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THEORIES OF ECONOMIC
GROWTH AND
DEVELOPMENT
OUTLINE
Objectives
Learning outcomes
Introduction
Development as Growth and the Linear Stages Theories
- Rostow’s stages of growth
- The Harrod-Domar Model
Structural-Change Models
- The Lewis theory of development
- Structural change and patterns of development
The International Dependence Revolution
-The Neo-colonial dependence model
-The False paradigm model
-The Dualistic development thesis
Neo-classical Growth Model
- Solow Growth model
Conclusions
Objectives
This topic aims at:
Discussing the theories used in the study of
development issues
Explaining how empirical studies inform our
thinking about development issues
Learning Outcomes
At the end of this topic, you should be able to
Explain the importance of theory in
understanding development issues
Explain and evaluate the various theories used
to study development issues
Apply these theories in the conduct of research
in order to come up with development policies
Introduction
In studying development issues it is important to
start with a theory.
Limited infrastructure
Imperfect information
increase in entrepreneurship
“During the take-off, new industries expand
rapidly, yielding profits a large proportion of
which are reinvested in new plant; and these new
industries, in turn, stimulate, through their rapidly
expanding requirement for factory workers, the
services to support them, and for other
manufactured goods, a further expansion in urban
areas and in other modern industrial plants”
𝑠
𝑔= ……………………i
𝑘
The model is based on a linear production
function with output given by capital stock, K
times a constant, A, that is;
𝑌 = 𝐴𝐾………………..ii
𝑆 = 𝑠𝑌…………………iv
Net investment (I) is defined as the change in
capital stock, K and can be represented by ΔK so
that
𝐼 = ∆𝐾……………………..v
OR Δ𝐾 = 𝑘Δ𝑌…………….vi
Because net savings, S, must equal net
investment, I, then
𝑆 = 𝐼………………..vii
Substituting iv, v and vi into vii yields:
𝑆 = 𝑠𝑌 = 𝑘∆𝑌 = ∆𝐾 = 𝐼 or simply
𝑠𝑌 = 𝑘∆𝑌 ……………………viii
Dividing both sides of the equation first by Y
and then by k we obtain:
∆𝑌 𝑠
= ……………………ix
𝑌 𝑘
𝑠
Or 𝑔 = ………………x
𝑘
𝑠
The ratio is known as the warranted rate of
𝑘
economic growth
The more they can save and invest, the faster they can
grow
But the actual rate at which they can grow for any level
of investment and saving (how much additional output
can be had from an additional unit of investment) can
be measured by the inverse of capital-output ratio, k,
1
because is the output-capital or output-investment
𝑘
ratio
𝐼
Multiplying the rate of new investment, 𝑠 = by
𝑌
1
its productivity, will give the rate by which
𝐾
national income will increase
Reality is that:
Capitalist profits are invested in labor saving
technology
Existence of capital flight
Little surplus labor in rural areas
Growing prevalence of urban surplus labor
Tendency for industrial sector wages to rise in the
face of open unemployment
This model thus, requires considerable modification
in assumptions and analysis to fit the reality of most
contemporary developing nations.
Taking into account laborsaving bias of most
modern technological transfer, the existence of
substantial capital flight, the widespread
nonexistence of rural surplus labor, the growing
prevalence of urban surplus labor, and the
tendency for modern-sector wages to rise
rapidly even where substantial open
unemployment exists.
Chenery’s Structural Changes and
Patterns of Development