lecture2- 3 classic theories of economic growth and development

Lecture2- 3

Classic Theories of Economic Growth and Development

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Classic Theories of Economic Development: Four Approaches

• 1 Linear stages of growth model• 2 Theories and Patterns of structural

change• 3 International-dependence revolution• 4 Neoclassical, free market

counterrevolution

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重难点

• 1 、刘易斯模型• 2 、 Measurement of Dual Economy and

Surplus Labor3 、索罗模型

• 4 、经济收敛

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1 Development as Growth and Linear-Stages Theories

• Because of its emphasis on the central role of accelerated capital accumulation, this approach is often dubbed “capital fundamentalism.”

• A Classic Statement: Rostow’s Stages of Growth

• the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity,and the age of high mass consumption (第六阶段：超越大众消费）

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Conditions of take-off

• 起飞阶段是经济社会出现急剧变革的阶段，是关键所在。必须具备三个条件：

• 一是要有较高的储蓄率，使储蓄占国民收入的 10％以上；二是要建立起飞的主导部门，使它发展较快并带动其它部门增长；

• 三是要有制度上的改革，即建立一种能够保证“起飞”的制度，包括政治、社会与经济方面，以推动经济的扩张。

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The Harrod-Domar Model

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The Harrod-Domar Model

To grow,economies must save and invest a certain roportion of their GDP. The more they can save and invest, the faster they can grow. So,the main obstacle to or constraint on development, according to this theory, is the relatively low level of new capital formation in most poor countries.But saving and investment is a necessary condition and not a sufficient condition for accelerated rates of economic.

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2 Structural-Change Models

• 2.1 The Lewis two-sector model• Nobel laureate W. Arthur Lewis formulated• extended by John Fei and Gustav Ranis • Two sector: a traditional agricultural

sector, a high-productivity modern urban industrial sector

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2.1 The Lewis two-sector model

• traditional sector: overpopulated rural subsistence sector characterized by zero marginal labor productivity

• surplus labor: it can be withdrawn from the traditional agricultural sector without any loss of output

• rural real wage is determined by the average and not the marginal product of labor(average level of real subsistence income in the traditional rural sector.)

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

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Criticisms of the Lewis Model

• Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation

• Surplus labor in rural areas and full employment in urban?

• constant real urban wages. Institutional factors?

• Assumption of diminishing returns in modern industrial sector

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

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The Fei–Ranis Modification

• One problem is to avoid increasing the average product of labor in agriculture and the industrial institutional wage that would halt industrial expansion

• agricultural sector must grow, through technological progress.

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剩余劳动力的度量（见姚洋《发展经济学》）

• 1.超过农业生产所需的劳动力• 2.边际产出为 0 的劳动力• 3.不改变家庭劳动时间（而劳动者数量变化了）的劳动力

• 4.工资标准：进城务工人员工资是否快速增长

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二元结构的衡量

• 城市（或农村）就业结构比重• 二元对比系数：是二元经济中农业部门的比较劳动生产率与非农业部门比较劳动生产率的比率。数值越小，二元结构越严重。

• 二元反差指数：农业部门与非农业部门收入或产值比重与就业比重之差的绝对值的平均值指数越大，二元结构越严重。 y 表示收入或产值比重， l表示就业比重。

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中国二元结构变化 1 （向仁康， 2013）

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Empirical Patterns of Development - Examples

• The patterns-of-development analysis of structural change focuses on the sequential process through which the economic, industrial, and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth

• Hollis B. Chenery

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Examples

• Switch from agriculture to industry (and services)

• the change in consumer demands from emphasis on food and basic necessities to desires for diverse manufactured goods and services

• Rural-urban migration and urbanization• Steady accumulation of physical and human

capital• Population growth first increasing and then

decreasing with decline in family size

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Examples

• The decline in family size and overall population growth as children lose their economic value and parents substitute what is traditionally labeled child quality (education) for quantity

• Let the facts speak for themselves

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3 The International-Dependence Revolution

• International-dependence models view developing countries as beset by institutional, political, and economic rigidities, both domestic and international, and caught up in a dependence and dominance relationship with rich countries

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3 The International-Dependence Revolution

• The neocolonial dependence model– Legacy of colonialism, Unequal power, Core-

periphery• The neo-Marxist, neocolonial view of

underdevelopment attributes a large part of the developing world’s continuing poverty to the existence and policies of the industrial capitalist countries of the northern hemisphere and their extensions in the form of small but powerful elite or comprador groups in the less developed countries.

