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Adorio, Gerlie R. Laiño, Heather P. Valmonte, Andrea Coleen L.

AC – 2A

CLASSIC THEORIES OF ECONOMIC DEVELOPMENT “It matters little how much information we possess about development if we have not grasped its inner meaning.” - Denis Goulet, The Cruel Choice Classic Theories of Economic Development  Post World War II  1950s and early 1960s  1970s  1980s and early 1990s Four Approaches: 1. The linear-stages-of-growth model 2. Theories and patterns of structural change 3. The international-dependence revolution 4. The neoclassical, free-market counterrevolution. Development as Growth and the Linear-Stages Theories Rostow’s Stages of Growth According to the Rostow doctrine, the transition from underdevelopment to development can be described in terms of a series of steps or stages through which all countries must proceed.     

The traditional society The pre-conditions for take-off into self-sustaining growth The take-off The drive to maturity The age of high mass consumption

One of the principal strategies of development necessary for any takeoff was the mobilization of domestic and foreign saving in order to generate sufficient investment to accelerate economic growth. The Harrod-Domar Growth Model  Saving (S) is some proportion,s, of national income (Y): S = sY  Net investment (I) is defined as the change in capital stock, K: I = K

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Total capital stock (K) bears a direct relationship to total national income or output (Y) as expressed by the capital output ratio (k) K = k simply K = kY Y

Obstacles and Constraints: Countries that were able to save 15% to 20% of GDP could grow (“develop”) at a much faster rate than those that saved less. Necessary vs. Sufficient Conditions The basic reason they didn’t work was not because more saving and investment isn’t a necessary condition for accelerated rates of economic growth – it is – but rather because it is not a sufficient condition. Structural-Change Models Structural-change theory focuses on the mechanism by which underdeveloped economies transform their domestic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, more urbanized, and more industrially diverse manufacturing and service economy. Lewis Theory of Development  formulated by William Aurthur Lewis in the mid – 1950s and later modified, fomalized, and extended by John Fei and Gustav Ranis

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Lewis Two Sector Model is one of the early theoretical models of development that focuses on the structural transformation.

Structural transformation – the process of transforming an economy in such a way that the contribution to national income by the manufacturing sector surpasses the contribution of the agriculture sector.

Lewis Two Sector Model

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promotes industrialisation, and stimulates sustained development

Criticisms of the Lewis two-sector model: 

the rate of labor transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation – this rejects the idea of ‘capital flight’

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the model does of course require a surplus of labor in rural areas

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the assumption that a competitive modern sector labor market exists so real wages are constant to the point where the supply of rural surplus labor is exhausted

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assumes diminishing returns in the modern industrial sector – yet there is much empirical evidence for increasing returns

Structural Change and Patterns of Development The patterns-of-development analysis of structural change focus on the sequential process through which the economic, industrial, and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth. These structural changes involve virtually all economic functions, including the transformation of production and changes in the composition of consumer demand, international trade, and resource use as well as changes in socioeconomic factors such as urbanization and the growth and distribution of a country’s population. The best-known model of structural change is the one based largely on the empirical work of the late Harvard economist Hollis B. Chenery and his colleagues, who examined patterns of development for numerous developing countries during the postwar period. International-Dependence Revolution 

IDR models view developing countries as beset by institutional, political, and economic rigidities in both domestic and international setup.

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IDR models argue that developing countries are up in a dependence and dominance relationship with rich countries.

Dependence – the reliance of developing countries on developed-country economic policies to stimulate their own economic growth. Dependence can also mean that

developing countries adopt developed countries education systems, technology, economic and political systems attitudes, etc.

Dominance – in international affairs, a situation in which the developed countries have much greater power than the less developed countries in decisions affecting important international economic issues, such as prices of agriculture commodities and raw materials in world markets.

Three major streams of thought:   

Neocolonial Dependence Model False – Paradigm Model Dualistic – Development Thesis

Neocolonial Dependence Model 

a model whose main proposition is that underdevelopment exists in developing countries because of continuing exploitative economic, political, and cultural policies of former colonial rules toward less developed countries.

