Module 2
Classic Theorieslof Economic Growth and Development!
INTRODUCTIONI
EVERY NATION STRIVES FOR DEVELOPMENT, but economic progress is not the only
component DEVELOPMENT > material & financial IWidespread realization national context
+linternational economic + social systeml
FOUR APPROACHESI
Post-World War III
1. Linear stages of growth
2. Theories and patterns of structural change
3. International-dependence revolution
4. Neo-classical, free market counterrevolutionl
POST WORLD WAR III
Context:
Struggle to rebuild
Postwar economic boom
Demand for consumer goods.
Flowing foreign aid to countries like PH
PH context: Bell Trade Act (no import duties forIUS productsffil
1. LINEAR STAGES THEORYI
DEVELOPMENT AS GROWTH
Post-war interest on poor nations
Economists had no conceptual apparatus for largelylagrarian countries w/o modern economic
structures.
Strands of thought
Marshall Plan: US financial and technicallassistance to war-torn European countries.1
All modern industrial nations were oncelunderdeveloped agrarian societies.1
1. LINEAR STAGES THEORYI
Rostow's Stages of Growth
Developed countries already passed all stages. Underdeveloped inItraditional and preconditions
stage should just follow rules of dev't to self-sustaining economy.I
The Harrod-Domar Growth Modell
the rate of growth of GDP (YN ifi is determined jointly by the net national savings ratio, s. and
the nationall capital-output ratio, c.
To grow, economies must save and invest.
Other components: labor force growth & technological
progress.
HIGH MAD
Sample:I
THE DEVE TH MATURITY
level & develprent
BA 3 TAKE OFF
PRE-CONDITIONS
Countries able to save 15% to 20% would develop faster
PROBLEM: relatively low level ot new capital formation in most poor countries
ANSWER: through either foreign aid or private foreign investment (justified Marshall
plan for developing worldflil
PROBLEMS:I
Eime
Mechanisms of development embodied in theltheory DOES NOT ALWAYS WORKI
WHY? More savings and investment are notIsuficient. I
Worked for Europe because of necessary Istructural, institutional, and attitudinal conditions. I
IL STRUCTURAL CHANGE MODELSI
2-SECTOR SURPLUS MODEL/LEWIS THEORY OF DEVELOPMENT
-Structural transformation of a subsistence economy
Presence of 2 sectors: overpopulated rural sector w/zero marginal labor productivity and a high-
productivity industrial sector
Transfer of labor from traditional to modem, growth of product output.I
LEWIS THEORY OF DEVELOPMENT
ΔΥ 15% 5% 3
Y Y Growth until surplus labor is absorbed by industrial sector f
Lewis turning point: declining labor-to-land ratio (marginal product of rural labor no longer Offi
labor supply curve positively sloped as modern-sector wage & employment growl
LEWIS THEORY OF DEVELOPMENTI
CRITICISMS:
1. Assumes labor transfer & employment creation proportional tolcapital accumulation. But what
if profits invested in labor saving equipment?
2. Contemporary research show little surplus labor in rural areas (except in some countries like
Chinaffi
3. Urban surplus labor
4. Wages increase amid unemployment.I
PATTERNS OF DEVELOPMENT ANALYSIS
Economic, industrial and institutional structure of an economy Itransformed to permit
new industries as engine of growth.
Capital accumulation + changes in economic structure needed.
Constraints (affect level of dev'tffi: Internal resources, population size, government policies;
External access to capital, technology, trade (countries as part of internal systemffi.
Empirical work of Harvard economist Holllis Chenery and his colleagues, cross-sectional and
time-series studies of countries at diff. levels of per capital income, identified characteristic
features of the development process:I
PATTERNS OF DEVELOPMENT ANALYSISI
Steady accumulation of physical and human capital
Shift from agri to industrial production. I
Change in consumer demand from basic necessities to diverse manufactured goods.1
Growth of cities and urban industriesI
Decline in family size ad overall population.I
- Proponents of structural change model prefer "facts to speak for Ithemselves" unlike theories
such as stages of growth.1
CONCLUSIONSI
Major hypothesis: development is an identifiable process of Igrowth and change with features
similar in all countries
Problem: The model does not recognize differences, factors influencing development process.
PATTERNS OF DEVELOPMENT ANALYSISI
Shift from agri to industrial production. I
Steady accumulation of physical and human capital
Change in consumer demand from basic necessities to diverse manufactured goods.I
Growth of cities and urban industries!
Decline in family size ad overall population.1
- Proponents of structural change model prefer "facts to speak for themselves" unlike theories
such as stages of growth.1
CONCLUSIONSI
Major hypothesis: development is an identifiable process of Igrowth and change with features
similar in all countries
Problem: The model does not recognize differences, factors influencing development process.
Limitations of emphasizing patterns over theory. May draw wrong conclusions about causality.
Optimistic that "correct" mix of policies will generate beneficial patterns.I
III. INTERNATIONALIDEPENDENCE REVOLUTIONI
1970s International-dependence modelslgained support because disenchantment. Iw/stages
and structural-change models! of
Resurgence in various forms in the 21st centuryI
Developing countries caught in a dependence andIdominance relationship with rich countries
because of institutional, political and economic rigidities dificulty for poor nations to be self-
reliant and independentl
1. NEOCOLONIAL DEPENDENCE MODEL
Indirect outgrowth of Marxist thinking
Underdevelopment as result of historical evolution of highlylunequal international capitalist
system of rich country-poor country relationships
Regardless if intentional, nations are under unequal power relations between the center and the
periphery.
Small elite ruling class (landlords, entreps, military rulers, Imerchants, public oficials, [Link]
interests (knowingly or notffi tolperpetuate the international capitalist system of inequality.
