Chapter3

ClassicTheoriesof
EconomicGrowth
andDevelopment

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ClassTheoriesofEconomic
DevelopmentFourApproaches
Linearstagesofgrowthmodel
TheoriesandPatternsofstructuralchange
Internationaldependencerevolution
Neoclassical,freemarketcounterrevolution

DevelopmentasGrowthandLinear
StagesTheories
MarshallPlan:
USfinancial&technicalassistanceforEuropeto
rebuildeconomy

DevelopmentasGrowthandLinear
StagesTheories
RostowsStagesofGrowth
TraditionalSociety
Thepreconditionfortakeoff
Thetakeoff
Drivetomaturity
Theageofhighmassconsumption

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HarrodDomarGrowthModel
Mobilizationofdomesticandforeignsaving
Investmentleadstomoregrowthcanbe
describedintermsofHarrodDomarGrowth
Model.ItisalsoreferredasAKmodel.
Everyeconomymustsavecertain%ofits
nationalincome.
Capitalstockisnecessarytoincreaseeconomic
growth.

HarrodDomarGrowthModel
Assumption
Directrelationshipbetweensizeoftotalstock
KandtotalGNPY
K/Yratiois3

TheHarrodDomarModel
S sY

(3.1)

I K

(3.2)

K kY

(3.3)

SI

(3.4)

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TheHarrodDomarModel

S sY kY K I

(3.5)

sY kY

(3.6)

Y s

Y
k

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(3.7)

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CriticismsoftheStagesModel
Necessaryversussufficientconditions
Lowsavings
Lowlevelofcapitalformation

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StructuralChangeModels
Underdevelopedeconomiestransfertheir
domesticstructurefromatraditionalsubsistence
agriculturetoamoremodern,urbanizedsector
Itemployeestoolsofneoclassicalpriceand
resourceallocationtheory

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TwoWellknownApproach
TheLewistwosectormodel(surplusLabour)
byW.ArthurLewis
PatternofDevelopmentbyHollisB

Figure3.1TheLewisModelofModern
SectorGrowthinaTwoSectorSurplus
LaborEconomy

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CriticismsLewisModel
Rateoflabortransferandemploymentcreation
maynotbeproportionaltorateofmodernsector
capitalaccumulation
Surpluslaborinruralareasandfullemployment
inurban?
Institutionalfactors?
Assumptionofdiminishingreturnsinmodern
sector
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Figure3.2TheLewisModelModifiedby
LaborsavingCapitalAccumulation:
EmploymentImplications

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TheInternationalDependence
Revolution
Threemajorstreamsofthought:
Theneocolonialdependencemodel
ItisanindirectoutgrowthofMarxistthinking.
Underdevelopmentisduetoahighlyunequal
internationalcapitalistsystemofrichcountrypoor
countryrelationship.
Richnationsareintentionallyexploitativeor
unintentionallyneglectful.
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TheInternationalDependence
Revolution
UnequalpowerrelationshipsbetweentheCenter
(Advancedcountries)andPeriphery(LDCs)
Eliteclasswhoenjoyshighincome,socialstatus
andpoliticalpowerwhoseprincipalinterestisin
theperpetuationoftheinternationalcapitalist
systemofinequalityandconformityinwhich
theyarerewarded.

TheInternationalDependence
Revolution
Directlyandindirectly,theyserveandare
rewardedbyinternationalspecialinterestpower
groups(WB,IMF,MNCs,Donoragencies)
Agricultureincometax,RGST,Subsidy,
PIA,Railway,PakistanSteel,KESC

TheInternationalDependence
Revolution
Thefalseparadigmmodel
Faultyandinappropriateadvice(privatization,SAP,
increaseTaxes,MP,FP)
Leadinguniversityintellectuals,tradeunionist,high
levelgovernmenteconomists,andcivilservantsget
theirtrainingindevelopedcountries.
elegantconceptbutinapplicablemodel(freemarket
economy,Nogovt.intervention)

TheInternationalDependence
Revolution
Ineconomicscoursesirrelevantwestern
concepts
ToomuchemphasisonK/Y,S,I,Privatization
andincreaseGDPgrowthrates

TheInternationalDependence
Revolution
Thedualisticdevelopmentthesis
Worldofdualsocieties,ofrichnationsandpoor
nations.
Dualismrepresentstheexistenceandpersistence
ofsubstantialandevenincreasingdivergence
betweenrichandpoornationsaswellaspeoples
atvariouslevel.

