classical theories of development Flashcards
Walt W. Rostow’s stages of economic growth - stage 1
1 - Traditional Society – higher proportion of resources devoted to agriculture, unchanging technology places a ceiling on productivity
Walt W. Rostow’s stages of economic growth - stage 2
2 - Pre-Conditions for Take-Off – society has developed basic financial infrastructure, production function is still limited, the concept of manufacturing develops
Walt W. Rostow’s stages of economic growth - stage 3
3 - Take-off -
o Three conditions must be satisfied:
▪ The rate of investment must rise from 5% to 10% of GNP
▪ The development of one or more substantial manufactured sector with high
growth rate
▪ The existence of social, political and institutional framework which would
allow modern sector expansion
Walt W. Rostow’s stages of economic growth - stage 4
4 - Drive to Maturity -
▪ The economy experiences a regular growth and modern technology is
extended
▪ Due to entrepreneurial and technological development everything is produced
which is desired
▪ 10% to 20% of GNP is invested and output grows more than the increase in
population
Walt W. Rostow’s stages of economic growth - stage 5
5 - High Mass Consumption – real incomes continue to rise, leading sectors in the economy produce consumer durables, society pays more attention to social welfare and social security than economic growth
Criticisms of Rostow’s Theory
Eurocentric, Sequential Progression – countries may not go through stages in order
Neglect of Structural Inequalities – unequal distribution of resources and access to education etc
Lack of Policy Prescriptions
Harrod-Domar Model
o Harrod-Domar Model explains growth as a function of a country’s savings rate and capital
o Capital-output condition - change in K = c x change in Y, also note S = sY, S = I and I = change in K
o Therefore sY = c x change in Y, which is rearranged to the growth rate of income - change in Y/Y = s/c
o To increase growth change in Y/Y, we must increase proportion of our income that we save s or decrease the amount of capital needed for each unit of output c
Criticisms of Harrod-Domar Model
Fixed Capital-Output Ratio assumes constant returns
Only considers capital and not labour
Neglect of Structural Inequalities – governance, property rights etc
Solow-Swan Model
o The Solow-Swan Model assumes constant returns to scale but diminishing marginal returns to capital K and labour L
o Effective labour – y = k^a
o Change in capital stock per worker - change in k = sy - dk – nk
o Fundamental equation of motion - change in k = sf(k) – (d + n)k – new capital produced is sf(k), and depreciation and providing new capital to a growing labour force is (d + n)k
o Including growth rate g - change in k = sf(k) – (d + n + g)k, steady state is where change in k = 0
o k < k* = k is increasing, k > k* = k is decreasing, k = k*= k is in equilibrium
o Increasing the savings rate s will only generate short run growth
Criticisms of Solow-Swan Model
No long run growth at steady state equilibrium
Savings rate is assumed to be fixed and exogenously determined and that doesn’t apply in the real world
Technological progress treated as exogenous
Simple AK Model of Endogenous Growth
o Y = AK^a L^1-a where A increases with ‘learning-by-doing’
o A = Â(K/L)^B so Y = Â(K/L)BK^aL^1-a
o If we assume a + B = 1 then Y = ÂK, and returns to capital are now constant and growth in output = growth in capital
o a + B > 1 = increasing returns to capital, a + B < 1 = decreasing returns to capital (Solow-Swan)
