1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.2 Harrod-Domar growth model
Harrod-Domar
growth model
In order to grow, economies must save and invest a certain
proportion of their GNI
gY = s / k
 The more they can save and invest, the faster they can grow
 However, the actual growth rate for any level of savings and
investment is determined by 1/k (the inverse of k, i.e.
capital productivity!)
Example:
s = 6%, k = 3, gY = 2%
 take-off: s = 15%, k = 3, gY = 5%
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1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.2 Harrod-Domar growth model
Harrod-Domar
growth model in practice
The savings gap can be filled by foreign aid, FDI, or loans
( Marshall Plan II) or forced saving (!)
However, capital accumulation necessary, but not sufficient
condition (Marshall plan II ≠ Marshall plan I)
 economic myopia
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1 Causes of and Strategies for Development:
Traditional
1.2 Structural change and modernization
1.2.1 Dual labor market model
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Dual labor market model
W. Arthur Lewis + Fei / Ranis, 1960s / early 1970s
Two sectors:
I) traditional, overpopulated rural subsistence, zero marginal
productivity of labor (“surplus labor”), wage rate according to
average product, unlimited supply of labor
II) modern industrial sector, profit-maximizing behavior of
enterprises, wage rate according to marginal product, perfectly
wage elastic supply of rural labor (supply curve: subsistence
wage plus premium) all profits being reinvested
upward spiral of self-sustaining growth until
modernization completed
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1 Causes of and Strategies for Development:
Traditional
1.2 Structural change and modernization
1.2.1 Dual labor market model
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Criticisms
no labor saving technology considered: possibility of antidevelopmental economic growth (increased inequality)
often no surplus labor in rural areas
until 1980s: tendency of urban wages to rise in spite of
open modern-sector unemployment
diminishing returns in the modern sector questionable
( New Growth Theory, external effects, but
complementary state investment in infrastructure etc.
necessary)
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1 Causes of and Strategies for Development:
Traditional
1.2 Structural change and modernization
1.2.1 Dual labor market model
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Dual labor market
model in practice
neglect of agriculture
neglect of urban informal sector
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1 Causes of and Strategies for Development:
Traditional
1.2 Structural change and modernization
1.2.2 Patterns of Development
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Patterns of development
analysis
Hollis Chenery et al. (late 1970s, early 1980s)
Similarity to simple stage models:
development = sequential process, S↑ I ↑ necessary
Difference:
S↑ I ↑ not sufficient!
Structural changes in socio-economic factors necessary
In practice: struggling for the right mix of policies
Criticism: lack of theoretical rigor can lead to wrong
intervention in assumed causal chains
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1 Causes of and Strategies for Development:
Traditional
1.3 Overcoming Dependency
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Dependency Theory
1970s, 2000f. (anti-globalization movement)
Causes for under-development: neo-colonial dependence,
intentionally exploitative or unintentionally neglectful
attitude of First World to Third World
Underdevelopment externally induced
In practice: De-linking, state-owned enterprises, and
industrial nationalism (import substitution industrialization
strategy ISI) / collective self-reliance
Criticism: Experiences all negative
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1 Causes of and Strategies for Development:
Traditional
1.4 Getting the Prices Right
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Market Fundamentalism
1990s
Causes for under-development:
incorrect pricing policies  too much state intervention, poor resource
allocation
New Political Economy  minimum government is best
Under-development internally induced
In practice I: Privatization, reduction of state intervention, integration
into the world economy according to static comparative advantages
In practice II: “Market-friendly approach”, non-selective interventions,
suitable climate for private enterprises
Criticism: Positive development examples were non-fundamentalist
during take-off (Germany, USA, Japan ... Taiwan, South Korea, China)
and developed dynamic comparative advantages by state involvement
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Causes of and Strategies for
Development
Conclusion
 each approach has its strengths and
weaknesses
(see case study on ROK and Argentina)
 no universally accepted paradigm
 traditional approaches have informed new,
eclectic approaches
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