3&4 - Classical Theories Of Economic Growth And Development Flashcards
Classic theories of development: 4 approaches, what are they?
- Linear stage of growth model - 1950s & 1960s (Rowstow stages of growth, Harrod-Domar growth model)
- Theories and patterns of structural change - 1970s (Lewis two-sector model)
- International-dependence “revolution” - 1970s (Neoclassical dependence model, false-paradigm model, dualistic development thesis)
- Neoclassical, Free market “counterrevolution” - 1980s & 1990s (Free market approach, public choice approach, market friendly approach)
What are the linear stages theories
- Rowstow’s stages of growth
- Harrod-Domar growth model
Rowstow’s stages of growth (5 stages)
- Traditional societies
- Preconditions for take-off
- Take-off
- Drive to maturity
- High mass consumption
Rowstow’s stages of growth
Traditional societies (first stage)
- Subsistence agriculture, very little mobility or social change, great division of wealth, decentralised political power
Rowstow’s stages of growth
Preconditions for take-off (second stage)
Level of investment rises to 10% of national income to ensure self-sustaining growth (transport and other social infrastructure), lend risk capital, entrepreneurship, industry, division of labour, agricultural revolution, political structure - modern government
Rowstow’s stages of growth
Take-off (third stage)
Self-sustaining economic growth, investment more than 10% of national income, establishment of leading growth sectors
Rowstow’s stages of growth
Drive to maturity (fourth stage)
Application of modern technology to bulk up resources, new leading sectors replace the old (e.g. steel), changes in distribution of workforce, growth in urban population, increase in proportion of white-collar workers, entrepreneur to manager
Rowstow’s stages of growth
High mass consumption (5th stage)
Flourishing capitalist system characterised by mass production and consumerism
Criticisms and advantages of Rowstow’s stages of growth
Criticisms:
- Can a valid meaningful distinction be made between stages of development (e.g. preconditions for take-off vs take-off)
Advantages:
- Shows the importance of agriculture at the early stage
- Provision of infrastructure and political stability
- How valuable the role of investment is in development
- Industrialisation - rural to industrial society
What does Harrod-domar model explain
Economic theory that explains the relationship between savings, investment and economic growth.
What’s the main equation
Y = Sg / c minus rate of capital depreciation
Suppose a country has a gross savings rate of 20%, a depreciation rate of 3%, and an ICOR of 2.5
Using the Harrod-Domar growth model, find the implied rate of growth of total GDP in the country
0.2 / 2.5 - 0.03 = 0.05
Obstacles and constraints of the Harrod-Domar model
- A country must be able to save more to increase GDP growth
- The main obstacle to or constraint on development, according to this theory, is relatively low level of new capital formation in most poor countries
- The “savings gap” can be filled through either foreign aid or private foreign investment
- Growth can also be increased by improving investment efficiency
2) Theories of structural-change (Lewis two-sector model)
What are the 3 assumptions of the Lewis two-sector model)
1) There’s 2 sectors
- Traditional, rural, subsistence with zero MPL
- High-productivity modern, urban industrial with labour transfer from traditional sector
2) Capitalists reinvest their profits
3) Level of wages in the modern sector is constant and higher than traditional sector
Lewis two sector model
Is there a shortage or surplus of labour in the traditional sector
Surplus of labour in traditional sector, due to underemployment and population growth
Lewis model
It assumes the economy is dualistic meaning what
Has two distinct sectors with different levels of productivity, wages and technological advancement
Lewis model (check graphs)
Explain the capital accumulation and investment
The surplus labour from agriculture is expected to move to the industrial (modern) sector leading to capital accumulation and increased production
However, industrial sector is seen to be capital intensive therefor requires investment in physical capital (machinery, factories)
What’s the Lewisian turning point
Where the surplus labour in the traditional sector become exhausted, and wages in traditional and modern sector start to rise rapidly. Turning point from dualistic economy to a integrated balanced one
Criticisms of the Lewis model
- Rate of labour transfer and employment creation may not be proportional to rate of modern-sector capital accumulation
- Questionable assumption of surplus labour in rural areas and full employment in urban
- Questionable assumption of diminishing returns in modern industrial sector, in some cases
- Institutional factors have a small (if any) role in this approach
3) The international-dependence model
The 3 theories
- Neo-colonial dependence model
- False paradigm model
- Dualistic-development thesis
Describe Neo-colonial dependence model
- Economic imbalances post-colonial era
- Model suggests despite achieving political independence, there’s developing countries still facing economic dependency and exploitation by powerful nations
- Rich ‘core’ nations (USA, UK) at one end, and underdeveloped or ‘peripheral nations’ at the other end. Under colonialism, powerful nations took control
- Attempts by poor nations to be self-reliant where it’s been impossible
- Restructuring of the world capitalist system is to free dependent developing nations from economic control of developed countries
Describe the false-paradigm model
- Proposition that developing countries have failed to develop because their development strategies (usually given by western economists) been based on incorrect model of development. For example, over stresses capital accumulation
Describe the dualistic development thesis
- Dualism = Existence of substantial divergences between rich and poor nations and people’s on various levels
Dualism embraces 4 key arguments:
1) Different sets of conditions, which some are superior and others inferior. For example, highly educated environment compared to illiterate
2) This coexistence of wealth and poor is chronic and not transitional. Other words, not a temporary phenomenon which time would eliminate
3) Degree of superiority and inferiority between developed and developing countries fail to show signs of diminishing, but seem to increase. For example, productivity gap between developed and developing countries seem to widen
4) Superior elements does little or nothing to pull up the inferior elements
Conclusions and implications of the international dependence model (revolution)
3 theories = New-colonial dependence, false-paradigm, dualism model
- The 3 theories (neo-colonial dependence, false-paradigm, dualism model) reject the exclusive emphasis on traditional neoclassical economic theories designed to accelerate growth of GDP as principle for development
- They question the validity of the Lewis model of modernisation
- They do not state there are patterns in development poorer countries should follow; instead the 3 theories place emphasis on the fact there’s power imbalances and need economic reform
- These 3 theories give little insight into how to sustain development
