Todaro & Smith economic development_ch03_Mushfiqul Haque Mukit

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
Chapter 3
Classic Theories
of Economic
Growth and
Development

Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 3-2
Chapter 3: Summary Outline:
Theories of Economic Growth & Development
• Linear Stage of Growth (Harrod-Domar Model
• Structural change theories (Lewis Model)
• International –dependence revolution (Marxist/Radical Model)
• Neoclassical-free market re-surgence
• Can differences in thinking be re-conciled?
• Explaining Growth- Application of Production Possibilities Curve (PPC)
• Illustrating growth using PPC, efficiency, trade offs ,technological
change
• New Growth Theory-Solow Model ( labor quality or human capital).
• What about institutions. They are ignored in these models.
• Measuring Development (Perkins chapter 2)

Class Theories of Economic
Development – Four Approaches
• Linear stages of growth model
• Theories and Patterns of structural change
• International-dependence revolution
• Neoclassical, free market counterrevolution

Development as Growth and
Linear-Stages Theories
• Rostow’s Stages of Growth: Historical
stages
• Harrod Domar Growth Model: Emphasis on
Physical Capital.

sYS =
KI ∆=
(3.1)
(3.2)
YkK ∆=∆ (3.3)
IS = (3.4)
The Harrod-Domar Model

The Harrod-Domar Model
IKYksYS =∆=∆== (3.5)
YksY ∆= (3.6)
k
s
Y
Y
=
∆ (3.7)

Criticisms of the Stages Model
• Necessary versus sufficient conditions

Structural-Change Models
• The Lewis two-sector model
• Modern and traditional sector

Figure 3.1 The Lewis Model of
Modern-Sector Growth:Two-Sector
Surplus-Labor Economy

Criticisms- Lewis Model
• Rate of labor transfer and employment creation may not be
proportional to rate of modern-sector capital accumulation.
Growth in modern sector may not draw enough labor.
• Surplus labor in rural areas and full employment in urban?
• Institutional factors? These assumptions are not correct.
• Assumption of diminishing returns in modern sector

Figure 3.2 The Lewis Model Modified
by Laborsaving Capital Accumulation:
Employment Implications

The International-Dependence
Revolution: Radical/Marxist Model
• The neoclassical dependence model
– Unequal power, core-periphery
• The false-paradigm model
– Using “expert” advisors
• The dualistic-development thesis
– Superior and inferior elements can coexist;
– center-periphery (sociologist’s view)
• Conclusions and implications
– No insight on development, empirical evidence

The Neoclassical Counterrevolution:
Market Resurgence
• Challenging the statist model
– Free market approach
– Public choice approach
– Market-friendly approach
• Traditional neoclassical growth theory
– Solow model
• Conclusions and implications
– institutional and political realities in developing world

Theories of Development:
Reconciling the Differences
• Development economics has no universally
accepted paradigm? But everything does not go?
• Insights and understandings are continually
evolving: Lessons from experience & history
• Each theory has some strengths and some
weaknesses:
• But there are better theories tested with reality of
evidence and experience

Case Study: South Korea and
Argentina

Concepts for Review
• 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

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

• 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

• Traditional neoclassical growth theory
• Underdevelopment

Appendix 3.1: Components of
Economic Growth
• Capital Accumulation, investments in physical and
human capital
– Increase capital stock
– GNP= Q(L,K)= F(L,K)
• Growth in population and labor force
• Technological progress
– Neutral, labor/capital-saving, labor/capital augmenting
– GNP= F(L, K, T)

Figure A3.1.1 Effect of Increases in Physical
and Human Resources on the Production
Possibility Frontier (PPF)- Model

Figure A3.1.2 Effect of Growth of Capital Stock and
Land on the Production Possibility Frontier (PPF):
Explaining Economic Growth

Figure A3.1.3 Effect of Technological
Change in the Agricultural Sector on
the Production Possibility Frontier

Figure A3.1.4 Effect of Technological
Change in the Industrial Sector on the
Production Possibility Frontier

Appendix 3.2: The Solow Neoclassical
Growth Model: Considers human
capital or labor quality & productivity
Y AK L Ki i i= −α α β1
Y AK L= + −α β α1
[ ]βα
β
−−
=−
1
n
ng

Appendix- Solow Growth
Model
( ) ( ) (A3.2.4)k sf k n kδ∆ = − +

Appendix- Solow Growth
Model
( *) ( ) * (A3.2.5)sf k n kδ= +

Figure A3.2.1 Equilibrium in the
Solow Growth Model

Figure A3.2.2 The Long-Run Effect of
Changing the Saving Rate in the Solow
Model

Appendix 3.3: Endogenous Growth
Theory: Accounts for labor quality,
technology, productivity
• Motivation for the new growth theory
• The Romer model
Y AK L Ki i i= −α α β1
Y AK L= + −α β α1
[ ]βα
β
−−
=−
1
n
ng

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