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The model views that the coexistence of rich and poor nations in an international system dominated by such unequal power relationship between the centre (the developed nations) and the periphery (the developing) renders attempts by poor nations to be self-reliant and independent difficult and sometimes even possible.

False – Paradigm Model 

Attributes underdevelopment to faulty and inappropriate advice provided by wellmeaning but often uninformed, biased, and ethnocentric international “expert” advisers.

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The proposition that developing countries have failed to development strategies (usually given to them by Western economists) have been based on an incorrect model of development.

Dualistic – Development Thesis  notion of a world of dual societies, of rich nations and poor nations and, in the developing countries, pockets of wealth within broad areas of poverty.

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Dualism represents the co-existence of two phenomenon or situation which one is desirable and other not.

Four Key Arguments 

Different sets of conditions, of which some are superior and others are inferior, can coexist in a given space;

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This coexistence is chronic and not merely transitional. It is not due to a temporary phenomenon, in which case time could eliminate the discrepancy between superior and inferior elements.

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The difference in the levels of wealth or skills between inferior countries and superior ones have tendency to increase.

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The interrelations between the superior and inferior elements are such that the existence of the superior elements does little to pull up the inferior element, it may actually serve to push it down—to “develop its underdevelopment”

The Neoclassical Counterrevolution: Market Fundamentalism Neoclassical Counterrevolution In 1980, with the power of conservative government of United States, Canada, Britain, and (West) Germany they came with this neoclassical counterrevolution. Two most powerful International Agencies: 1. World Bank 2. International Monetary Fund 

The central argument of the neoclassical counterrevolution is that underdevelopment results from poor resource allocation.

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Lord Peter Bauer, Deepak Lal, Ian Littlem Harry Johnson. Bela Balassa, Jagdish Bhagwati and Anne Krueger argue that state intervention slows the pace of economic growth.

NEOLIBERALS Economic efficiency and economic growth will be stimulated:  Competitive free markets  Privatizing state-owned enterprises  Free trade and export expansion

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Investors Eliminating plethora of government agencies Dependence Theorist Corruption, inefficiency, and lack of economic incentives

Three Component Approaches: 1. Free-market Analysis 2. Public-choice Theory 3. Market-friendly Approach Free-Market Analysis  Markets alone are efficient  Free market development economist have tended to assume that developingworld markets are efficient and that whatever imperfections exist of little consequence Public-Choice Theory  Also known as New political economy approach.  Governments can do nothing right. Assumes that politicians, bureaucrats and state act solely from self-interested perspective.  Minimal government is the best government. Market-Friendly Approach  Most recent variant on neoclassical counterrevolution.  This approach recognizes that there are many imperfections in LDC product and factor markets and government do have a key role to play in facilitating the operations of market through nonselective interventions. Traditional Neoclassical Growth Theory  Liberalization of national markets draw additional domestic and foreign investment and increases rate of capital accumulation.  Direct outgrowth of Harrod Domar and Solow Models. Solow Neoclassical Growth Model • Robert Solow earned the Nobel Prize in Economics in 1987. SOLOW NEOCLASSICAL GROWTH MODEL Y=Ka(AL)1-a Y= Gross Domestic Product K= Stock of Capital L= Labor A= Productivity of Labor a= Elasticity of Output

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Exogenous growth model

KEY RESULTS OF SOLOW'S MODEL    

Explains that output is a growth in factor inputs. Increase in labor to growth in output is the most important. Steady-state rate of growth of per capita income that is long-run growth rate is determined by progress in technology. The poor countries are poor because they have less capital but if thet save at same rate as rich countries and access to same technology, they will eventually catch up.

TRADITIONAL NEOCLASSICAL GROWTH THEORY  Increase in labor quantity and quality  Increase in capital  Improvement in technology CLOSED ECONOMIES *No external activities OPEN ECONOMIES *Those with Trade and Foreign Investment...