Theories of Economic Development

							Chapter 3




            1
 Rostow’s (linear) stages of growth
   Traditional society
   Pre-conditions for take-off
   Take-off
   Drive to maturity
   High mass consumption




                                       2
 The Harrod-Domar growth model
  we know that S=sY and I=∆K
  also K/Y=k and ∆K/∆Y=k, so ∆K=k∆Y
  if I=∆K=k∆Y and S=sY, then sY=k∆Y,
  therefore ∆Y/Y=s/k
 Evaluation of both models
   Saving and capital formation are a necessary but not
    sufficient condition for growth
   What is also needed is infrastructure, institutions,
    capital markets, human capital , well functioning
    markets




                                                           3
 The Lewis two-sector model
   Traditional (rural), MPL=0, surplus labour can be moved
      without reducing output, wage=APL
     Modern urban industrial sector (migration)
     Wages in the urban sector are consistently higher
     The modern sector generate growth by earning profits
      above wages and reinvesting the profit
     Assume labour supply in urban sector is perfectly elastic
      and the urban wage is constant
     Growth is self-sustaining



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5
 Criticism of the Lewis model
   Capital accumulation in the modern sector is not at the
    same rate as migration of labour; profits may be
    distributed to the owners of capital only
   There may not be surplus labour
   Wages in the urban sector may be rising
   Increasing returns to labour in the urban sector




                                                              6
 The Patterns of development model (Chenery)
   Development requires structural changes are necessary
    in addition to increased saving
   Areas of change: structure of the economy consumer
    demand, urbanization, accumulation of capital ,
    smaller family size
   Development is constrained by domestic and
    international factors, removing the latter can speed up
    the process
   Criticism – cause and effect problems: structural
    changes vs. development and growth




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 The neocolonial dependence model
   Inequality is characteristic of the world capitalist
    system; the centre and the periphery
   The ruling group in developing countries represents the
    interests of developed countries
   Underdevelopment is externally created
   Development requires changing the internal and
    international balance of power




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 The false paradigm model
   Underdevelopment is due “wrong” advise from
    international experts that are not informed about
    country specifics; or from internationally trained
    domestic experts indoctrinated by “western” theories
   Neoclassical theory does not take into account the role
    of institutions, traditions, distributional issues
 Dualistic development
   Dualism (rich and poor nations, rich and poor
    individuals in developing countries, structure of the
    economy) is persistent
 Criticism of the three theories




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 Free markets
   Supply-side economics from the 1980s, privatization
   Underdevelopment is due to inefficient market, poor
    resource allocation and government intervention, trade
    restrictions, lack of incentives
 Public choice theory
   Government is inefficient – all participants pursue their
    self-interest rather than objectives in the interest of the
    public
 Market-friendly approaches
   Milder than the free markets approach, includes social
    factors
 The Solow growth model – from class notes
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