Economic Development Lecture 3 Growth Theories I Life

Economic Development Lecture 3: Growth Theories I Life Impact | The University of Adelaide University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Overview • Development economics theory: A short history • Linear Stages Theory – Rostow’s Stages of Growth – Harrod-Domar Growth Model • Structural-change Model – Lewis Theory of Development – Patterns of Development Analysis Slide 1 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Development economics theory: A short history Marshall Plan Structural Change Linear-Stages WWII 50 s Slide 2 60 s Neoclassical Growth International Dependence 70 s 80 s Endogenous Growth Contemporary Theories 90 s 00 s University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Linear Stages Growth • Rostow’s Stages of Growth – – – 1/ 2/ 3/ 4/ 5/ Traditional Preconditions for take-off Take-off Drive to maturity High mass consumption – Principle strategy to move through the stages was capital accumulation Slide 3 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Linear Stages Growth • Harrod Domar Growth Model (‘AK model’) – S = s. Y – I = ΔK – k = ΔK / ΔY – I = ΔK = kΔY = s. Y = S – Divide by Y and k: • ΔY/Y = s/k – Additional output growth from an additional unit of investment is 1/k Slide 4 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Case Study: Bhutanese Farmer Slide 5 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Case Study: Bhutanese Farmer Slide 6 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Case Study: Bhutanese Farmer Slide 7 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Linear Stages Growth • Harrod Domar Growth Model – What is desirable? • High I • High savings rates • Lower capital to output ratios – better technology – lower capital transaction costs • Lower capital depreciation rates Slide 8 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Linear Stages Growth • Harrod Domar Growth Model – What is problematic? • Low levels of technology • Little ability to save • Lack of FDI to plug savings gap • High S and I is a necessary, but not sufficient condition for growth Slide 9 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Structural-change Model • Lewis Theory of Development – ‘Two-sector’ model • Agricultural/traditional • Modern/industrial – Transfer of labour from the traditional to the modern sector, accumulation of capital Slide 10 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Structural-change Model • Lewis Theory of Development – Assumptions • Large pools of surplus labour in agriculture • Wages constant (but different) in each sector • Owners of modern sector capital (‘capitalists’) reinvest all of their profits Slide 11 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Lewis Theory of Development Slide 12 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Structural-change Model • Lewis Theory of Development – Criticisms • What if capitalists invest in nonlabour intensive industries? Slide 13 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Structural-change Model Slide 14 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Structural-change Model • Lewis Theory of Development – Criticisms • K not reinvested – conspicuous consumption • Increased income inequality • Is there surplus labour? • Increases in modern sector wages • Assumes diminishing returns in modern sector, but what about returns to scale? Slide 15 University of Papua New Guinea

Lecture 3: Growth Theories I Michael Cornish Structural-change Model • Lewis Theory of Development – Conclusions • Consistent with the linear stages theory – Focus on investment and accumulation of capital • However, like linear stages theory, did not recognise that increased savings and investment were necessary but not sufficient conditions for growth Slide 16 University of Papua New Guinea

Lecture 3: Growth Theories I Slide 17 Michael Cornish University of Papua New Guinea