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Chapter 3

Classic Theories
of Economic
Growth and
Development

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Chapter 3: Summary Outline:
Theories of Economic Growth & Development

Linear Stage of Growth (Harrod-Domar Model


Structural change theories (Lewis Model)
International dependence revolution (Marxist/Radical Model)
Neoclassical-free market re-surgence
Can differences in thinking be re-conciled?
Explaining Growth- Application of Production Possibilities Curve (PPC)
Illustrating growth using PPC, efficiency, trade offs ,technological
change
New Growth Theory-Solow Model ( labor quality or human capital).
What about institutions. They are ignored in these models.
Measuring Development (Perkins chapter 2)

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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

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Development as Growth and
Linear-Stages Theories

Rostows Stages of Growth: Historical


stages
Harrod Domar Growth Model: Emphasis on
Physical Capital.

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The Harrod-Domar Model

S sY (3.1)

I K (3.2)

K kY (3.3)

SI (3.4)

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The Harrod-Domar Model

S sY kY K I (3.5)

sY kY (3.6)

Y s (3.7)

Y k

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Criticisms of the Stages Model

Necessary versus sufficient conditions

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Structural-Change Models

The Lewis two-sector model


Modern and traditional sector

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Figure 3.1 The Lewis Model of Modern-
Sector Growth:Two-Sector Surplus-
Labor Economy

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Criticisms- Lewis Model

Rate of labor transfer and employment creation may not be


proportional to rate of modern-sector capital accumulation.
Growth in modern sector may not draw enough labor.

Surplus labor in rural areas and full employment in urban?


Institutional factors? These assumptions are not correct.

Assumption of diminishing returns in modern sector

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Figure 3.2 The Lewis Model Modified
by Laborsaving Capital Accumulation:
Employment Implications

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The International-Dependence
Revolution: Radical/Marxist Model

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;
center-periphery (sociologists view)
Conclusions and implications
No insight on development, empirical evidence
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The Neoclassical Counterrevolution:
Market Resurgence

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

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Theories of Development:
Reconciling the Differences
Development economics has no universally
accepted paradigm? But everything does not go?

Insights and understandings are continually


evolving: Lessons from experience & history

Each theory has some strengths and some


weaknesses:
But there are better theories tested with reality of
evidence and experience

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Case Study: South Korea and
Argentina

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Concepts for Review

Autarky Dominance
Average product Dualism
Capital-labor ratio
False-paradigm model
Capital-output ratio
Free market
Center
Closed economy Free-market analysis
Comprador groups Harrod-Domar growth
Dependence model

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Concepts for Review (contd)

Lewis two-sector Neocolonial


model dependence model
Marginal product New institutionalism
Market-friendly New political economy
approach approach
Necessary condition Open economy
Neoclassical Patterns-of
counterrevolution Development analysis

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Concepts for Review (contd)

Periphery Stages-of-growth
Production function model of development
Public choice theory Structural-change
theory
Savings ratio
Structural
Self-sustaining growth transformation
Solow neoclassical Sufficient condition
growth model
Surplus labor

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Concepts for Review (contd)

Traditional neoclassical growth theory


Underdevelopment

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Appendix 3.1: Components of
Economic Growth

Capital Accumulation, investments in physical and


human capital
Increase capital stock
GNP= Q(L,K)= F(L,K)
Growth in population and labor force
Technological progress
Neutral, labor/capital-saving, labor/capital augmenting
GNP= F(L, K, T)

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Figure A3.1.1 Effect of Increases in Physical
and Human Resources on the Production
Possibility Frontier (PPF)- Model

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Figure A3.1.2 Effect of Growth of Capital Stock and
Land on the Production Possibility Frontier (PPF):
Explaining Economic Growth

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Figure A3.1.3 Effect of Technological
Change in the Agricultural Sector on
the Production Possibility Frontier

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Figure A3.1.4 Effect of Technological
Change in the Industrial Sector on the
Production Possibility Frontier

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Appendix 3.2: The Solow Neoclassical
Growth Model: Considers human
capital or labor quality & productivity

1
Yi AKi L K i

1
Y AK L
n
g n
1
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Appendix- Solow Growth
Model

k sf (k ) ( n)k (A3.2.4)

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Appendix- Solow Growth
Model

sf (k *) ( n)k * (A3.2.5)

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Figure A3.2.1 Equilibrium in the
Solow Growth Model

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Figure A3.2.2 The Long-Run Effect of
Changing the Saving Rate in the Solow
Model

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Appendix 3.3: Endogenous Growth
Theory: Accounts for labor quality,
technology, productivity
Motivation for the new growth theory
The Romer model
1
Yi AKi L K i

1
Y AK L
n
g n
1
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