Chapter 3Chapter 3: Summary Outline: Theories of Economic Growth & DevelopmentClass Theories of Economic Development – Four ApproachesDevelopment as Growth and Linear-Stages TheoriesThe Harrod-Domar ModelSlide 6Criticisms of the Stages ModelStructural-Change ModelsFigure 3.1 The Lewis Model of Modern-Sector Growth:Two-Sector Surplus-Labor EconomyCriticisms- Lewis ModelFigure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment ImplicationsThe International-Dependence Revolution: Radical/Marxist ModelThe Neoclassical Counterrevolution: Market ResurgenceTheories of Development: Reconciling the DifferencesCase Study: South Korea and ArgentinaConcepts for ReviewConcepts for Review (cont’d)Slide 18Slide 19Appendix 3.1: Components of Economic GrowthFigure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier (PPF)- ModelFigure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier (PPF): Explaining Economic GrowthFigure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility FrontierFigure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility FrontierAppendix 3.2: The Solow Neoclassical Growth Model: Considers human capital or labor quality & productivityAppendix- Solow Growth ModelSlide 27Figure A3.2.1 Equilibrium in the Solow Growth ModelFigure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow ModelAppendix 3.3: Endogenous Growth Theory: Accounts for labor quality, technology, productivityCopyright © 2009 Pearson Addison-Wesley. All rights reserved.Chapter 3Classic Theories of Economic Growth and DevelopmentCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-2Chapter 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)Copyright © 2009 Pearson Addison-Wesley. All rights reserved.3-3Class Theories of Economic Development – Four Approaches •Linear stages of growth model•Theories and Patterns of structural change•International-dependence revolution•Neoclassical, free market counterrevolutionCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-4Development as Growth and Linear-Stages Theories•Rostow’s Stages of Growth: Historical stages•Harrod Domar Growth Model: Emphasis on Physical Capital.Copyright © 2009 Pearson Addison-Wesley. All rights reserved.3-5sYS KI (3.1)(3.2)YkK (3.3)IS (3.4)The Harrod-Domar ModelCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-6The Harrod-Domar ModelIKYksYS (3.5)YksY (3.6)ksYY(3.7)Copyright © 2009 Pearson Addison-Wesley. All rights reserved.3-7Criticisms of the Stages Model•Necessary versus sufficient conditionsCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-8Structural-Change Models•The Lewis two-sector model •Modern and traditional sectorCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-9Figure 3.1 The Lewis Model of Modern-Sector Growth:Two-Sector Surplus-Labor EconomyCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-10Criticisms- 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 sectorCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-11Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment ImplicationsCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-12The 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 evidenceCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-13The 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 worldCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-14Theories 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 experienceCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-15Case Study: South Korea and ArgentinaCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-16Concepts 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 growthmodelCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-17Concepts 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 analysisCopyright © 2009 Pearson Addison-Wesley. All rights reserved.3-18Concepts for Review (cont’d)•Periphery•Production function•Public choice theory•Savings ratio•Self-sustaining