ECON 3066 ECON 30 66 Economic Developmen t
© Natalya Brown 2008
Part I
Four Approaches Line Linear ar-S -Sta tage gess-of of-G -Gro row wth Mod Model els s Stru Struct ctur ural al-C -Cha hang nge e Mod Model els s Inte Intern rnat atio iona nall Depen Depende denc nce e Revol Revolut utio ion n
Four Approaches Four Four major major and and ofte often n compe competin ting g devel develop opmen mentt theories, all trying to explain how and why development does or does not occur. Newer Newer mode models ls often often draw draw on on var variou ious s aspect aspects s of of these classical theories. In the the 1950 1950¶s ¶s and and 196 1960¶ 0¶s, s, line linearar-sta stage ges-o s-offgrowth models were popular. They described the process of development development as a series of successive stages.
These These model models s were were replac replaced ed in in the the 1970 1970¶s ¶s by by Structural Change and International Dependence models. Stru Struct ctur ural al chan change ge mode models ls emph emphas asize ized d the the internal process of structural changes that a developing country must go through, while international dependence models viewed underdevelopment in terms of international and domestic power relationships, institutional and structural rigidities and the resulting proliferation of dual economies and dual societies both within and among nations of the world.
In the 1980¶s 1980¶s and 1990¶s 1990¶s the neocla neoclassi ssical cal counterrevolution focused on the beneficial role of free markets, open economies and the privatization of public enterprises and suggested that the failure of some economies to develop is a result of too much government intervention and regulation.
Linear-Stages-of-Growth Linear-Stages-of-Growth Models ± Rostow Rostow¶s ¶s Stage Stages s of Growt Growth h ± Harrod Harrod-Do -Doma mar¶s r¶s Growt Growth h Model Model
The thinki thinking ng here here was was that that the deve develop loping ing countries could learn a lot from the historical growth experience of the now developed countries in transforming their economies from poor agrarian societies to modern industrial giants. Emphasi Emphasized zed the the role role of of acce acceler lerat ated ed capita capitall accumulation.
Rostow¶s Stages of Growth
Rost Rostow ow argu rgued that hat eco econom nomic deve evelop lopment ca can be described in terms of a series s eries of steps through which all countries must proceed: 1. 2. 3. 4. 5.
The Tr Traditional So Society The The PrePre-co cond ndit itio ions ns for for take take-o -off ff int into o selfself-su sust stain aining ing grow growth th The Take-off The Drive to to Ma Maturity The The Age Age of High High Mass ass Con Consu sump mpttion ion
Adva Advan nced ced natio ation ns wer were e con consid sidered red well be beyond th the take-off stage while underdeveloped nations were seen as still in the traditional traditional or pre-conditions stages. Emp Emphasi asized zed the the need for for the the mobili ilizati zation on of of do domesti stic and foreign investment in order to accelerate growth.
Rost Rostow ow¶s ¶s mode modell sta state tes s tha thatt cou count ntri ries es may may nee need d to to depend on a few raw material exports to finance the development of manufacturing sectors which are not yet of superior competitiveness in the early stages of takeoff. In that way, Rostow¶s model allows for a degree of government control over domestic development not generally accepted by some ardent free trade advocates. As a basi basic c assum assumpti ption, on, Rostow Rostow believ believes es that that coun countri tries es want to modernize as he describes modernization, and that the society will ascent to the materialistic norms of economic growth.
Traditional Societies Tradit Tradition ional al societi societies es are marked marked by their their pre-Newtonian understanding and use of technology. technology. These are societies which have pre-scientific understandings of gadgets, and believe that gods or spirits facilitate the procurement of goods, rather than man and his own ingenuity. The norms of economic growth are completely absent from these societies.
Preconditions for Take-off The The prec precon ondi diti tion ons s to tak takee-of offf are, are, to to Rostow, that the society begins committing itself to education, that it enables a degree of capital mobilization, especially through the establishment of banks and currency, that an entrepreneurial class form, and that the secular concept of manufacturing develops, with with only a few sectors developing at this point. This leads to a take off in ten to fifty years.