The elite serve or are rewarded by international speciallinterest power groups tied by allegiance
or funding to wealthy capitalist countries.
Elites' viewpoints inhibit genuine reform efforts and may lead to even lower levels of living and
perpetuation of underdevelopment.
External-induced against internal constraints!
Revolutionary struggles or major restructuring of world Icapitalist system required to free
dependent nations.
Theotonio Dos Santos: Dependence as conditioning situation; Expand based on expansion of
dominant countries; Dominant countries w/ technological, commercial,
Pope John Paul II: One must denounce the existence of economic, financial, and social
mechanisms which, although they are manipulated by people, often function almost
automatically, thus accentuating the situation of wealth for some and poverty for the rest. These
mechanisms, which are maneuvered directly or indirectly by the more developed countries, by
their very functioning, favor the interests of the people manipulating them. But in the end, they
suffocate or condition the economies of the less developed countries. I
2. FALSE-PARADIGM MODEL
less radical.
Underdevelopment as result of faulty and inappropriate advice by well-meaning. though
uninformed or biased advisers from developed country agencies and orgs
Inappropriate policies merely serving vested interests of existing power groups. (domestic and
internationalffi
Intellectuals, economists, civil servants trained in alien and "irrelevant" Western concepts.I
3. DUALISTIC-DEVELOPMENT THESIS
Dualism-divergence between rich and poor nations Irich and poor peoples on various levelsl
4 KEY ARGUMENTSI
Different sets of conditions coexist rich and poor, modem and traditional (Lewis modelffi, elites
and masses, powerful industrialized nations and impoerished peasant societies.
Chronic coexistence (not temporaryffi of wealth and poerty will not be rectified in time.
Degrees of superiority or inferiority show no signs of diminishing and instead increases.
Superior element does little to pull up or "trickle down to the inferior element, may even push it
down.I
IDR models, amid ideological differences, all reject the emphasis on traditional
neoclassical economic theories.
Question validity of the Lewis-type models reject Chenery observation of "well-defined empirical
patterns" that should be followed by poor countries.
Emphasis on international power imbalances and need for economic, political and institutional
reforms (internal & worldtfi.
Expropriation of private assets w/expectation that public asset ownership and control will help
address poverty & unemployment.1
WEAKNESSES:
Appealing explanation but no insight on how countries linitiate and sustain development.
Actual economic experience of developing countries that pursued revolutionary campaigns of
industrial nationalization and state-run production has been mostly negativel
Based on dependency theory, countries could pursue a policylof autarky or inwardly directed
development & trade w/ other developing countries.I
IV. NEOCLASSICAL COUNTERREVOLUTIONI
1 imitation
IV. NEOCLASSICAL COUNTERREVOLUTIONI
Neoclassical counter revolutionl
Challenges statist models in favor of free markets, public choice & market-friendly approaches.
Developed nations: favored supply-side macroeconomic policies, rational expectations. theories
and privatization of public corporations.
Developing countries: freer markets and dismantling of public ownership, statist planning and
government regulation
Contextl
Emerged in the 1980s during political ascendancy of conservative governments of US.
Canada, Britain and West Germany.
Neoclassicists on the board of powerful international agencies World Bank and International
Monetary Fund as influence of International Labor Organization, United Nations Development
Program and United Nations Conference on Trade and Development eroded!
Argument!
Underdevelopment resulted from poor resource allocation because of incorrect pricing policies
and state interventionl(corruption, ineficiency, lack of incentives, [Link].
State intervention slows economic growth.
Neoliberals: economic eflciency and growth will be stimulated by free markets, privatizing state
enterprises, export expansion and eliminating government regulation and price distortions.
Allow "magic of the marketplace" and "invisible hand to guide resource allocation. and stimulate
economic dev'tI
3 component approaches
1. Free-market approach markets alone are eficient: competition is effective, technology and
informationlfreely available and costless: gov't is counterproductive.
2. Public choice approach new political economyfapproach; governments do nothing right
because of Iselfish interests: misallocation of resources.
3. Market-friendly approach imperfections in economyland need gov't for market-friendly
interventions (social services and climate for private enterpriseffi; acceptance of market failures.
Traditional Neoclassical Growth Theory Liberalization opening up of markets, draw
investmentland increase rate of capital accumulation.
Solow neoclassical growth model economies tolconverge to same income level if
same rates of savings, depreciation, labor force and productivityIgrowth.
Source of output growth: labor quantity and [Link] capital and technology improvement.
Openness - encourages access to foreign productionlideas, technological progress. I
CONCLUSIONSI
Finger-pointing between dependence theorists (many from developing countries, seeing
underdevelopment as externally induced phenomenonffi and neoclassical revisionists (most
from Western economies, blame gov't intervention and bad economic policiesffi.
Market price allocation may do a better job than statelintervention but developing economies
have very different structures.
"Competitive free markets generally do not exist, information is limited, markets fragmented,
etc.1.
CONCLUSIONSI
Invisible hand often lifts those already well-off, failing toloffer opportunities for upward mobility of
the majority.
Lessons from supply-and-demand analysis to arrive at "correct" prices.
"In an environment of widespread institutional rigidity and severe socioeconomic inequality, both
markets and governments will typically fail. "I
RECONCILING DIFFERENCESI
Each approach has strengths and weaknesses,
Controversies ideological, theoretical or empirical makes the study of economic development
challenging.
Evolving patterns of insights and understandings.
CONSENSUS? Significance from each approach:I
Linear stages: crucial role of savings and investment
Two-sector model: transfer of resources from low to high productivity activities, linkages
between traditional & modern
Dependence theory: importance of world economy and decisions of developed
world affecting developing economies.
Neoclassical: eficient production, proper price systems. I