1. ECO 102 Development Economics
Aisha Khan
Summer 2009
Section G & I
Lecture eight

2. Classic theories of development
Chapter Four

3. Most development literature was developed post World War II
The linear stages of growth model
Theories and patterns of structural change
The international dependence revolution
Neo-classical, free market counter revolution

4. Linear stages theories
Rostow’s stages of growth
Harrod-Domar Growth model

5. Rostow’s stages of Growth
Traditional society
Preconditions for take-off into self-sustaining economic growth
Take-off
The drive to maturity
The age of high mass consumption
Countries needed to follow the right steps to achieve the next stage

6. Harrod-Domar model
Investment leads to more growth (necessary for takeoff)
Capital stock (K)
Total GNP (Y)
Capital-output ration (k)
Savings ratio (s)

7. Harrod-Domar model Constraint Necessary vs sufficient
Increasing ‘s’ will increase GNP growth rate
Main constraint  that even with increasing ‘s’  the capital output ratio is the same
This is because of the low level of new capital formation
Necessary vs sufficient
More savings and investment is not a sufficient condition
Lacking attitudes, managerial competence intelligent development

8. Structural change models
Lewis theory of development
“Two-sector surplus labor”
Patterns of development

9. Lewis theory of development
Surplus-labor countries
Agricultural production function
Only variable input  labor
Capital and technology is fixed
Assumptions
Surplus labor allows MP to be zero
All rural workers share equally  wage is determined by AP

10. Lewis theory of development
Industrial production functions
Only variable input  labor
Capital and technology is fixed

11. Reinvestment from the industrialists causes capital to increase  TP curves move upwards
Wages are fixed at a higher level than rural wages and employers can hire infinite numbers due to excess labor
Labor employed will be where Wm = MP
MP of the manufacturing sector is equal to the demand for labor
More investment from the capitalists allows more capital stock and thus more labor employed
Achieves self-sustaining growth

12. Criticism of Lewis
Assumes that the rate of labor transfer is equal to the rate of modern-sector capital accumulation
Much evidence that there is increasing returns in the industrial sector

13. Instead of investment in the same sort of capital as before we believe that investment goes into more labor-saving techniques which cause the demand for labor to pivot such that more total product can be produced but at the same time the same wage and same labor employed.
This allows us to see that the greater surplus in earnings goes to the owners or few industrialists and does not actually change the status of the poorer.

14. Criticism of Lewis
Assumes that there is surplus labor in rural areas but full employment in urban areas
Assumes the guarantee that a constant wage will always be supplied in the industrial sector
Assumes diminishing returns in the industrial sector

15. Patterns of development
Sequential process -> set of interrelated changes
Through cross-sectional and time-series analysis
Include
the shift from agricultural to industrial production
steady accumulation of capital
change in consumer demands from food to manufactured g&s
growth of urban areas
decline in family size and popn growth

16. International dependence revolution
Neocolonial dependence model
The false-paradigm model
The dualistic-development thesis

17. Neocolonial dependence model
Center  developed countries
Periphery  LDC’s
Organizations help reinforce this structure
Perpetuation of underdevelopment

18. Case-Study: Pakistan
What are the true statistics?

19. Reminder
Quiz 2  Monday, May 25th 2009