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ECON 3508 Autumn 2015
Introduction to Economic Development
II. THEORIES OF GROWTH AND DEVELOPMENT
See Text, Chapter 3. (excluding appendices)
September 2015
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Agenda1. Introduction2. Stage Theorizing: Rostow3. Growth Theorizing: Harrod-Domar4. Structural Change: W. A. Lewis5. “Dependence” Theories: Prebisch; Frank6. Neo-Classical Approaches7. Mainstream Economics Approach
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1. Introduction
Brevity of the era in which “human development” as we know it, has been an important objective of public policy;
Reasons for Post WWII focus on “development”
The evolution of “Development Economics” and “Economics for Development”
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Rostow’s purpose;
Stages of Growth:Traditional Society; Preconditions for Take-Off; Take-Off; Drive to Maturity; High Mass Consumption
2. Rostow’s “Stages of Economic Growth”
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The “Take-Off”:
“The great watershed in the lives of most societies”Two types:
“Regions of Recent Settlement” (Canada, Australia, NZ….)“Older civilizations”
Beginning the “Take-Off”? Some sharp stimulus e.g. political revolution; major technological change, external challengeRequirements:
increase in net investment to 10% or more of GDPnew institutional structures; new elites and control of income flows; effective entrepreneurshipDevelopment of “Leading Sectors”
Types of leading sectors: UK: cotton, engineering, canals, railways,France, US, Canada, Russia: Railways widening the market
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Rostow: Actual Historical Stages, from “Take-Off”
to “High Mass Consumption”
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Critique of Rostow’s Schema:– General weakness of “stage theories”?– Ethnocentric?
• Would model from US, UK Europe be applicable everywhere?• Is “high mass consumption” stage the universal objective? (Rostow
amended this and added Stage #6: “The Search for Quality in Life”
– Is movement from stage to stage “uni-directional”? Or can take-offs fizzle and reverse?
But some of his ideas are interesting and have come to be taken for granted in our understanding of “development”: e.g. – role of Savings and Investment; – idea of leading sector; – some thoughts re social change– Importance of entrepreneurship
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3. The Harrod-Domar ModelDefinition of Variables: S: Savings Y: National Income or GDP Y: change in National income or GDP per year Y/Y = g, or the growth rate of GDP (i.e. the change in GDP as a
proportion of total GDPI: K or “Net Investment” (over and above replacement investment)K: Capital stock;s: S/Y, or net Savings;ICOR: Incremental Capital to Output Ratio, or “c”;
c” = K/ Y
Note: This was presented in class. Please see the textbook, pp. 121-124
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3. The Harrod-Domar Model
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Concepts of “Dualism” and “Structural Change”Historical and colonial aspects;Traditional societies, institutions and technologies
and “Modern” (or “western”) societies, institutions
and technologies
The range of “dualistic” theorizing
4. The “Lewis Model”
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Assumptions: Two SectorsTraditional: – Traditional Society; – L intensive; K-extensive; – abundant or surplus labour; – subsistence income; – disguised unemployment (Traditional agriculture and urban
informal economy)Modern Sector: – Technologically modern; – capital intensive; – “capitalistic”; – “modern” goods; (modern factories, plantations, mines, government services, professional services…)
4. The “Lewis Model”
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Further Assumptions:1. Closed national economy; (no migration, capital
flows etc.)2. “Homogenous” labour;3. Pure competition; 4. “Capitalists” were well-behaved;5. Mechanisms exist for the transfer of agricultural
surplus from rural to urban areas.
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Structural-Change Models:
W. A. Lewis
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[See notes from class discussion and text]
Workings of the Lewis Model
The Growth Process
Implications for Income Distribution
Policy Implications of the model
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Limitations of the Lewis Model1. Two sectors only?2. Takes modern sector investment for granted
(are capitalists well-behaved?)3. Is traditional economy incapable of
contributing to growth?4. International linkages do exist: migration,
capital flows5. Labour markets are not truly competitive6. Political implications of income distribution
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“Structural Change” Theorizing
• Switch from agriculture to industry (and services)• Rural-urban migration and urbanization• Steady accumulation of physical and human capital
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Patterns of Structural Change
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5. The Dependence Approach:• General features and varieties• The neocolonial dependence model– Legacy of colonialism, Unequal power, Core-
periphery• R. Prebisch;• A.G.Frank and P. Baran• O. Sunkel;• “False Paradigm” General Limitations of Approach
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6. “Neo-Classical Approach• 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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7. Mainstream Economics Approach
Focus on the factors of production and Productivity
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Example of the role of Productivity in shaping Production per person:
Agriculture in Canada and Africa Generally
Canada: - recent technologies (seeds, machines etc.)- large farms, much land per farm family; - much machinery, equipment, buildings & livestock per farm; - much education per farmer; - serviced by a broad range of other activities (machine dealers, transport, fertilizer firms, R&D, etc.)
** about 4% of the labour force is in agriculture (plus mining, fisheries and lumber) ; yet Canada has large “net exports” of food, minerals wood….
