ECON 317: ECONOMIC GROWTH AND DEVELOPMENT

CLASSIC THEORIES OF ECONOMIC DEVELOPMENT: FOUR APPROACHES Development as growth and the linear-stages approachThe view that the process of development is a series of successive stages of economic growth

through which all countries must pass in order to develop. Structural-change modelsFocused on emphasizing the internal process of structural change required for economic

growth and development The international-dependence revolutionEmphasized international and domestic institutional and political constraints on development The neoclassical counter-revolutionThe view that the lack of economic development is primarily the result of too much

governmental interference in the market and the lack of openness (trade-wise) The current thinking is eclectic, drawing on insights from the above approaches.

Development as Growth, and the Linear-Stages Approach Background: the success of the Marshall Plan and the historical

experience of the then industrial countries Rostow’s stages-of-growth modelTraditional societyPre-conditions for take-off into self-sustaining growthThe take-off into self-sustaining growthThe drive to maturityAge of high mass consumption Strengths and weaknesses of Rostow’s linear-stages model

Development as Growth, and the Linear-Stages Approach (II) The Harrod-Domar model of economic growth , where s is the saving rate; and d is the rate of capital depreciation(note: 0<s<1 and 0<d<1)

But, in equilibrium,

Given the above, the output growth rate is given by:

Development as Growth, and the Linear-Stages Approach (III) Lessons from the Harrod-Domar modelA very useful tool for economic policy makingIn order to increase the growth rate of output, increase the saving

rate and/or use capital efficiently Strengths and weaknesses of the Harrod-Domar model

Structural-Change Models The “two-sector surplus labour” model of Arthur LewisThe traditional sectorThe modern sectorA major focus: the process of labour transfer and the growth in

output and employment in the modern sector

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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

Criticisms of the Lewis Model (II) The assumption of surplus labor in rural areas and full employment in

urban areas is highly doubtful; Institutional factors render the assumption of constant modern sector

wages unrealistic; The assumption of free geographical and occupational mobility of

labour can be questioned; In spite of the above drawbacks, the model is useful in highlighting

important aspects of the development process.

The International-Dependence Revolution The view that developing countries are faced with institutional,

political, and economic rigidities, and are caught up in a dependence and dominance relationship with rich countries;

Three main strands of the above viewThe neo-colonial dependence modelThe false-paradigm modelThe dualistic-development view

The International-Dependence Revolution (II) The neo-colonial dependence modelA view that the global economic system is influenced mainly by

persistent and unequal relationships between rich (core) and poor (periphery) countries;

The above is viewed as a legacy of colonialismIt’s also viewed as supported by influential elite groups in the

developing countries for whom such a relationship is rewarding;This model thus, unlike the linear-stages and structural-change

models, sees underdevelopment as being externally induced.

The International-Dependence Revolution (III) The false-paradigm modelAttributes underdevelopment to the misapplication of developed-

country modelsAccording to the model, the resulting policies can also serve the

interests of elite groups (domestic and international);The role of higher education in the perpetuation of inappropriate

policy prescription.

The International-Dependence Revolution (IV) The dualistic-development thesisDualism, as a concept in development economics, refers to the existence and persistence of two forms of a phenomenon, activity, or entity, and where one of these forms can typically be viewed as being “superior” and the other “inferior”;Three main arguments of the concept of dualism:Different sets of conditions can coexist in a given spaceThe coexistence is not temporary or transitional, but chronic;There is a tendency for the degrees of superiority or inferiority to widen.

The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism Main argument: inefficient allocation of resources (via inappropriate

pricing policy and excessive state intervention) is the cause of underdevelopment.

Three strands of the neoclassical counter-revolutionFree market approachPublic choice (new political economy) approachMarket-friendly approach

The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism (II)

Free market approachAccording to this approach, markets alone are efficient;Assumes that markets in developing countries are efficient and that any imperfections

are minor;Views any governmental/state intervention in the market as distortionary and

undesirable. Public choice theoryAssumes that politicians, bureaucrats, and citizens are primarily self-centred;Highlights the failures of state-owned enterprisesIt contends therefore that there is very little that governments can do right;Advocates a very minimal role for the state.

The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism (III) The market-friendly approachLinked to the 1990s writings of the World Bank and its economistsAcknowledges the existence of many imperfections in LDC product

and factor markets;Recognizes that governments have a key role to play in enhancing the

operation of markets;Governments’ role must be market-friendly (non-selective)Acknowledges that market failures are more widespread in LDCs in

areas such as investment coordination and environmental outcomes.

The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism (IV) Traditional neoclassical growth theory (typified by Solow’s model)A theoretical support to the neoclassical counter-revolutionThe Solow growth model is an improvement on the Harrod-Domar

model via the significant roles given to labour and technology

Where Y is output, K is capital (physical and human), L is labour, and A is the productivity of labour.

The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism (V)Output growth results from one or more of three factors:Increases in labour (quantity and quality)Increases in capital (via saving and investment)Technological progressThe opening up of economies, by attracting foreign investment, has the

effect of increasing saving and investment rates, and consequently per capita income;

Open economies tend to converge to higher per capita incomes, compared to closed economies, especially since at lower capital-labour ratios, the returns on investments are higher.

Classic Theories of Development: Concluding Thoughts 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