economic theories equating development to growth

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ECONOMIC THEORIES

SOCIO 153~GROUP 1: Balagtas, Galapon, Maquimot, Pardo, Pinauin, Tiburcio, Ybanez

ECONOMICS

o

Came from Greek term oikonomia which means “household management, thrift”

o The branch of knowledge concerned with the production, consumption, and transfer of wealth.

o

Economics is the study of how people choose to use resources.

Resources include the time and talent people have available, the land, buildings, equipment

and other tools on hand, and the knowledge of how to combine them to create useful

products and services.

FOCUS: Economic theories that equate development with growth

o Rostow’s Stages of Economic Growth

o

Harrod-Domar Growth Model

o Lewis’ Theory of Economic Growth

HISTORICAL BACKGROUND

o

Late 1940’s to mid-1950’s

o Based on Keynesian Economics by John Maynard Keynes, which is a theory of total spending in the

economy (“aggregate demand”) and its effects on output and inflation

o

Keynesian Economics

Central tenet: government intervention can stabilize economy

Tenets: Aggregate demands is influenced by many economic decisions - public and private.

Prices, especially wages, respond slowly to changes in supply and demand.

Changes in aggregate demand, whether anticipated or unanticipated, have their greatest

short-run effect on real output and employment, not on prices.

o

Cold War

“...Competition between the superpowers for influence in the South: the US and other OECD

countries offered capitalist growth and modernization to counter the Soviet Union’s

proposal for socialist development.”

o Marshall Plan

On June 5, 1947, Secretary of State George C. Marshall issued a call for a comprehensiveprogram to rebuild Europe.

o Development studies that focused on underdeveloped countries and the idea that developed

countries should provide assistance to the underdeveloped countries arose.

MAIN PROPONENTS

o Walt Whitman Rostow

Born in New York City



In 1942, he joined the newly formed Office of Strategic Services, the precursor of Centra

Intelligence Agency

His inaugural lecture in the Oxford University was published in a book form

as The American Diplomatic Revolution (1946)

He attracted a wider audience in 1960 with the publication of The Stages of

Economic Growth: A Non-Communist Manifesto

Rostow became one of the closest advisers of Kennedy in the 1960 presidential nomination.

("Let's get this country moving again!“)

Rostow's association with Lyndon Johnson’s administration made him a primary target o

the antiwar movement.

o Roy F. Harrod

Born in Norfolk, England

Roy Harrod graduated from New College, Oxford

Roy Harrod is credited with getting twentieth-century economists thinking about economic

growth.

Died April 1 at Emerson Hospital in Concord, Mass., where he had lived for many years.

Harrod returned to Oxford to administer and teach at Christ Church College until his

retirement in 1967

Roy Harrod is credited with getting twentieth-century economists thinking about economic

growth.

Harrod was a close colleague of Keynes, and his official biographer. The Life of John

Maynard Keynes was a second, and only slightly less theoretical, product of Harrod’s long

association with Keynes.

o Evsey Domar

Leading theorist of economic growth and expert on comparative economic systems

Died April 1 at Emerson Hospital in Concord, Mass., of myelodysplasia, a bone marrow

disorder He was a developer of the Harrod-Domar model of economic growth, which predicts how

much people must save and invest to keep an economy growing.

o Arthur Lewis

In 1979, British citizen W. Arthur Lewis was awarded the Nobel Prize, along with Theodore

Schultz, for “pioneering research into economic development ... with particular

consideration of the problems of developing countries.”

He entered the London School of Economics on a scholarship at age eighteen.

He earned his Ph.D. from the London School of Economics in 1940.

One of Lewis’s major contributions to economics is a 1954 article that discusses his conceptof a “dual economy” in a poor country.

Lewis had no sympathy for the view that poor countries should be run by dictators so that

they could develop.

CONTENTS

o Linear Stages Theory

Rostow and Harrod-Domar

Viewed the process of development as a series of successive stages of economic growth

Mixture of saving, investment, and foreign aid was necessary for economic development



Emphasized the role of accelerated capital accumulation in economic development

o

I. Rostow’s Stages of Economic Growth

Rostow equates the concept of development with economic growth

It requires a country to identify its distinctive or unique economic resources.

The model puts forth the idea that a country can develop economically by concentrating on

resources in short supply to expand beyond local industries to reach the global market and

finance the country’s further development.

This is a linear theory of development. Economies can be divided into primary, secondary

and tertiary sectors. The history of developed countries suggests a common pattern of

structural change.

5 Stages:

1.

Traditional Society

Two Forms: Subsistence or Agrarian Society

The type of activities a subsistence or agrarian society undertakes is shaped

by the general topography and climate of the region they inhabit.

