Development Economics
III
Prof. Dr. Hans H. Bass
Jacobs University, Spring 2010
Development Economics
Agenda Feb. 18
1.
Causes of and Strategies for Development: Traditional ...
1.1 Creating preconditions for take-off
1.1.1 Stages of growth
1.1.2 Harrod/Domar growth model
1.2 Structural change and modernization
1.2.1 Dual labor market model
1.2.2 Patterns of development
1.3 Overcoming dependency
1.4 Getting the prices right
2.
... and New
Feb. 18, 2010
2
1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.1 Stages of growth

1.
2.
3.
4.
5.

Stages of Economic
Growth
historical analogy
traditional society
pre-conditions for take-off into self-sustaining growth
take-off
drive to maturity
age of high mass consumption
“These stages are not merely descriptive. [...]
They have an inner logic [...]” (W. W. Rostow 1960)
 “Theory of Economic Growth”
Feb. 18, 2010
3
1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.1 Stages of growth
Take off (Rostow)
 I / GNP* > 10 %  I = S domestic + S external
Example Japan 1880  1930: 12%  25%
 At least one leading sector ( unbalanced growth with linkages)
above average growth of demand and supply
 income elasticity of demand εD,Y and ... supply εS,Y both > 1
significant share in the economy
transmittance of technological key innovations to other industries
strong backward and forward linkages
Example Japan: railways, textiles (cotton)
 Establishing the political, social and institutional framework conditions for
a modern industrial society
Feb. 18, 2010
4
1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.2 Harrod-Domar growth model
Harrod-Domar
growth model
national income Y = f (K, L), gY = ∆Y / Y
savings  investment (Y=C+S and Y=C+I)
savings S = s Y (attitudinal relation)
net investment I = ∆K
capital-output ratio k = K / Y (technical relation)
or: k = ∆K / ∆Y
or: ∆K = k ∆Y
S=I
or: S = s Y = k ∆Y = ∆K = I
or: s Y = k ∆Y
∆Y / Y = s / k
Feb. 18, 2010
5
1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.2 Harrod-Domar growth model
Harrod-Domar
growth model
In order to grow, economies must save and invest a certain
proportion of their GNI
gY = s / k
 The more they can save and invest, the faster they can grow
 However, the actual growth rate for any level of savings and
investment is determined by 1/k (the inverse of k, i.e.
capital productivity!)
Example:
s = 6%, k = 3, gY = 2%
 take-off: s = 15%, k = 3, gY = 5%
Feb. 18, 2010
6
1 Causes of and Strategies for Development:
Traditional
1.1 Creating preconditions for take-off
1.1.2 Harrod-Domar growth model
Harrod-Domar
growth model in practice
The savings gap can be filled by foreign aid, FDI, or loans
( Marshall Plan II) or forced saving (!)
However, capital accumulation necessary, but not sufficient
condition (Marshall plan II ≠ Marshall plan I)
 economic myopia
Feb. 18, 2010
7
1 Causes of and Strategies for Development:
Traditional
1.2 Structural change and modernization
1.2.1 Dual labor market model



Dual labor market model
W. Arthur Lewis + Fei / Ranis, 1960s / early 1970s
Two sectors:
I) traditional, overpopulated rural subsistence, zero marginal
productivity of labor (“surplus labor”), wage rate according to
average product, unlimited supply of labor
II) modern industrial sector, profit-maximizing behavior of
enterprises, wage rate according to marginal product, perfectly
wage elastic supply of rural labor (supply curve: subsistence
wage plus premium) all profits being reinvested
upward spiral of self-sustaining growth until
modernization completed
Feb. 18, 2010
8
1 Causes of and Strategies for Development:
Traditional
1.2 Structural change and modernization
1.2.1 Dual labor market model




Criticisms
no labor saving technology considered: possibility of antidevelopmental economic growth (increased inequality)
often no surplus labor in rural areas
until 1980s: tendency of urban wages to rise in spite of
open modern-sector unemployment
diminishing returns in the modern sector questionable
( New Growth Theory, external effects, but
complementary state investment in infrastructure etc.
necessary)
Feb. 18, 2010
9
1 Causes of and Strategies for Development:
Traditional
1.2 Structural change and modernization
1.2.1 Dual labor market model


Dual labor market
model in practice
neglect of agriculture
neglect of urban informal sector
Feb. 18, 2010
10
1 Causes of and Strategies for Development:
Traditional
1.2 Structural change and modernization
1.2.2 Patterns of Development






Patterns of development
analysis
Hollis Chenery et al. (late 1970s, early 1980s)
Similarity to simple stage models:
development = sequential process, S↑ I ↑ necessary
Difference:
S↑ I ↑ not sufficient!
Structural changes in socio-economic factors necessary
In practice: struggling for the right mix of policies
Criticism: lack of theoretical rigor can lead to wrong
intervention in assumed causal chains
Feb. 18, 2010
11
1 Causes of and Strategies for Development:
Traditional
1.3 Overcoming Dependency





Dependency Theory
1970s, 2000f. (anti-globalization movement)
Causes for under-development: neo-colonial dependence,
intentionally exploitative or unintentionally neglectful
attitude of First World to Third World
Underdevelopment externally induced
In practice: De-linking, state-owned enterprises, and
industrial nationalism (import substitution industrialization
strategy ISI) / collective self-reliance
Criticism: Experiences all negative
Feb. 18, 2010
12
1 Causes of and Strategies for Development:
Traditional
1.4 Getting the Prices Right






Market Fundamentalism
1990s
Causes for under-development:
incorrect pricing policies  too much state intervention, poor resource
allocation
New Political Economy  minimum government is best
Under-development internally induced
In practice I: Privatization, reduction of state intervention, integration
into the world economy according to static comparative advantages
In practice II: “Market-friendly approach”, non-selective interventions,
suitable climate for private enterprises
Criticism: Positive development examples were non-fundamentalist
during take-off (Germany, USA, Japan ... Taiwan, South Korea, China)
and developed dynamic comparative advantages by state involvement
Feb. 18, 2010
13
Causes of and Strategies for
Development
Conclusion
 each approach has its strengths and
weaknesses
(see case study on ROK and Argentina)
 no universally accepted paradigm
 traditional approaches have informed new,
eclectic approaches
Feb. 18, 2010
14