ECON 3508
Autumn 2015
Introduction to Economic
Development
II. THEORIES OF GROWTH AND
DEVELOPMENT
See Text, Chapter 3.
September 2015
Agenda
1. Introduction
2. Stage Theorizing:
Rostow
3. Growth Theorizing:
Harrod-Domar
4. Structural Change:
W. A. Lewis
5. “Dependence” Theories: Prebisch; Frank
6. Neo-Classical Approaches
7. Mainstream Economics Approach
1. Introduction
Brevity of the era in which “human development” as we
know it, has been an important objective of public
policy;
Reasons for Post WWII focus on “development”
The evolution of “Development Economics” and
“Economics for Development”
2. Rostow’s “Stages of Economic Growth”
Rostow’s purpose;
Stages of Growth:
Traditional Society;
Preconditions for Take-Off;
Take-Off;
Drive to Maturity;
High Mass Consumption
The “Take-Off”:
“The
great watershed in the lives of most societies”
Two types:
“Regions of Recent Settlement” (Canada, Australia, NZ….)
“Older civilizations”
Beginning the “Take-Off”? Some sharp stimulus e.g. political
revolution; major technological change, external challenge
Requirements:
increase in net investment to 10% or more of GDP
new institutional structures;
new elites and control of income flows;
effective entrepreneurship
Development of “Leading Sectors”
Types of leading sectors:
UK: cotton, engineering, canals, railways,
France, US, Canada, Russia: Railways widening the market
Rostow: Actual
Historical Stages, from
“Take-Off” to “High
Mass Consumption”
Critique of Rostow’s Schema:
– General weakness of “stage theories”?
– Ethnocentric?
• Would model from US, UK Europe be applicable everywhere?
• Is “high mass consumption” stage the universal objective?
(Rostow amended this and added Stage #6: “The Search for
Quality in Life”
– Is movement from stage to stage “uni-directional”? Or
can take-offs fizzle and reverse?
But some of his ideas are interesting and have come
to be taken for granted in our understanding of
“development”: e.g.
–
–
–
–
role of Savings and Investment;
idea of leading sector;
some thoughts re social change
Importance of entrepreneurship
3. The Harrod-Domar Model
Definition of Variables:
S: Savings
Y: National Income or GDP
Y: change in National income or GDP per year
Y/Y =
g, or the growth rate of GDP (i.e. the change in GDP as a
proportion of total GDP
I: K or “Net Investment” (over and above replacement invststment)
K: Capital stock;
s: S/Y, or net Savings;
ICOR: Incremental Capital to Output Ratio, or “c”;
c” =
K/ Y
Note: This was presented in class. Please see the textbook, pp. 121-124
3. The Harrod-Domar Model
4. The “Lewis Model”
Concepts of “Dualism” and “Structural Change”
Historical and colonial aspects;
Traditional societies, institutions and technologies
and
“Modern” (or “western”) societies, institutions
and technologies
The range of “dualistic” theorizing
4. The “Lewis Model”
Assumptions: Two Sectors
Traditional:
– Traditional Society;
– L intensive; K-extensive;
– abundant or surplus labour;
– subsistence income;
– disguised unemployment (Traditional agriculture and
urban informal economy)
Modern Sector:
– Technologically modern;
– capital intensive;
– “capitalistic”;
– “modern” goods;
(modern factories, plantations, mines, government services,
professional services…)
Further Assumptions:
1. Closed national economy; (no migration, capital
flows etc.)
2. “Homogenous” labour;
3. Pure competition;
4. “Capitalists” were well-behaved;
5. Mechanisms exist for the transfer of agricultural
surplus from rural to urban areas.
[Note: see notes from class discussion and
text]
Workings of the Lewis Model
The Growth Process
Implications for Income Distribution
Policy Implications of the model
Structural
-Change
Models:
W. A.
Lewis
Limitations of the Lewis Model
1. Two sectors only?
2. Takes modern sector investment for granted
(are capitalists well-behaved?)
3. Is traditional economy incapable of
contributing to growth?
4. International linkages do exist: migration,
capital flows
5. Labour markets are not truly competitive
6. Political implications of income distribution
“Structural Change” Theorizing
• Switch from agriculture to industry (and services)
• Rural-urban migration and urbanization
• Steady accumulation of physical and human capital
Patterns of Structural
Change
5. The Dependence Approach:
• General features and varieties
• The neocolonial dependence model
– Legacy of colonialism, Unequal power, Coreperiphery
• R. Prebisch;
• A.G.Frank and P. Baran
• O. Sunkel;
• “False Paradigm”
General Limitations of Approach
6. “Neo-Classical Approach
• Challenging the Statist Model: Free Markets, Public
Choice, and Market-Friendly Approaches
– Free market approach
– Public choice approach
– Market-friendly approach
• Main Arguments
–
–
–
–
Denies efficiency of intervention
Points up state owned enterprise failures
Stresses government failures
Traditional neoclassical growth theory - with diminishing
returns, cannot sustain growth by capital accumulation
alone
7. Mainstream Economics Approach
Focus on the factors of production and
Productivity
Example of the role of Productivity in
shaping Production per person:
Agriculture in Canada and Africa Generally
Canada:
- recent technologies (seeds, machines etc.)
- large farms, much land per farm family;
- much machinery, equipment, buildings & livestock per
farm; - much education per farmer;
- serviced by a broad range of other activities (machine
dealers, transport, fertilizer firms, R&D, etc.)