Limited Opportunity

This is due to remoteness, lack of capital, lack of travel and outside

experience by the local population, lack of education, knowledge and skills

and lack of motivation to do anything different.

2.

Transitional Stage

Beginning to Experience Some Development

The breaking out from traditional society is spurred on by government

investment in transport, social capital, and other infrastructure.

Improvement in Labor Quality

This is achieved through training and education. In this stage, savings and

investment grow.

3.

Take Off

Industrialization as impetusThe impetus of a developing economy is industrialization. Industrialization

increases with workers switching from the land to manufacturing. Growth is

concentrated in a few regions of the country and in one or two industries.

Supporting Industrialization

New political and social institutions are evolving to support

industrialization. Mobilization of domestic and foreign saving were done in

order to generate sufficient investment to accelerate economic growth.

More investment = More growth

4.

Drive to Maturity

High Standard of LivingGrowth is now supported by technological innovation. The general

population will be enjoying a reasonably high standard of living in primarily

urban environments, benefiting from the decades of vertical deepening of

the industrial base.

5. High Mass Consumption

There are certain primary types of industries that would remain within a

post industrial economy.

Have been able to maintain a strong competitiveness through accumulated

investment, continue to generate advantaged technology, higher education



and research institutions compliment the industry, a wide range of relevant

skilled workforce exists, and companies are domiciled within the country

Industries where early mover advantages still exist

Industries that still hold factor advantages because of exclusive access to

particular resources, and

Industries that serve the wealth and consumer sophistication of the nation

Underdeveloped countries: Those that are still in stage 1 and 2

Developing countries: Those that are in stage 3

Developed countries: Those that have reached the fourth stage

According to the model, each country is in one of these five stages of development. With

MDC’s in stage 4 or 5, whereas LDCs are in one of the t hree earlier stages. The model asserts

that today's MDC’s passed through the other stages in the past. For example, the U.S. was in

stage 1 prior to independence, stage 2 during the 1st half of the 1800’s, stage 3 during the

middle of the 1880’s, and stage 4 during the late 1800’s, before entering stage 5 during the

early 1900’s. The model assumes that LDCs will achieve development by moving along from

an earlier to a later stage.

o

II. Harrod-Domar Growth Model

Major Assumption: Domar suggests that the economy's rate of growth depends on:

the level of saving

the productivity of investment i.e. the capital output ratio

Developing countries have an abundant supply of labor (L). So it is a lack of physical capita

(K) that holds back economic growth and development.

o

More physical capital generates economic growth

Net investment leads to more capital accumulation, which generates higher output and

income.

Higher income then allows for higher levels of saving

Saving and Investmento The principal strategy for development is mobilization of saving and generation of

investment to accelerate economic growth. It explains the mechanism by which

investment leads to growth and investment comes from savings.

Rate of economic growth (GNP growth rate) is determined jointly by the ability of the

economy to save (savings ratio) and the capital-output ratio.

o III. Lewis’ Theory of Economic Growth

Many underdeveloped countries have dual economies with both a traditional agricultural

sector and a modern industrial sector.

Agricultural Sector

Subsistence nature

Characterized by low productivity, low incomes,low savings and considerable

underemployment

Zero marginal labor productivity

Industrial Sector

Assumed to be technologically advanced

High levels of investment in urban environment

High productivity sector into which labor from the subsistence sector is gradually

transferred



Modern industrial sector would attract workers from the rural areas because industrial

firms could offer wages that would guarantee a higher quality of life

As the level of labor productivity was so low in traditional agricultural areas, people leaving

the rural areas would have virtually no impact on output.

A growing industrial sector requiring labour provided the incomes that could be spent and

saved.

The Lewis model implies employment will expand until surplus labor is absorbed in the

modern or industrial sector.

This model is mainly used in development economics. It suggests that if developing

countries want to achieve economic growth, governments need to encourage saving, and

support technological advancements to decrease the economy’s capital output ratio.

CRITICISMS

o Rostow’s Stages of Economic Growth

Failed to propose work in a manner that would bridge economic history and economic

theory

Should have elaborated more on the concepts of stages

Failed to explain development experiences of countries other than the Western ones

It is mechanical and the stages become more of a classificatory system

o

Harrod-Domar Growth Model

Level of assumption, one being that there is no reason for growth to be sufficient to

maintain full employment

Model sees economic growth and development the same

Developing countries find it difficult to increase savings

Model implies poor countries should borrow to trigger economic growth

Ignores factors such as labor productivity, technological innovation and levels of corruption

o Lewis’ Theory of Economic Growth

Profits generated by industrial sector results in expansion

Agricultural sector wages start increasing

Capitalist profits may not be re-invested

Assumption of full employment in an urban area

economic theories equating development to growth

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