Chapter 3 Classic Theories of Economic Growth and

Class Theories of Economic Development – Four Approaches • Linear stages of growth model

Development as Growth and Linear-Stages Theories • Rostow’s Stages of Growth • Harrod Domar

The Harrod-Domar Model (3. 1) (3. 2) (3. 3) (3. 4) Copyright © 2009

The Harrod-Domar Model (3. 5) (3. 6) (3. 7) Copyright © 2009 Pearson Addison-Wesley.

Criticisms of the Stages Model • Necessary versus sufficient conditions Copyright © 2009 Pearson

Structural-Change Models • The Lewis two-sector model Copyright © 2009 Pearson Addison-Wesley. All rights

Figure 3. 1 The Lewis Model of Modern. Sector Growth in a Two-Sector Surplus

Criticisms- Lewis Model • Rate of labor transfer and employment creation may not be

Figure 3. 2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications Copyright

The International-Dependence Revolution • The neoclassical dependence model – Unequal power, core-periphery • The

The Neoclassical Counterrevolution • Challenging the statist model – Free market approach – Public

Theories of Development: Reconciling the Differences • Development economics has no universally accepted paradigm

Case Study: South Korea and Argentina Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Concepts for Review • Autarky • Dominance • Average product • Dualism • Capital-labor

Concepts for Review (cont’d) • Lewis two-sector model • Neocolonial dependence model • Marginal

Concepts for Review (cont’d) • Periphery • Production function • Public choice theory •

Concepts for Review (cont’d) • Traditional neoclassical growth theory • Underdevelopment Copyright © 2009

Appendix 3. 1: Components of Economic Growth • Capital Accumulation, investments in physical and

Figure A 3. 1. 1 Effect of Increases in Physical and Human Resources on

Figure A 3. 1. 2 Effect of Growth of Capital Stock and Land on

Figure A 3. 1. 3 Effect of Technological Change in the Agricultural Sector on

Figure A 3. 1. 4 Effect of Technological Change in the Industrial Sector on

Appendix 3. 2: The Solow Neoclassical Growth Model Copyright © 2009 Pearson Addison-Wesley. All

Appendix- Solow Growth Model Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -25

Appendix- Solow Growth Model Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -26

Figure A 3. 2. 1 Equilibrium in the Solow Growth Model Copyright © 2009

Figure A 3. 2. 2 The Long-Run Effect of Changing the Saving Rate in

Appendix 3. 3: Endogenous Growth Theory • Motivation for the new growth theory •

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Class Theories of Economic Development – Four Approaches • Linear stages of growth model • Theories and Patterns of structural change • International-dependence revolution • Neoclassical, free market counterrevolution Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -2

Criticisms- 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 sector Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -9

The International-Dependence Revolution • The neoclassical dependence model – Unequal power, core-periphery • The false-paradigm model – Using “expert” advisors • The dualistic-development thesis – Superior and inferior elements can coexist • Conclusions and implications – No insight on development, empirical evidence Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -11

The Neoclassical Counterrevolution • Challenging the statist model – Free market approach – Public choice approach – Market-friendly approach • Traditional neoclassical growth theory – Solow model • Conclusions and implications – institutional and political realities in developing world Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -12

Theories of Development: Reconciling the Differences • Development economics has no universally accepted paradigm • Insights and understandings are continually evolving • Each theory has some strengths and some weaknesses Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -13

Concepts for Review • Autarky • Dominance • Average product • Dualism • Capital-labor ratio • Capital-output ratio • Center • False-paradigm model • Free market • Closed economy • Free-market analysis • Comprador groups • Harrod-Domar growth • Dependence model Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -15

Concepts for Review (cont’d) • Lewis two-sector model • Neocolonial dependence model • Marginal product • New institutionalism • Market-friendly approach • New political economy approach • Necessary condition • Open economy • Neoclassical counterrevolution • Patterns-of Development analysis Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -16

Concepts for Review (cont’d) • Periphery • Production function • Public choice theory • Savings ratio • Self-sustaining growth • Solow neoclassical growth model Copyright © 2009 Pearson Addison-Wesley. All rights reserved. • Stages-of-growth model of development • Structural-change theory • Structural transformation • Sufficient condition • Surplus labor 3 -17

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 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3 -19