** about 4% of the labour force is in agriculture (plus
mining, fisheries and lumber) ; yet Canada has large “net
exports” of food, minerals wood….
Sub-Saharan African Agriculture:
- traditional technologies;
- small farms; little land per farm family;
- reliance on hand tools, e.g. hoes, machetes and
pangas;
- limited formal education for farm people;
“Great skill; traditional technology”
Result: Africa: 62.0% of the labour force is in agriculture;
8.6% in industry; 20.4% in services, but is a major net
importer of food..
Result:
One Canadian farm worker feeds
+/- 25 to 30 people, plus net exports;
One African farm family feeds itself and
about two additional persons on average,
minus net imports.
Implications ??
How Is Productivity Determined?
The Factors of Production include:
1. Physical Capital
2. Human Capital
Capital is a produced factor of production, i.e. capital is
an input into the production process that in the past was
an output from production.
3. Natural Resources
4. Technological Knowledge
To which I would add
5. “Enterpreneurship” and
6. “Social Capital”
The Factors of Production:
1. Physical Capital
The stock of equipment and structures that are
used to produce goods and services.
Examples:
Produced through investment.
How to achieve growth? Save and Invest in
Physical Capital
As a theory of growth?
Necessary but Insufficient
Relevance for Developing Countries?
The Factors of Production: 2. Human Capital
• the knowledge and skills that workers acquire
through education, training, and experience.
• Like physical capital, human capital raises a
nation’s ability to produce goods and services.
• Produced through investment in people
Examples: family environment, health,
education, nutrition, sanitation, on-the-job
training; water availability
As a “Theory of Growth”? Important but not the
whole story
Relevance for Developing Countries
The Factors of Production:
3. “Land” or Natural Resources
Inputs used in production that are provided by Mother
Nature: land, trees, soils, rivers, and mineral deposits,
oil…...
– They may not be necessary for an economy to be
highly productive
– But they sure can help [or sometimes hinder: the
“curse of oil wealth”]
– Renewable Resources: Trees, forests, fish stocks,
soil fertility
– Non-Renewable Resources: Oil, natural gas;
minerals of various sorts
[Note: These also usually require Investment for their
harnessing by humans]
Relevance for Developing Countries
The Factors of Production:
4. Technological Knowledge
Definition: The understanding of the ways to produce
goods and services; how factors of production of
all kinds can be combined to produce goods and
services
Human Capital refers to the resources expended
transmitting this understanding to the labour force.
Note: Both of these are produced by “investment:”
– Education, training & learning of all sorts; and
– R&D
Technological Change: a “dynamic” factor:
Includes:
–Embodied tech in capital equipment
–Embodied in Consumer Goods
–Scientific & tech journals, texts and
publications
–Patents, intellectual property
–Process technology
–Embedded in people’s brains and capabilities
–In established enterprises
Can raise the productivity of Labour and
Capital and can economize on resources.
Relevance for Developing Countries
– Existence of a “backlog” of knowledge:
A broad range of newer technologies is awaiting
implementation
Investment in new technologies via R & D is expensive and
out of reach
“The Advantages of being a Latecomer”
“Leap-frogging” and catching up
– Transfer of Tech embedded in capital goods requires
high levels of Investment and Savings and/or large
role for MNC.
Therefore S & I are doubly important
– The possibility of “catching up” (applying
newer technologies to a broad range of
activities)
• Via purchases of capital equipment;
• Via purchases of new consumer goods
(telephones, computers, drugs & medications,
new plant varieties…..)
• Via learning from books, manuals etc…….
• Via tech transfer in enterprises or purchases of
process systems
The Production Function
Income depends upon Labour, Physical Capital, Human
Capital and Natural Resources:
or:
Y = Af(L, K, H, N)
where “A” is a variable that reflects production technology
Constant Returns to Scale: a doubling of inputs causes output to
double as well. Then:
xY = Af(xL, xK, xH, xN)
Then if we set x = 1/L, then:
Y/L = Af(1, K/L, H/L, N/L)
Meaning? Output per worker depends upon capital
per worker, education etc per worker, and natural
resources per worker.)
Factors of Production: 5. Entrepreneurship
Entrepreneurship:
- performs a central role in an economy
- largely ignored in economic theory
An entrepreneur:
- perceives and seizes an opportunity for the
achievement of an objective,
- visualizes and plans how the objective can be
achieved,
- undertakes to do everything necessary to
implement the vision,”
- brings together all of the other factors of
production;
Factors of Production: 6. Social Capital
• “Social Capital:” increasingly recognized as an
additional “factor of production” as well as
being of significance from a political science or
governance perspective.
• Various analysts emphasize the importance of
“social capital” in an economy, and as a factor
that can promote economic development and
for the reduction of poverty.
[See the World Bank Web Site on social capital:
http://www1.worldbank.org/prem/poverty/scapital/home.
htm]
What is Social Capital?
• “..the institutions, relationships, and norms that
shape the quality and quantity of a society's
social interactions..
• Social capital is not just the sum of the
institutions which underpin a society – it is the
glue that holds them together.”
– [Source: the above-mentioned World Bank Web Site]
Beyond the Neo-Classical Approach
“The Santiago consensus”?
Sustainability focused approaches?
Aspirations but not theories