1. ECON 317: ECONOMIC GROWTH AND DEVELOPMENT

2. CLASSIC THEORIES OF ECONOMIC DEVELOPMENT: FOUR APPROACHES
Development as growth and the linear-stages approach
The view that the process of development is a series of successive stages of economic growth through which all countries must pass in order to develop.
Structural-change models
Focused on emphasizing the internal process of structural change required for economic growth and development
The international-dependence revolution
Emphasized international and domestic institutional and political constraints on development
The neoclassical counter-revolution
The view that the lack of economic development is primarily the result of too much governmental interference in the market and the lack of openness (trade-wise)
The current thinking is eclectic, drawing on insights from the above approaches.

3. Development as Growth, and the Linear-Stages Approach
Background: the success of the Marshall Plan and the historical experience of the then industrial countries
Rostow’s stages-of-growth model
Traditional society
Pre-conditions for take-off into self-sustaining growth
The take-off into self-sustaining growth
The drive to maturity
Age of high mass consumption
Strengths and weaknesses of Rostow’s linear-stages model

4. Development as Growth, and the Linear-Stages Approach (II)
The Harrod-Domar model of economic growth
𝑌= 𝐾 𝑣 , 𝑤ℎ𝑒𝑟𝑒 𝑌:𝑜𝑢𝑡𝑝𝑢𝑡;𝐾:𝑐𝑎𝑝𝑖𝑡𝑎𝑙;𝑎𝑛𝑑 𝑣:𝑐𝑎𝑝𝑖𝑡𝑎𝑙−𝑜𝑢𝑡𝑝𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
∆𝐾=𝐼−𝑑𝐾;𝑎𝑛𝑑 𝑆=𝑠𝑌,
where s is the saving rate; and d is the rate of capital depreciation
(note: 0<s<1 and 0<d<1)
But, in equilibrium, 𝐼=𝑆 Thus, ∆𝐾=𝑠𝑌−𝑑𝐾
Given the above, the output growth rate is given by:
g= ∆𝑌 𝑌 = 𝑠 𝑣 −𝑑

5. Development as Growth, and the Linear-Stages Approach (III)
Lessons from the Harrod-Domar model
A very useful tool for economic policy making
In order to increase the growth rate of output, increase the saving rate and/or use capital efficiently
Strengths and weaknesses of the Harrod-Domar model

6. Structural-Change Models
The “two-sector surplus labour” model of Arthur Lewis
The traditional sector
The modern sector
A major focus: the process of labour transfer and the growth in output and employment in the modern sector

7. Figure 3.1 The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labor Economy

8. Criticisms of the Lewis Model
Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation

9. Criticisms of the Lewis Model (II)
The assumption of surplus labor in rural areas and full employment in urban areas is highly doubtful;
Institutional factors render the assumption of constant modern sector wages unrealistic;
The assumption of free geographical and occupational mobility of labour can be questioned;
In spite of the above drawbacks, the model is useful in highlighting important aspects of the development process.

10. The International-Dependence Revolution
The view that developing countries are faced with institutional, political, and economic rigidities, and are caught up in a dependence and dominance relationship with rich countries;
Three main strands of the above view
The neo-colonial dependence model
The false-paradigm model
The dualistic-development view

11. The International-Dependence Revolution (II)
The neo-colonial dependence model
A view that the global economic system is influenced mainly by persistent and unequal relationships between rich (core) and poor (periphery) countries;
The above is viewed as a legacy of colonialism
It’s also viewed as supported by influential elite groups in the developing countries for whom such a relationship is rewarding;
This model thus, unlike the linear-stages and structural-change models, sees underdevelopment as being externally induced.

12. The International-Dependence Revolution (III)
The false-paradigm model
Attributes underdevelopment to the misapplication of developed- country models
According to the model, the resulting policies can also serve the interests of elite groups (domestic and international);
The role of higher education in the perpetuation of inappropriate policy prescription.

13. The International-Dependence Revolution (IV)
The dualistic-development thesis
Dualism, as a concept in development economics, refers to the existence and persistence of two forms of a phenomenon, activity, or entity, and where one of these forms can typically be viewed as being “superior” and the other “inferior”;
Three main arguments of the concept of dualism:
Different sets of conditions can coexist in a given space
The coexistence is not temporary or transitional, but chronic;
There is a tendency for the degrees of superiority or inferiority to widen.

14. The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism
Main argument: inefficient allocation of resources (via inappropriate pricing policy and excessive state intervention) is the cause of underdevelopment.
Three strands of the neoclassical counter-revolution
Free market approach
Public choice (new political economy) approach
Market-friendly approach

15. The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism (II)
Free market approach
According to this approach, markets alone are efficient;
Assumes that markets in developing countries are efficient and that any imperfections are minor;
Views any governmental/state intervention in the market as distortionary and undesirable.
Public choice theory
Assumes that politicians, bureaucrats, and citizens are primarily self-centred;
Highlights the failures of state-owned enterprises
It contends therefore that there is very little that governments can do right;
Advocates a very minimal role for the state.

16. The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism (III)
The market-friendly approach
Linked to the 1990s writings of the World Bank and its economists
Acknowledges the existence of many imperfections in LDC product and factor markets;
Recognizes that governments have a key role to play in enhancing the operation of markets;
Governments’ role must be market-friendly (non-selective)
Acknowledges that market failures are more widespread in LDCs in areas such as investment coordination and environmental outcomes.

17. The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism (IV)
Traditional neoclassical growth theory (typified by Solow’s model)
A theoretical support to the neoclassical counter-revolution
The Solow growth model is an improvement on the Harrod-Domar model via the significant roles given to labour and technology
𝑌=𝐹(𝐾,𝐴𝐿)
Where Y is output, K is capital (physical and human), L is labour, and A is the productivity of labour.

18. The Neoclassical (Neoliberal) Counter-Revolution - Market Fundamentalism (V)
Output growth results from one or more of three factors:
Increases in labour (quantity and quality)
Increases in capital (via saving and investment)
Technological progress
The opening up of economies, by attracting foreign investment, has the effect of increasing saving and investment rates, and consequently per capita income;
Open economies tend to converge to higher per capita incomes, compared to closed economies, especially since at lower capital- labour ratios, the returns on investments are higher.

19. Classic Theories of Development: Concluding Thoughts
Governments do fail, but so do markets; a balance is needed
Must attend to institutional and political realities in developing world
Development economics has no universally accepted paradigm
Insights and understandings are continually evolving
Each theory has some strengths and some weaknesses