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Chapter 3
Classic Theories of Economic Growth and
Development
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3.1 Classic Theories of Economic Development: Four Approaches
• Linear stages of growth model• Theories and Patterns of structural change• International-dependence revolution• Neoclassical, free market counterrevolution
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3.2 Development as Growth and Linear-Stages Theories
• A Classic Statement: Rostow’s Stages of Growth
• Harrod-Domar Growth Model (sometimes referred to as the AK model)
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The Harrod-Domar Model - Simplified Version
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The Harrod-Domar Model - Simplified Version
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• Equation 3.7 is also often expressed in terms of gross savings, in which case the growth rate is given by
(3.7’)
where δ is the rate of capital depreciation • But there is now growing evidence of “per capita
income convergence,” weighting changes in per capita income by population size
• (Also, in chapter 3, we return to examine the concept of conditional convergence when we study the Solow model)
The Harrod-Domar Model – Incorporating Capital Depreciation
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Criticisms of the Stages Model
• Necessary versus sufficient conditions
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3.3 Structural-Change Models
• The Lewis two-sector model
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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 of the 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 and full employment in urban?
• Institutional factors?• Assumption of diminishing returns in
modern industrial sector
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Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications
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Empirical Patterns of Development - Examples
• Switch from agriculture to industry (and services)
• Rural-urban migration and urbanization• Steady accumulation of physical and human
capital• Population growth first increasing and then
decreasing with decline in family size
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3.4 The International-Dependence Revolution
• The neocolonial dependence model– Legacy of colonialism, Unequal power, Core-periphery
• The false-paradigm model– Pitfalls of using “expert” foreign advisors who misapply
developed-country models• The dualistic-development thesis
– Superior and inferior elements can coexist; Prebisch-Singer Hypothesis
• Criticisms and limitations– Does little to show how to achieve development in a
positive sense; accumulating counterexamples
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3.5 The Neoclassical Counterrevolution: Market Fundamentalism
• Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches– Free market approach– Public choice approach– Market-friendly approach
• Main Arguments – Denies efficiency of intervention– Points up state owned enterprise failures– Stresses government failures– Traditional neoclassical growth theory - with diminishing
returns, cannot sustain growth by capital accumulation alone
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3.6 Classic Theories of Development: Reconciling the Differences
• Governments do fail, but so do markets; a balance is needed
• Must attend to institutional and political realities in developing world
• 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• Center• Closed economy• Comprador groups• Dependence• Dominance
• Dualism• False-paradigm model• Free market• Free-market analysis• Harrod-Domar growth
model• Lewis two-sector model• Marginal product• Market failure
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Concepts for Review (cont’d)
• Market-friendly approach• Necessary condition• Neoclassical
counterrevolution• Neocolonial dependence
model• Net savings ratio• New political economy
approach• Open economy• Patterns-of-development
analysis• Periphery
• Production function• Public-choice theory• Self-sustaining growth• Solow neoclassical growth
model• Stages-of-growth model of
development• Structural-change theory• Structural transformation• Sufficient condition• Surplus labor• Underdevelopment
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Appendix 3.1: Components of Economic Growth
• Capital Accumulation, investments in physical and human capital– Increase capital stock
• Growth in population and labor force• Technological progress
– Neutral, labor/capital-saving, labor/capital augmenting
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Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier
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Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier
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Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier
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Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier
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Appendix 3.2 The Solow Neoclassical Growth Model
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Appendix 3.2 The Solow Neoclassical Growth Model
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Appendix 3.2 The Solow Neoclassical Growth Model
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Figure A3.2.1 Equilibrium in the Solow Growth Model
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Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow Model
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Appendix 3.3 Endogenous Growth Theory
• Motivation for the new growth theory• The Romer model