The Take-off Take Take-o -off ff then then occ occur urs s whe when n sect sector or led led growth becomes common and society is driven more by economic processes than traditions. At this point, the norms of economic growth growth are well established. Tran Transi sitio tion n fro from m tradi traditio tiona nall to to mode modern rn economy
The Drive to Maturity The The drive drive to matu maturity rity refers refers to the the need need for the economy itself to diversify. The sectors of the economy which which lead initially initially begin to level off, while other sectors begin to take off. This diversity leads to greatly reduced rates of poverty and rising standards of living, as the society no longer needs to sacrifice its comfort in order to strengthen certain sectors.
Age of High Mass Consumption The age age of high high mass mass consump consumptio tion n ref refers ers to the period of contemporary comfort afforded many western nations, wherein consumers concentrate on durable goods, and hardly remember the subsistence concerns of previous stages. in the the age age of high high mass consump consumptio tion, n, a socie society ty is able to choose between concentrating on military and security issues, on equality and welfare issues, or on developing great luxuries for its upper class.
Criticism Stro Strong ng bias bias tow towar ards ds wes weste tern rn mode modell of of modernization (free vs. controlled markets, China). Tries Tries to fit econo economic mic progre progress ss into into a line linear ar system
Harrod-Domar Growth Model ( AK Model) Foll Follow owin ing g on Rost Rostow ow¶s ¶s theo theory ry the the AK model describes the mechanism by which more investment leads to more growth. Pointe Pointed d to the the neces necessit sity y of of net net addit addition ions s to the the capital stock Used Used to exp expla lain in an econo economy' my's s grow growth th rate rate in terms of the level of saving and productivity of capital. It sugge suggests sts there there is is no no natur natural al rea reason son for for an economy to have balanced growth.
Concepts of Growth Warra Warrant nted ed grow growth th ± the the rat rate e of of out outpu putt grow growth th at at whi which ch firms believe they have the correct amount of capital and therefore do not increase or decrease investment, given expectations of future demand. Natu Natura rall rat rate e of of gro growt wth h ± The The rat rate e at at whi which ch the the labo labour ur force expands, a larger labour force generally means a larger aggregate output. Actu Actual al grow growth th ± The The actu actual al aggr aggreg egat ate e outp output ut chan change ge.. There There is no guara guarante ntee e that that an econo economy my wil willl achie achieve ve sufficient output growth to sustain full employment in a context of population growth. The The prob proble lem m arises arises when when actu actual al grow growth th eith either er exce exceeds eds or fails to meet warranted growth expectations. A vicious cycle can be created where the difference is exaggerated by attempts to meet the actual demand, causing economic instability.
Components ± Capita Capitall stock stock (K) ± Output (Y) - GDP ± Capital-Output Capital-Output ratio ratio (k): the dollar dollar amount amount of of capital needed to produce a $1 stream of GDP. K/Y or K/Y ± Savings (S) and the savings savings ratio ratio (s): the fixed fixed proportion of national output that is used for new investment.
So (1) S = sY Net inves investmen tmentt is is the the chan change ge in in the the capi capital tal stoc stock k
I = K
(2) Remem Remembe berr that that k = K/Y K/Y or or K/ K/Y, Y, so tha thatt
K = kY
(3) Net savin savings gs must must equa equall to net net inv invest estmen mentt so that that S = I. Combining (1), (2) and (3):
sY = kY s/k = Y/Y Y/Y is the growth rate of GDP.
Increa Increasin sing g the savings savings rate, rate, increa increasin sing g the the marginal product of capital, or decreasing the depreciation rate will increase the growth rate of output;
So the the gro grow wth rat rate e of of GDP GDP is det deter ermi mine ned d jointly by the savings ratio, s, and the national capital-output ratio So the the rate rate of gro grow wth of of GDP GDP is pos positi itive vely ly related to the economies savings ratio and negatively related to the economies capital-output ratio. The The more more eco econo nomi mies es save save and and inv inves est, t, the the faster they can grow but the actual rate of growth is measured by the inverse of the capital-ou capital-output tput ratio ± the output-cap output-capital ital ratio.
