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Chapter 3: Classic Theories of Economic Growth and Development
Terms in this set (35)
Rostow's Stages of Growth
Harrod-Domar Growth Model:
3 Important Components of Economic Growth (relation to Harrod-Domar Growth Model)
1) Capital (capital investment)
2) Labor (labor force growth)
3) Technology (technological advancements)
--labor not explicit in model due to it being abundant in developing countries
--technology progress expressed in Harrod-Domar context as a decrease in required capital-output ratio (c) given more growth for given level of output
Main Obstacle of development according to growth theory of needing to increase savings to increase growth rate of output/GDP (Y)?
relatively low level of new capital formation in most poor countries
--Hypothesis that underdevelopment is due to underutilization of resources arising from structural or institutional factors that have their origins in both domestic and international dualism. Development therefore requires more than just accelerated capital formation
--mechanism by which underdeveloped economies transform domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, urbanized, industrially diverse manufacturing and service economy
Lewis "two-sector surplus labor" model (structural-change model)
--by W. Arthur Lewis
focused on structural transformation of a primarily subsistence economy
--Lewis Two-Sector Model: theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development
--Lewis Theory focused on this
--process of transforming an economy in such a way that the contribution to national income by the manufacturing sector eventually surpasses the contribution by the agricultural sector. More generally, major alteration to industrial composition of economy
What are 2 sectors of underdeveloped countries according to Lewis two-sector model?
1) traditional, overpopulated, rural subsistence sector characterized by zero marginal labor productivity: surplus labor --> portion of rural labor force whose productivity is zero or negative
What is focus of Lewis two-sector model?
1) process of labor transfer
2) growth of output and employment in the modern sector ("industrial sector")
--Both of these are brought about by output expansion in that sector
--speed which expansion occurs is determined by rate of industrial investment, and capital accumulation in the MODERN sector.
Assumptions of Lewis two-sector model?
--investment that leads to speed of output expansion is possible by excess of modern-sector profits over wages on ASSUMPTION that capitalists will reinvest ALL PROFITS
--assumed level of wages in urban industrial sector were constant, determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector
What are criticism of Lewis two-sector model (problems with 4 assumptions)?
1) assume implicitly that labor transfer and capital accumulation in modern sector happen proportionally...but what if they reinvest in labor-saving capital? (new graph, non-developmental growth model)
2) assume that surplus labor exists in agriculture sector while full employment of labor in modern sector. research shows little surplus labor in rural locations.
3) assume competitive modern-sector labor market guarantees continued existence of constant real urban wages up to point where supply of rural labor is exhausted. Wages should rise in rural areas.
4) assumption of diminishing marginal returns in modern/industrial sector.
Patterns of development analysis of structural change:
attempt to identify characteristic features of internal process of structural transformation that a "typical" developing economy undergoes as it generates and sustains modern economic growth and development
STRUCTURAL-CHANGE MODEL (Patterns of development or Patterns of change model)
How is structural change model different than previous Lewis model and growth stages model?
Similar to these because considers increased savings and investment to be NECESSARY BUT NOT EFFICIENT!
Best known model of structural change is? (empirical work)
from Hollis B. Chenery--examined patterns of development in developing countries. Empirical studies (cross-section and time-series) of countries with different income per capita.
--REVEALED CHARACTERISTIC FEATURES OF DEVELOPMENT PROCESS
What are examples of revealed characteristic features of the development process from the structural change model based on empirical analysis?
-shift from agriculture to industrial production
-steady accumulation of physical and human capital
-change in consumer demands from emphasis on food/basic needs to desires for manufactured goods/services
-growth of cities and urban industries as people migrate from farms/small towns
-decline in family size and pop growth as children lose economic value--pop growth increasing then decreasing in family size
What is major hypothesis for the structural-change model?
That development is an IDENTIFIABLE process of growth and change, whose main features are similar in all countries.
What does structural-change model recognize?
However, model does recognize that differences can arise among countries in pace and pattern of development depending on circumstances (both domestic and internationally)
What is a limitation of the structural-change model?
Emphasizing patterns rather than theory runs risk of drawing wrong conclusions about CAUSALITY.
General sentiment toward structural-change model?
optimistic: "correct" mix of economic policies will generate beneficial patterns of self-sustaining growth.
What is the international-dependence revolution and model?
Views developing countries as beset by institutional, political, and economic rigidities, both domestic and international, and caught up in a dependence and dominance relationship with rich countries.