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The false-paradigm model

– Pitfalls of using “expert” foreign advisors who misapply developed-country models

• Attributes underdevelopment to faulty and inappropriate advice provided by well-meaning but often uninformed, biased, and ethnocentric international “expert” advisers from developed country assistance agencies and multinational donor organizations.

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The false-paradigm model

• In addition, according to this argument, leading university intellectuals, trade unionists, high-level government economists, and other civil servants all get their training in developed-country institutions where they are unwittingly served an unhealthy dose of alien concepts and elegant but inapplicable theoretical models.

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The dualistic-development thesis

– Superior and inferior elements can coexist; Prebisch-Singer Hypothesis

• Dependence notion of the coexistence of powerful and wealthy industrialized nations with weak, impoverished peasant societies in the international economy.

• This coexistence is chronic and not merely transitional.

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The dualistic-development thesis

• Not only do the degrees of superiority or inferiority fail to show any signs of diminishing, but they even have an inherent tendency to increase.

• The interrelations between the superior and inferior elements are such that the existence of the superior elements does little or nothing to pull up the inferior element, let alone “trickle down” to it.

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4 The Neoclassical Counterrevolution: Market Fundamentalism

• The central argument: under-development results from poor resource allocation due to incorrect pricing policies and too much state intervention by overly active developing-nation governments.

• promoting free markets and laissez-faire economics

• South Korea, Taiwan, and Singapore as “free market” examples

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• Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches– Free market approach:markets

alone are efficient; competition is effective, if not perfect; government intervention in the economy is by definition distortionary and counterproductive.

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– Public choice approach: also known as the new political economy approach; politicians, bureaucrats, citizens, and states act solely from a self-interested perspective, using their power and the authority of government for their own selfish ends; bribe; rent-seek; minimal government is the best government

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• Market-friendly approach: recognizes that there are many imperfections in developing-country product and factor markets and that governments do have a key role to play in facilitating the operation of markets through “nonselective” (market-friendly) interventions; market failures are more widespread in developing countries in areas such as investment coordination and environmental outcomes.

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Traditional Neoclassical Growth Theory

•Another cornerstone of the neoclassical free-market argument is the assertion that liberalization (opening up) of national markets draws additional domestic and foreign investment and thus increases the rate of capital accumulation. In terms of GDP growth, this is equivalent to raising domestic savings rates, which enhances capital-labor ratios and per capita incomes in capital-poor developing countries.•Solow neoclassical growth model

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Appendix 3.1: Components of Economic Growth

• Capital Accumulation, investments in physical and human capital– Increase capital stock

• Growth in population and labor force• Technological progress

– Neutral, labor/capital-saving, labor/capital augmenting

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Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier

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Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier

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

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Appendix 3.2: The Solow Neoclassical Growth Model

,Y F K L

,1 or ( )Y L f K L y f k

y Ak

( ) ( )sf k n k

( ) ( )k sf k n k

1( ) ( ) ( ) ( )Y t Y t A t L t

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Appendix 3.2 The Solow Neoclassical Growth Model

( ) ( ) (A3.2.4)k sf k n k

( *) ( ) * (A3.2.5)sf k n k

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Figure A3.2.1 Equilibrium in the Solow Growth Model

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

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Appendix 3.2

• The effect of change of n• The growth accounting :TFP • Convergence

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Appendix 3.3: Endogenous Growth Theory

• In a rather ad hoc manner, neoclassical theory credits the bulk of economic growth to an exogenous or completely independent process of technological progress.

• two insurmountable drawbacks: First, technological advance is completely independent of the decisions of economic agents. And second, the theory fails to explain large differences in Solow residuals across countries with similar technologies.

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• Discarding the neoclassical assumption of diminishing marginal returns to capital investments; offset the natural tendency for diminishing returns

• Increasing returns to scale in aggregate production(externalities : public and private investments in physical or human capital generate external economies, complementary investments; technology spillovers: learning by doing as “learning by investing.” )

• Endogenous technological progress

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• Motivation for the new growth theory• The Romer(1986) model

Y AK L Ki i i 1

Y AK L 1

1

ng n

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A note:

lecture2- 3 classic theories of economic growth and development

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