The fact fact that that LDCs LDCs saving savings s level levels s are often often not not eno enough ugh to meet the levels suggested by the linear-stages models, the need to fill the ³savings gap´ was used to justify massive transfers of capital and technical assistance from developed countries to LDCs. More More savin savings gs and and inve investm stmen entt is not not a suffic sufficie ient nt cond conditi ition on for accelerated rates of economic growth. Many LDCs lack the necessary structural, institutional and attitudinal conditions to convert new capital effectively into higher levels of output. They also lacked the complementary complementary factors of production (e.g. skilled labour and managerial competence). Also Also the the deve develo lopme pment nt strate strategie gies s propo proposed sed by by the the stage stages s models failed to take into account the global environment in which developing developing countries countries exist ± one in which development strategies can be thwarted by external forces beyond beyond the countries control.
Structural Change Models ± Lewis Lewis Two-Se Two-Sector ctor Model Model ± PatternsPatterns-of-De of-Develo velopment pment Approach Approach
Thes These e mod model els s tend tend to emp empha hasi size ze the the transformation of domestic economic structures from traditional subsistence agriculture economies to more modern, urbanized and industrially diverse manufacturing and service economies.
Lewis Two-Sector Model The The econ econom omy y cons consis ists ts of two two sec secto tors rs ± The traditio traditional nal agricult agricultural ural sector sector is is typically typically character characterized ized by by low wages, an abundance of labour, and low productivity through a labour intensive production process. ± the modern modern manufactur manufacturing ing sector sector is defined defined by higher higher wage wage rates than the agricultural sector, higher marginal productivity, and a demand for more workers initially
Labou Labourr can can be be with withdra drawn wn from from the tradit tradition ional al secto sector r without any loss of output Focus Focus is on on labou labourr transf transfer er and and outp output ut and and empl employ oymen mentt growth in the modern sector. The rate at which this occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Wages Wages in the indus industri trial al secto sectorr are are fix fixed ed at at a premiu premium m above wages in the traditional sector. It is assumed that rural labour supply is perfectly elastic.
Lewis assumed assumed that with the urban wage wage above the average rural wage, that the modern-sector employers could hire as many surplus rural workers as the wanted without fear of rising wages The successive reinvestment of profits from the modern sector would increase the production possibilities of that sector leading to successive increases in the demand for labour. The employment expansion in the industrial sector would continue until all the excess labour from the traditional sector is absorbed. From that point onwards, modern sector wages would rise in order for industrial employers to attract additional workers from the traditional sector. Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority as the hypothetical developing nation's investment is going towards the physical capital stock in the manufacturing sector.
Over Over tim time e as thi this s tran transit sition ion con contin tinue ues s to take take pla place ce and and investment results in increases in the capital stock, s tock, the marginal productivity of workers in the manufacturing will be driven up by capital formation and driven down by additional additional workers entering the manufacturing sector. Eventually, the wage rates of the agricultural and manufacturing manufacturing sectors will equalize as workers leave the agriculture for the manufacturing, increasing marginal productivity and wages in the agriculture while driving down productivity and wages in manufacturing. The The end end resu result lt of of this this transi transitio tion n proce process ss is is that that the the agricultural wage equals the manufacturing wage, the agricultural marginal product of labour equals the manufacturing marginal product of labour, and no further manufacturing manufacturing sector enlargement takes place as workers no longer have a monetary incentive to transition.
One of the problems with Lewis¶ model is that it assumes that the
rate of labour transfer and employment creation creation is proportional to the rate of modern sector capital accumulation. It does not leave room for the possibility that capitalist profits could be reinvested in laboursaving capital equipment nor does it leave room for the possibility of capital flight. The model also assumes assumes surplus surplus labour labour in rural areas and full employment in urban areas. By and large this is not the case in most developing nations. The assumption of a competitive modern-sector labour market that allows modern sector wages to remain fixed until the rural sector labour surplus is exhausted is unrealistic. In reality there is a tendency for urban wages to rise over time, even when there is is considerable urban unemployment.