--3 streams of thought: neocolonial dependence model, false-paradigm model, dualistic-development thesis
Neocolonial Dependence Model:
--model whose main proposition is that underdevelopment exists in developing countries because of continuing exploitative economic, political, and cultural policies of former colonial rulers toward less developed countries
(has to do with colonial rule in past and power over developing countries)
--makes underdevelopment seen as external induced problem from industrial capitalist countries in north.
--different from linear-growth and structural-change theories stress on internal problems like savings/investment
--proposition that developing countries have failed to develop because their development strategies (usually given to them by Western economists) have been based on an incorrect model of development, one that, for example, overstressed capital accumulation or market liberalization without giving due consideration to needed social and institutional change.
--knowledge used to try to help developing countries is biased and theoretical rather than applicable; too many irrelevant Western tools
--Marxist based theory, based on disenchantment with stages and structural-change models
--focus on external causes of underdevelopment
existence and persistence of substantial and even increasing divergences between rich and poor countries and rich and poor peoples on various levels. mutually exclusive coexisting
What are four key arguments of dualistic-development thesis?
1) different conditions where some are "superior" and some are "inferior" can coexist. (EX: modern and traditional production in urban and rural sectors
2) coexistence is CHRONIC (not temporary--discrepancy can't be eliminated between inferior and superior)
3) degrees of superiority or inferiority are NOT diminishing--inherently increasing
4) interrelations of superior and inferior exist so superior does nothing to pull up inferior element NOR "TRICKLE DOWN" to it. can actually develop its underdevelopment.
What do the 3 international-dependence models (neocolonial dependence model, false paradigm model, dualistic-development theory) emphasize?
Emphasize on international power imbalances and on needed fundamental economic, political and institutional reforms both domestic and worldwide.
--call for getting ride of private owned and call for public ownership/control to be effective and eradicate poverty (OPPOSITE OF NEXT FREE MARKET MODEL!)
What are 2 weaknesses of international-dependence models/theories?
1) no insight into how countries initiate and sustain development (just criticize)
2) actual economic experience developing countries that pursued revolutionary campaigns of industrial nationalization and state-run production have been negative (autarky--closed economy, overall negative)
What was neoclassical counterrevolution in economic theory and policy?
--1980s resurgence of neoclassical free-market orientation toward development problems and policies, counter to interventionist dependence revolution of 1970s
--supply-side macro-economics, rational expectations theories, privatization of public corporations. FREE MARKET CAPITALISM RESURGENCE!
--call for DECREASE in gov't regulation
What is the central argument of the neoclassical counterrevolution?
That underdevelopment results from poor resource allocation due to incorrect pricing policies and too much state intervention by overly active developing-nation governments. lack of incentives, corruption, inefficiency (gov't regulation)
How is neoclassical counterrevolution theory different from dependence theorists?
--counterrevolutionaries say that developing world is underdeveloped due to state and corruption and inefficiency of economies of developing countries! not fault of developed world.
--need to restructure not international economic system but promote free markets and laissez-faire economics.
What are 3 component approaches of the neoclassical counterrevolution?
1) FREE-MARKET APPROACH: free market analysis argues that markets alone are efficient and perform better than government regulation markets. Competition perfect, technology moves freely, information perfect
2) PUBLIC-CHOICE THEORY: known as new political economy approach, theory that self-interest guides all individual behavior and that governments are inefficient and corrupt because they use gov't to pursue agendas (gov't selfish)
3) Market-friendly approach: the notion historically promulgated by the World Bank that successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy in areas where the market is inefficient
-recognizes imperfections in developing-country product and factor markets and gov't don't have key role in helping in market-friendly interventions
-different from free-market and public-choice in that recognizes/accepts market failures are bigger in developing countries. believes in incomplete information, economies of scale in production are issues for developing countries.
What does free-market argument aster about liberalization?
opening up of national markets draws additional domestic and foreign investment and increases rate of domestic savings rates and enhances K/L ratios and per capita incomes in capital poor countries.
Solow neoclassical growth model:
model that economies will converge if same savings rates, depreciation rates, labor force growth rates, and productivity growth rates. Allows for substitution of capital and labor. ASSUMES diminishing returns to using these inputs.
-constant returns to scale for
What does Solow neoclassical growth model imply?
economies will converge to the same level of income per worker "conditionally" meaning other things equal, particularly savings rates, depreciation, labor force growth rate, and productivity.
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