Lecture 3: Growth Theories I Economic Development Lecture 3: Growth Theories I

Overview Development economics theory: A short history Linear Stages Theory Rostow’s Stages of Growth Harrod-Domar Growth Model Structural-change Model Lewis Theory of Development Patterns of Development Analysis

Development economics theory: A short history Marshall Plan Structural Change Neoclassical Growth Endogenous Growth International Dependence Linear-Stages Contemporary Theories WWII 50s 60s 70s 80s 90s 00s

Linear Stages Growth Rostow’s Stages of Growth 1/ Traditional 2/ Preconditions for take-off 3/ Take-off 4/ Drive to maturity 5/ High mass consumption Principle strategy to move through the stages was capital accumulation

Linear Stages Growth S = sY I = ΔK k = ΔK / ΔY Harrod Domar Growth Model (‘AK model’) S = sY I = ΔK k = ΔK / ΔY I = ΔK = kΔY = sY = S Divide by Y and k: ΔY/Y = s/k Additional output growth from an additional unit of investment is 1/k

Case Study: Bhutanese Farmer

Case Study: Bhutanese Farmer

Case Study: Bhutanese Farmer

Harrod Domar Growth Model Linear Stages Growth Harrod Domar Growth Model What is desirable? High I High savings rates Lower capital to output ratios better technology lower capital transaction costs Lower capital depreciation rates

Harrod Domar Growth Model Linear Stages Growth Harrod Domar Growth Model What is problematic? Low levels of technology Little ability to save Lack of FDI to plug savings gap High S and I is a necessary, but not sufficient condition for growth

Structural-change Model Lewis Theory of Development ‘Two-sector’ model Agricultural/traditional Modern/industrial Transfer of labour from the traditional to the modern sector, accumulation of capital

Structural-change Model Lewis Theory of Development Assumptions Large pools of surplus labour in agriculture Wages constant (but different) in each sector Owners of modern sector capital (‘capitalists’) reinvest all of their profits

Lewis Theory of Development

Structural-change Model Lewis Theory of Development Criticisms What if capitalists invest in non-labour intensive industries?

Structural-change Model

Structural-change Model Lewis Theory of Development Criticisms K not reinvested – conspicuous consumption Increased income inequality Is there surplus labour? Increases in modern sector wages Assumes diminishing returns in modern sector, but what about returns to scale?

Structural-change Model Lewis Theory of Development Conclusions Consistent with the linear stages theory Focus on investment and accumulation of capital However, like linear stages theory, did not recognise that increased savings and investment were necessary but not sufficient conditions for growth