Transcript Chapter 3
Chapter 3 Classic Theories of Economic Growth and Development Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Classic Theories of Economic Development – Four Approaches 1. Linear stages of growth models 2. Theories and Patterns of structural change 3. International-dependence revolution 4. Neoclassical, free market counterrevolution Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-2 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 The Harrod-Domar Model S sY (3.1) Savings rate s I K (3.2) Invest = ΔCapital K kY (3.3) Capital/Output = k SI (3.4) Closed Economy Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-14 The Harrod-Domar Model S sY kY K I (3.5) sY kY (3.6) Y s Y k (3.7) Growth rate of GDP = savings rate/capital-output ratio => To increase GDP growth, increase s (or foreign S) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-15 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? Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-16 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 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1978 Chen (2002) 1983 1988 1993 1998 Constant (2004-05) Rupees per Person per Month Rural vs. Urban Consumption 1,200 Rural 1,052 Urban 1,000 NSSO 779 800 559 600 405 400 200 0 1972-73 2004-05 Figure 3.1 The Lewis Model of ModernSector Growth in a Two-Sector SurplusLabor Economy Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-29 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 urbanrural divide. Chapter 7: Todaro Model Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-30 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 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-31 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 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-32 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 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-33 Case Study: South Korea and Argentina Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-34 Concepts for Review • • • • • • • • Autarky Average product Capital-labor ratio Capital-output ratio Center Closed economy Comprador groups Dependence Copyright © 2009 Pearson Addison-Wesley. All rights reserved. • Dominance • Dualism • False-paradigm model • Free market • Free-market analysis • Harrod-Domar growth model 3-35 Concepts for Review (cont’d) • Lewis two-sector model • Marginal product • Market-friendly approach • Necessary condition • Neoclassical counterrevolution Copyright © 2009 Pearson Addison-Wesley. All rights reserved. • Neocolonial dependence model • New institutionalism • New political economy approach • Open economy • Patterns-of Development analysis 3-36 Concepts for Review (cont’d) • • • • • • Periphery Production function Public choice theory Savings ratio Self-sustaining growth Solow neoclassical growth model Copyright © 2009 Pearson Addison-Wesley. All rights reserved. • Stages-of-growth model of development • Structural-change theory • Structural transformation • Sufficient condition • Surplus labor 3-37 Concepts for Review (cont’d) • Traditional neoclassical growth theory • Underdevelopment • You are NOT responsible for the appendices Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-38