TheInternationalDependence
Revolution
Fourkeyarguments
Superiorandinferiorelementscancoexist
Itisnotatemporaryphenomenon
Increasing
Itmayactuallyservetopushitdown.
Conclusionsandimplications
Noinsightondevelopment,empiricalevidence

TheNeoclassicalCounterrevolution:
MarketFundamentalism

Supplysidemacroeconomicpolicies
RationalExpectationTheories
FreeMarkets
Privatization
ControlledVotebyIMF,WB,WTO

TheNeoclassicalCounterrevolution:
MarketFundamentalism

InconjunctionwithILO,UNDP,UNCTAD
Centralargument
Underdevelopmentresultsfrompoorresources
allocationduetoincorrectpricingpoliciesand
toomuchstateintervention.
SugarPrices,Wheatandricesupportprices,
PIA,Railway,KESC,WAPDA,SteelMill

TheNeoclassicalCounterrevolution:
MarketFundamentalism

Underdevelopmentisnotbecauseofdeveloped
countriesandinternationalagencies.
Underdevelopmentisbecauseoftheheavy
handofstateandcorruption,Inefficiency,and
lackofeconomicincentives

TheNeoclassicalCounterrevolution:
MarketFundamentalism

Challengingthestatistmodel
Freemarketapproach:Marketsaloneare
efficient.
Competitioniseffective,ifnotperfect
Technologyisfreelyavailableandcostlessto
absorb
Informationisalsoperfect.

TheNeoclassicalCounterrevolution:
MarketFundamentalism

Publicchoiceapproach(newpoliticaleconomy
approach):Arguethatgovernmentcando
nothingright.
Elitesusepoliticalinfluencetoobtainspecial
benefits(rents)fromgovernmentpoliciesthat
restricttoaccessimportantresources.
Politicianusegovernmentresourcesto
consolidateandmaintainpositionsofpowerand
authority.
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TheNeoclassicalCounterrevolution:
MarketFundamentalism

Bureaucratsandpublicofficialsusetheir
positionstoextractbribesfromrentseeking
citizensandtoprotectbusinessesontheside.
MisallocationofscarceresourcesCNG,Rental
Power

TheNeoclassicalCounterrevolution:
MarketFundamentalism

Marketfriendlyapproach:Recognizesthatthereare
manyimperfectionsinLDCproductandfactor
marketsandgovernmentsdohaveakeyroletoplay
infacilitatingtheoperationofmarketsthrough
nonselective(marketfriendly)interventions.
Physicalandsocialinfrastructure
HealthCare
Education

TheNeoclassicalCounterrevolution:
MarketFundamentalism

Traditionalneoclassicalgrowththeory
ArguesthatLiberalization(oeningup)of
nationalmarketsdrawsadditionaldoesticand
foreigninvestment
Solowmodel

Conclusionsandimplications
institutionalandpoliticalrealitiesindeveloping
world

TheoriesofDevelopment:
ReconcilingtheDifferences
Developmenteconomicshasnouniversally
acceptedparadigm
Insightsandunderstandingsarecontinually
evolving
Eachtheoryhassomestrengthsandsome
weaknesses

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CaseStudy:SouthKoreaand
Argentina

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Appendix3.1:Componentsof
EconomicGrowth
CapitalAccumulation,investmentsinphysical
andhumancapital
Increasecapitalstock

Growthinpopulationandlaborforce
Technologicalprogress
Neutral,labor/capitalsaving,labor/capital
augmenting

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FigureA3.1.1EffectofIncreasesinPhysicaland
HumanResourcesontheProductionPossibility
Frontier

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FigureA3.1.2EffectofGrowthofCapital
StockandLandontheProduction
PossibilityFrontier

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FigureA3.1.3EffectofTechnological
ChangeintheAgriculturalSectoronthe
ProductionPossibilityFrontier

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FigureA3.1.4EffectofTechnological
ChangeintheIndustrialSectoronthe
ProductionPossibilityFrontier

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Appendix3.2:TheSolow
NeoclassicalGrowthModel

A(t ) L(t )
Y F K , L
L f K L ,1 or y f (k )
1

Y (t ) Y (t )

y Ak

k sf (k ) ( n)k
sf (k ) ( n)k

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AppendixSolowGrowthModel

k sf (k ) ( n)k

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(A3.2.4)

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AppendixSolowGrowthModel

sf (k *) ( n)k *

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(A3.2.5)

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FigureA3.2.1Equilibriuminthe
SolowGrowthModel

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FigureA3.2.2TheLongRunEffectof
ChangingtheSavingRateintheSolow
Model

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Appendix3.3:Endogenous
GrowthTheory
Motivationforthenewgrowththeory
TheRomermodel

1
i

Yi AK L

Y AK

L
N
gn
1
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