Growth and the Asian Experience

→ Analyzes process of economic growth

→ Relates factors of production to output/income

→ As labor and capital grow over time, so will income/output

→ Observed growth in output/income that is unaccounted for by growth of labor and capital

→ Multifactor productivity
→ Pertains to efficiency with which inputs are combined to produce outputs

◼ greater economies of scale

◼ better management
◼ marketing/organizational abilities
◼ shifts from low to high productivity activities

Keynesian Theory
➢ Growth of income is dependent on rate of capital formation and capital-output ratio
➢ Employs Harrod-Domar model
❖ Savings and investment are important
• Assumes saving is a constant proportion of income
• Income is the sum of consumption and savings (investments)
❖ Efficiency of capital usage
• Capital-output ratio
➢ Does not consider Law of Diminishing Returns

Solow/Neoclassical Theory
➢ Incorporates Law of Diminishing Returns
➢ Output depends on its labor and capital working together
➢ Production function

Power Balance Theory

➢ Stress international power balance
➢ North-South issue
❖ Terms and patterns of trade keep some countries poor and other richer
❖ Saving rate is dependent on income
❖ High productivity is difficult to achieve
➢ Economic growth is a process of shifts in resources among sectors
❖ Stress rigidities hindering shifts
❖ How shifts take place over time as development progresses
Structural Theory
➢ Highlights Lewis-Fei-Ranis model
➢ Explains how industrialization process takes place and how inefficiencies arise
➢ 2 sector model – a modern and a traditional
➢ Resources move from the traditional to the modern sector and this spurs growth
▪ Decline in agriculture’s contribution to GDP; increase in industrial output up to a time when it too
begin to decline; increase in service income

New Growth Theory

➢ Stress importance of externalities – new technology and higher levels of education

✓ Asian economies flourished

✓ Incomes grown faster for a sustained period of time
✓ Economies moved from a very low level of economic activity to fairly high levels of per-capita
income

◼ Importance of outward – looking policies and emphasis on exports and foreign direct investments
▪ Development of import-substituting industries
▪ Protection through import restrictions and tariffs
▪ Emphasis on agriculture-based industry gave way to development of labor-intensive industries
▪ Technology
- Buying from foreign companies under license
- Copying without license
- Entering into joint venture and importing through foreign direct investment
◼ Macroeconomic policies and role of government
▪ Markets, competition and contests for resources play lead role for allocation process
◼ Education, labor-force growth and labor productivity
▪ Labor productivity increased as total productivity
▪ Increase on amount of capital per worker
▪ High investment given to workforce education
◼ Labor-market flexibility

◼ Different initial conditions

◼ Importance of sector policies

➢ High growth rates of saving and investment

➢ Increased productivity