EconomicsDevelopmentM03TodaroSmith01393411EconC03

Copyright 2012 Pearson Addison-Wesley.All rights reserved.Chapter 3Classic Theories of Economic Growth and DevelopmentCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-23.1 Classic Theories of Economic Development:Four Approaches Linear stages of growth model Theories and Patterns of structural change International-dependence revolution Neoclassical,free market counterrevolutionCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-33.2 Development as Growth and Linear-Stages Theories A Classic Statement:Rostows Stages of Growth Harrod-Domar Growth Model(sometimes referred to as the AK model)Copyright 2012 Pearson Addison-Wesley.All rights reserved.3-4The Harrod-Domar ModelCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-5The Harrod-Domar ModelCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-6Criticisms of the Stages Model Necessary versus sufficient conditionsCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-73.3 Structural-Change Models The Lewis two-sector model Copyright 2012 Pearson Addison-Wesley.All rights reserved.3-8Figure 3.1 The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labor EconomyCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-9Criticisms of the Lewis Model Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation Surplus labor in rural areas and full employment in urban?Institutional factors?Assumption of diminishing returns in modern industrial sectorCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-10Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation:Employment ImplicationsCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-11Empirical Patterns of Development-Examples Switch from agriculture to industry(and services)Rural-urban migration and urbanization Steady accumulation of physical and human capital Population growth first increasing and then decreasing with decline in family sizeCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-123.4 The International-Dependence RevolutionThe neocolonial dependence model Legacy of colonialism,Unequal power,Core-peripheryThe false-paradigm model Pitfalls of using“expert”foreign advisors who misapply developed-country modelsThe dualistic-development thesis Superior and inferior elements can coexist;Prebisch-Singer HypothesisCriticisms and limitations Does little to show how to achieve development in a positive sense;accumulating counterexamplesCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-133.5 The Neoclassical Counterrevolution:Market Fundamentalism Challenging the Statist Model:Free Markets,Public Choice,and Market-Friendly Approaches Free market approach Public choice approach Market-friendly approach Main Arguments Denies efficiency of intervention Points up state owned enterprise failures Stresses government failures Traditional neoclassical growth theory-with diminishing returns,cannot sustain growth by capital accumulation aloneCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-143.6 Classic Theories of Development:Reconciling the DifferencesGovernments do fail,but so do markets;a balance is neededMust attend to institutional and political realities in developing world Development economics has no universally accepted paradigm Insights and understandings are continually evolvingEach theory has some strengths and some weaknessesCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-15Concepts for ReviewAutarkyAverage productCapital-labor ratioCapital-output ratioCenterClosed economyComprador groupsDependenceDominanceDualismFalse-paradigm modelFree marketFree-market analysisHarrod-Domar growth modelLewis two-sector modelMarginal productMarket failure Copyright 2012 Pearson Addison-Wesley.All rights reserved.3-16Concepts for Review(contd)Market-friendly approachNecessary conditionNeoclassical counterrevolutionNeocolonial dependence modelNet savings ratioNew political economy approachOpen economyPatterns-of-development analysisPeripheryProduction functionPublic-choice theorySelf-sustaining growthSolow neoclassical growth modelStages-of-growth model of developmentStructural-change theoryStructural transformationSufficient conditionSurplus laborUnderdevelopmentCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-17Appendix 3.1:Components of Economic Growth Capital Accumulation,investments in physical and human capital Increase capital stock Growth in population and labor force Technological progress Neutral,labor/capital-saving,labor/capital augmentingCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-18Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility FrontierCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-19Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility FrontierCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-20Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility FrontierCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-21Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility FrontierCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-22Appendix 3.2:The Solow Neoclassical Growth Model,YFKLggg=,1 or()Y Lf K Lyf k=yAk()()sf kn k()()ksf kn k 1()()()()Y tY tA t L taa-=Copyright 2012 Pearson Addison-Wesley.All rights reserved.3-23Appendix 3.2 The Solow Neoclassical Growth Model()()(A3.2.4)ksf kn k Copyright 2012 Pearson Addison-Wesley.All rights reserved.3-24Appendix 3.2 The Solow Neoclassical Growth Model(*)()*(A3.2.5)sf kn kCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-25Figure A3.2.1 Equilibrium in the Solow Growth ModelCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-26Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow ModelCopyright 2012 Pearson Addison-Wesley.All rights reserved.3-27Appendix 3.3:Endogenous Growth Theory Motivation for the new growth theory The Romer modelYAK LKiiiYAKL 1Ngnbab-=-