3. classic theories of economic growth and development

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Chapter 3

ClassicTheories of

EconomicGrowth andDevelopment


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Copyright 2012 Pearson Addison-Wesley. All rights reserved.3-2

3.1 Classic Theories of EconomicDevelopment: 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 inear!"ta#es Theories

A Classic tatement! "ostow#s tages of$rowth

%arrod-&omar $rowth 'odel (sometimes

referred to as the A) model*


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The $arrod!Domar %odel


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The $arrod!Domar %odel


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Criticisms of the "ta#es %odel

Necessar+ versus sufficient conditions


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3.3 "tructural!Chan#e %odels

The Lewis two-sector model


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Fi#ure 3.1The Lewis'odel of'odern-ector$rowth in aTwo-ectorurplus-Laor

conom+


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Criticisms of the ewis %odel

"ate of laor transfer and emplo+mentcreation ma+ not e proportional to rate ofmodern-sector capital accumulation

urplus laor in rural areas and fullemplo+ment in uran.

Institutional factors.

Assumption of diminishing returns in

modern industrial sector


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Fi#ure 3.2 The Lewis 'odel 'odified + LaorsavingCapital Accumulation! mplo+ment Implications


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Empirical &atterns of Development !E'amples

witch from agriculture to industr+ (andservices*

"ural-uran migration and urani/ation

tead+ accumulation of ph+sical andhuman capital

Population growth first increasing and then

decreasing with decline in famil+ si/e


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3.( The )nternational!Dependence*evolution

The neocolonial dependence model

0 Legac+ of colonialism, 1ne2ual power, Core-peripher+

The false-paradigm model

0 Pitfalls of using 3e4pert5 foreign advisors who misappl+

developed-countr+ models The dualistic-development thesis

0 uperior and inferior elements can coe4ist6 Preisch-inger %+pothesis

Criticisms and limitations

0 &oes little to show how to achieve development in apositive sense6 accumulating countere4amples


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3.+ The ,eoclassical Counterrevolution:%ar-et Fundamentalism

Challenging the tatist 'odel! 7ree 'arkets, PulicChoice, and 'arket-7riendl+ Approaches0 7ree market approach

0 Pulic choice approach

0 'arket-friendl+ approach

'ain Arguments

0 &enies efficienc+ of intervention

0 Points up state owned enterprise failures

0 tresses government failures

0 Traditional neoclassical growth theor+ - with diminishingreturns, cannot sustain growth + capital accumulationalone


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3. Classic Theories of Development:*econcilin# the Differences

$overnments do fail, ut so do markets6 a alance isneeded

'ust attend to institutional and political realities indeveloping world

&evelopment economics has no universall+ acceptedparadigm

Insights and understandings are continuall+ evolving

ach theor+ has some strengths and some weaknesses


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Concepts for *eview

Autark+

Average product

Capital-laor ratio

Capital-output ratio

Center

Closed econom+

Compradorgroups

&ependence

&ominance

&ualism

7alse-paradigm model

7ree market

7ree-market anal+sis

%arrod-&omar growthmodel

Lewis two-sector model

'arginal product

'arket failure


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Concepts for *eview /cont0d

'arket-friendl+ approach

Necessar+ condition

Neoclassicalcounterrevolution

Neocolonial dependencemodel

Net savings ratio

New political econom+approach

8pen econom+

Patterns-of-developmentanal+sis

Peripher+

Production function

Pulic-choice theor+

elf-sustaining growth

olow neoclassical growth

model tages-of-growth model ofdevelopment

tructural-change theor+

tructural transformation

ufficient condition urplus laor

1nderdevelopment


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Appendi' 3.1: Components of EconomicGrowth

Capital Accumulation, investments inph+sical and human capital

0 Increase capital stock

$rowth in population and laor force Technological progress

0 Neutral, laor9capital-saving, laor9capitalaugmenting


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Fi#ure A3.1.1 ffect of Increases in Ph+sical and %uman"esources on the Production Possiilit+ 7rontier


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Fi#ure A3.1.2 ffect of $rowth of Capital tock andLand on the Production Possiilit+ 7rontier


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Fi#ure A3.1.3 ffect of Technological Change in theAgricultural ector on the Production Possiilit+7rontier


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Fi#ure A3.1.( ffect of Technological Change in theIndustrial ector on the Production Possiilit+ 7rontier


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Appendi' 3.2: The "olow,eoclassical Growth %odel

( ),Y F K L =

( ),1 or ( )Y L f K L y f k = =

y Ak=

( ) ( )sf k n k = +

( ) ( )k sf k n k = +

( )1

( ) ( ) ( ) ( )Y t Y t A t L t =


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Appendi' 3.2 The "olow,eoclassical Growth %odel

( ) ( ) (A3.2.4)k sf k n k = +


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Appendi' 3.2 The "olow,eoclassical Growth %odel

( *) ( ) * (A3.2.5)sf k n k= +


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Fi#ure A3.2.1 2uilirium in the olow$rowth 'odel


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Fi#ure A3.2.2 The Long-"un ffect of Changing theaving "ate in the olow 'odel


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Appendi' 3.3: Endo#enous GrowthTheor

'otivation for the new growth theor+

The "omer model

Y AK L K i i i= 1

Y AK L= + 1

[ ]1N

g n

=

3. classic theories of economic growth and development

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