1. Classic Theories of Economic Growth and Development
Chapter 3
Classic Theories of Economic Growth and Development

2. Classic Theories of Economic Development – Four Approaches
Linear stages of growth models
Theories and Patterns of structural change
International-dependence revolution
Neoclassical, free market counterrevolution
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3. LDCs are poor because they lack capital
Observation:
LDCs have much less capital per worker than rich countries.
“Capital” = machinery and equipment
Result: Lower productivity of labor
And thus Lower wages/incomes.
LDCs are poor because they lack capital

13. Development as Growth and Linear-Stages Theories
Rostow’s Stages of Growth
Traditional, Preconditons, Take-off, Drive to Maturity, High Mass Consumption
Harrod Domar Growth Model
Mobilization of savings to generate sufficient investment to accelerate growth.
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14. The Harrod-Domar Model
(3.1) Savings rate s
(3.2) Invest = ΔCapital
(3.3) Capital/Output = k
(3.4) Closed Economy
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15. The Harrod-Domar Model
(3.5)
(3.6)
(3.7)
Growth rate of GDP = savings rate/capital-output ratio
=> To increase GDP growth, increase s (or foreign S)
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16. Criticisms of the Harrod-Domar Model
Necessary versus sufficient conditions
Is Saving necessary for growth?
Not if foreign investment or foreign aid (World Bank Loans, etc.)
Is Saving (Investment) sufficient for growth?
Are there institutions to channel savings to productive uses: a well-functioning financial system or government plan?
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17. Observation: LDCs often have two quite different sectors:
Traditional (subsistence) agriculture
Low K/L, low Land/L, “old” technology
(NOT: tractors or combines, hybrid seeds, chemical fertilizer, pesticides, herbicides)
Result: VERY low productivity and incomes

25. “Modern” Industrial Sector
Higher K/L, more modern technology than traditional sector (tho often low by rich country standards)
Result: Higher productivity and incomes
Also: Large Urban-Rural gaps in income result in migration to the cities

26. Urban-Rural Income Ratio: China
History, geography and government policy are some of of the reasons that incomes differ. Another important factor is urbanization. This chart displays the ratio of urban disposable income per capita to rural net income per capita.
The first stage of reform and opening ended collective agriculture. The result was a substantial increase in rural incomes. As the chart shows, rural incomes increased faster than urban incomes during the early years, and so the income ratio declined.
But the urban-rural ratio has been rising since the middle 1980s. By the year 2000, urban incomes averaged 2.8 times rural ones, slightly more than the 2.6 ratio in 1978.

27. The National Sample Survey Organization (NSSO) quinquennial surveys provide data on average consumption per capita in urban and rural areas. One omission from these data is housing, but otherwise the data are remarkably comprehensive, including consumption of home production and gifts as well as market purchased amounts. Figure 4.0 displays the urban-rural breakdown for all India in ,and adjusted for inflation. [1] Average consumption in urban areas is nearly twice that in rural areas. Rural consumption increased slightly faster (38 percent versus 35 percent) over the entire 32 year period. Thus the percentage gap in consumption declined slightly, although the absolute gap clearly widened.
[1] There are some inconsistencies in the questionnaire between surveys, and the NSSO price indices for individual states are highly suspect. See Deaton and Dreze (2002), Deaton (2008) and the discussion in Section III below. In this paper the rural and urban series are deflated by the national Consumer Price Indices for Agricultural Labor (CPI-AL) and for Urban Non-Manual Employees (CPI-UNME), respectively (NSSO, 2006, p. 18).

28. Structural-Change Models
The Lewis two-sector model
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29. Figure 3.1 The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labor Economy
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30. Criticisms - 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 (no) and full employment in urban (no)?
Institutional factors (unions, min wage)?
Assumption of diminishing returns in modern sector (agglomeration economies)
BUT: Captures some elements of urban-rural divide. Chapter 7: Todaro Model
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31. The International-Dependence Revolution
The neoclassical dependence model
Unequal power, core-periphery (exploitation)
The false-paradigm model
Using “expert” advisors who give wrong advice (true!)
The dualistic-development thesis
Superior and inferior elements can coexist (true)
Implications
Autarky (end exploitation by “neocolonialists”)
State led development: SOEs, central planning, regulation
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32. The Neoclassical Counterrevolution
Challenging the statist model of government led development
Central planning, SOEs, etc, not usually successful
Free market approach
Public choice approach (not: government is “bad;” rather, what incentives for politicians/bureaucrats)
Criticism of Neoclassical Counterrevolution:
Institutional and political realities in developing world differ from Western world
assume property rights and functioning court systems
ignore power relationships of traditional social systems based on caste, gender, elites
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33. Theories of Development: Reconciling the Differences
Development economics has no universally accepted paradigm
Insights and understandings are continually evolving
Each theory has some strengths and some weaknesses
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34. Case Study: South Korea and Argentina
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35. Concepts for Review Dominance Dualism False-paradigm model Free market
Autarky
Average product
Capital-labor ratio
Capital-output ratio
Center
Closed economy
Comprador groups
Dependence
Dominance
Dualism
False-paradigm model
Free market
Free-market analysis
Harrod-Domar growth
model
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36. Concepts for Review (cont’d)
Lewis two-sector model
Marginal product
Market-friendly approach
Necessary condition
Neoclassical counterrevolution
Neocolonial dependence model
New institutionalism
New political economy approach
Open economy
Patterns-of Development analysis
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37. Concepts for Review (cont’d)
Periphery
Production function
Public choice theory
Savings ratio
Self-sustaining growth
Solow neoclassical growth model
Stages-of-growth model of development
Structural-change theory
Structural transformation
Sufficient condition
Surplus labor
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38. Concepts for Review (cont’d)
Traditional neoclassical growth theory
Underdevelopment
You are NOT responsible for the appendices
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39. Appendix 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 augmenting
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40. Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier
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41. Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier
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42. Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier
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43. Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier
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44. Appendix 3.2: The Solow Neoclassical Growth Model
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45. Appendix- Solow Growth Model
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46. Appendix- Solow Growth Model
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47. Figure A3.2.1 Equilibrium in the Solow Growth Model
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48. Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow Model
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49. Appendix 3.3: Endogenous Growth Theory
Motivation for the new growth theory
The Romer model
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