Theories of Development: A Comparative Analysis

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Theories of Development A Comparative Analysis

• Chapter 3

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Leading Theories of Economic Development Five
Approaches

• Classical Scenario ????????
• Linear-stages-of-growth model
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• Neoclassical models
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• Endogenous growth
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W subsistence wage line
Total production
Original condition Labor ON1 Production
OP WageN1W1 SurplusE1W1 Demand for labor
increase Wages increase to E1N1gtN1W1 According to
Malthusian theory of population, population will
increase to ON2 Surplus appear again
E2W2 Equilibrium point E Technology development
E, the day of doom can not be eliminated
TP
E
TP
E
E2
E1
P
W2
W1
O
N1
N2
Labor
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Limitations of the classical model

• The role of technology development has been
  grossly underestimated
• The Malthusian theory of population growth has
  been proved to be misleading whenever wages are
  above level of subsistence, population will
  increase??
• Too aggregated and did not account for the
  diversities with labor and capital input

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The Linear-Stages Theory

• Rostows stages of growth
• The Harrod-Domar growth model
• Obstacles and constraints
• Some criticisms of the stages model

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Rostows stages of growth

• The Transition from underdevelopment to
  development can be descried in terms of a series
  of steps or stages through which all countries
  must proceed
• the traditional society
• the pre-conditions for take-off into
  self-sustaining growth
• the take-off
• the drive to maturity
• the age of high mass-consumption

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The Harrod-Domar Model

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v capital-output ratio S saving ratio S
total saving Y total output K capital stock
I total investment
(3.1)
(3.2)
(3.3)
(3.4)
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The Harrod-Domar Model
(3.5)
(3.6)
(3.7)
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Harrod-Domar theory of economic growth

• The rate of growth of economic output I s
  determined jointly by the national saving ratio S
  and national capital-output ratio K
• The main obstacle on development is the
  relatively low level of new capital formation in
  most poor countries
• Justifying massive transfers of capital and
  technical assistance from developed to less
  developed nations

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Criticism of Harrod-Domar model

• Saving and investment is the necessary condition
  for economic growth but not the sufficient
  condition
• How about the ability of converting new capital
  effectively into high levels of output
• managerial competence
• skilled labor
• well-integrated commodity and money market
• institutional settings
• infrastructures

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Stability of economic growth-Harrodian
knife-edge

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Stability of economic growth-Harrodian knife-edge

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Stability of economic growth-Harrodian knife-edge

• ?????? actual growth rate warranted growth
  rate natural growth rate of the labor force.
  Thus n s/v is the necessary condition for
  economic growth.
• (Joan Robinson Golden Age rule ,Cambridge
  University)
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• But s, v and n are determined independently and
  there is nothing that guarantees that s/v will be
  equal to n. thus the golden rule is very hard to
  achieve.
• It is a knife-edge growth rate (very unstable
  system, with no mechanism to bring the economy
  back to the equilibrium growth rate).
• When the economy is growing fast, it continues to
  grow even faster and goes beyond full employment
  (i.e. high inflation), but when growth is slow,
  it continues to grow even slower (i.e. high
  unemployment).

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Neoclassical growth model

• In the Harrod-Domar growth model, steady-state
  growth was unstable. In the popular term of the
  day, it was a "knife-edge" in the sense that any
  deviation from that path would result in a
  further move away from that path
• Robert M. Solow (1956), Trevor Swan (1956) and
  James E. Meade (1961) contested this conclusion.
  They claimed that the capital-output ratio of the
  Harrod-Domar model should not be regarded as
  exogenous.
• Neoclassical model the capital-output ratio, v,
  was precisely the adjusting variable that would
  lead a system back to its steady-state growth
  path, i.e. that v would move to bring s/v into
  equality with the natural rate of growth (n). The
  resulting model has become famously known as the
  "Solow-Swan" or simply the "Neoclassical" growth
  model.

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• ???????????????-GDP??,??????????
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  ,?????????????????

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• 1987?,???????????
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Technology development and Solows model
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Characteristics of equilibrium point

1. After the equilibrium point, the growth of
   output per labor is jointly determined by
   technology development ratio, investment ratio,
   population growth ratio, depreciation ratio of
   capital

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• Growth rate
• s and n influence the absolute level but not the
  growth rate of long-term output per labor

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Growth accounting
Growth rate of GDP Contribution to growth Contribution to growth Contribution to growth Growth rate of GDP per labor
Growth rate of GDP capital labor TFP Growth rate of GDP per labor
1960-1970 4.0 0.8 1.2 1.9 2.2
1970-1980 2.7 0.9 1.5 0.2 0.4
1980-1990 2.6 0.8 0.7 1.0 1.5
1960-1990 3.1 0.9 1.2 1.1 1.4
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• ??????????????GDP???1880-2000??????
• ??????OECD???????GDP???????????
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