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Sub-Saharan African Agriculture:- traditional technologies;- small farms; little land per farm family;- reliance on hand tools, e.g. hoes, machetes and pangas;- limited formal education for farm people;
“Great skill; traditional technology”
Result: Africa: 62.0% of the labour force is in agriculture; 8.6% in industry; 20.4% in services, but is a major net importer of food..
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Result:
One Canadian farm worker feeds +/- 25 to 30 people, plus net exports;
One African farm family feeds itself and about two additional persons on average, minus net imports.
Implications ??
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How Is Productivity Determined?
The Factors of Production include:
1. Physical Capital2. Human Capital
Capital is a produced factor of production, i.e. capital is an input into the production process that in the past was an output from production.
3. Natural Resources4. Technological KnowledgeTo which I would add
5. “Enterpreneurship” and
6. “Social Capital”
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The Factors of Production: 1. Physical Capital
The stock of equipment and structures that are used to produce goods and services.
Examples:
Produced through investment.
How to achieve growth? Save and Invest in Physical Capital
As a theory of growth?
Necessary but Insufficient
Relevance for Developing Countries?
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The Factors of Production: 2. Human Capital
• the knowledge and skills that workers acquire through education, training, and experience.
• Like physical capital, human capital raises a nation’s ability to produce goods and services.
• Produced through investment in people
Examples: family environment, health, education, nutrition, sanitation, on-the-job training; water availability
As a “Theory of Growth”? Important but not the whole story
Relevance for Developing Countries
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Inputs used in production that are provided by Mother Nature: land, trees, soils, rivers, and mineral deposits, oil…...– They may not be necessary for an economy to be
highly productive– But they sure can help [or sometimes hinder: the
“curse of oil wealth”]– Renewable Resources: Trees, forests, fish stocks, soil
fertility– Non-Renewable Resources: Oil, natural gas;
minerals of various sorts[Note: These also usually require Investment for their
harnessing by humans]Relevance for Developing Countries
The Factors of Production: 3. “Land” or Natural Resources
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The Factors of Production: 4. Technological Knowledge
Definition: The understanding of the ways to produce goods and services; how factors of production of all kinds can be combined to produce goods and services
Human Capital refers to the resources expended transmitting this understanding to the labour force.
Note: Both of these are produced by “investment:”– Education, training & learning of all sorts; and – R&D
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Technological Change: a “dynamic” factor:–Embodied tech in capital equipment–Embodied in Consumer Goods–Scientific & tech journals, texts and
publications–Patents, intellectual property–Process technology–Embedded in people’s brains and capabilities– In established enterprises
Can raise the productivity of Labour and Capital and can economize on resources.
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Relevance for Developing Countries– Existence of a “backlog” of knowledge:
A broad range of newer technologies is awaiting implementation
Investment in new technologies via R & D is expensive and out of reach
“The Advantages of being a Latecomer” “Leap-frogging” and catching up
– Transfer of Tech embedded in capital goods requires high levels of Investment and Savings and/or large role for MNC. Therefore S & I are doubly important
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– The possibility of “catching up” (applying newer technologies to a broad range of activities)• Via purchases of capital equipment;• Via purchases of new consumer goods
(telephones, computers, drugs & medications, new plant varieties…..)• Via learning from books, manuals etc…….• Via tech transfer in enterprises or purchases of
process systems
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The Production FunctionIncome depends upon Labour, Physical Capital, Human
Capital and Natural Resources: or: Y = Af(L, K, H, N)
where “A” is a variable that reflects production technology
Constant Returns to Scale: a doubling of inputs causes output to double as well. Then: xY = Af(xL, xK, xH, xN)
Then if we set x = 1/L, then:Y/L = Af(1, K/L, H/L, N/L)
Meaning? Output per worker depends upon capital per worker, education etc per worker, and natural resources per worker.)
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Factors of Production: 5. EntrepreneurshipEntrepreneurship:
- performs a central role in an economy - largely ignored in economic theory
An entrepreneur: - perceives and seizes an opportunity for the
achievement of an objective, - visualizes and plans how the objective can be
achieved, - undertakes to do everything necessary to
implement the vision,” - brings together all of the other factors of
production;
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Factors of Production: 6. Social Capital• “Social Capital:” increasingly recognized as an
additional “factor of production” as well as being of significance from a political science or governance perspective.
• Various analysts emphasize the importance of “social capital” in an economy, and as a factor that can promote economic development and for the reduction of poverty.
[See the World Bank Web Site on social capital: http://www1.worldbank.org/prem/poverty/scapital/home.htm]
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What is Social Capital?
• “..the institutions, relationships, and norms that shape the quality and quantity of a society's social interactions..
• Social capital is not just the sum of the institutions which underpin a society – it is the glue that holds them together.”– [Source: the above-mentioned World Bank Web Site]
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Beyond the Neo-Classical Approach“The Santiago consensus”?
Sustainability focused approaches?
Aspirations but not theories