Part II Stru Struct ctur ural al Chan Change ge Model odels s ± PatternsPatterns-of-De of-Develo velopment pment Analysi Analysis s
Inte Intern rnat atio iona nall-De Depe pend nden ence ce Revol Revolut utio ion n
Patterns-of-Development Patterns-of-Development Approach Incre Increase ased d savin savings gs and invest investme ment nt are are perc perceiv eived ed as as necessary but not sufficient conditions for economic growth. Along with accumulation of human and physical capital, a set of interrelated structural changes are needed to make the transition from traditional economy to a modern one. Changes in: ± ± ± ± ± ±
Composi Compositi tion on of cons consume umerr demand demand Inte Intern rnat atio iona nall trad trade e Reso Resour urce ce usag usage e Production ion Urba Urbani niz zatio ation n The growt growth h and distrib distribut ution ion of of the popula populatio tion n
Both Both dome domesti stic c and and int intern ernati ation onal al const constrai raints nts on development development are emphasized. Domes Domesti tic c cons constr trai aint nts: s: coun countr try y¶s resour resource ce endowment and physical population, government policies policies and objectives. Inte Interna rnatio tiona nall constr constrain aints: ts: Exte Externa rnall capita capital, l, technology and international trade. The exten extentt to which which countr countries ies face face these these constraints determines their development level. Recog Recogni nitio tion n is is give given n to the importa importance nce of the integrated international system in which develo developing ping countri countries es belong belong ± a system system that that can promote or hinder their development.
Based Based on exten extensiv sive e empiri empirical cal work work cond conduct ucted ed by Hollis B. Chenery and his colleages using crosssectional and time-series data, patterns of development analysis identified several characteristic features of the development process. ± The shift shift from from agricul agricultura turall to industrial industrial productio production n ± The stead steady y accumulat accumulation ion of physi physical cal and human human capital ± The shift in consum consumer er demands demands from from basic basic necessities to desires for diverse manufactured goods and services. ± The declin decline e in family family size and and overall overall populatio population n growth
The main hypoth hypothesis esis of struct structura urall chan change ge models models is that that development is an identifiable process of growth and change whose main features are similar in all countries. Howeve Howeverr recog recognit nition ion is given given to the the diffe differen rences ces in the the circums circumstan tances ces of developing countries such as differences in physical endowments. Practi Practitio tioner ners s of this this approa approach ch may be lead lead to draw draw incorre incorrect ct conclusions about causality since the approach is based on empirical observation and less on theory. ± For example example,, practition practitioners ers may may observed observed the import important ant role role of higher education in developed countries and recommend recommend policies to develop an advanced university system even before the majority of the population has has gained basic literacy. This policy could backfire backf ire by leading to an increase in inequality.
Often Often the the patter patterns ns ident identifie ified d throu through gh empiri empirical cal observ observat ation ion point point to to international factors factors that are largely out of the control of individual countries. Struc Structu tural ral change change anal analyst ysts s are optim optimist istic ic beca because use they they believ believe e that that the right mix of economic policies will generate beneficial patterns of self-sustaining growth.
International-Dependence Revolution Neoc Neocol olon onia iall Depe Depend nden ence ce Mode Modell Fals False e-Pa -Paradi radig gm Mod Model el The international-dependence models grew out of the increasing disenchantment with both the stages-of-growth and structural-change models only for them to fall out of favor in the 80¶s and 90¶s as the neoclassical models took over in importance. These 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.
Neocolonial Dependence Model It lays lays the the blame blame for the existe existence nce of under underdev develo elopme pment nt on the the shoulders of the historical evolution of a highly unequal capitalist system of rich country-poor country relationships. The dominan dominance ce of the the unequ unequal al power power relat relation ionshi ships ps betwee between n the the center (the rich countries) and the periphery (the developing countries) renders the attempts by the LDCs to be self-sufficient and independent difficult. Also Also the the membe members rs of the the elite elite class class in the the develo developin ping g count countrie ries s have have interests that help to perpetuate the international capitalist system of inequality and conformity. Directly and indirectly the elite class serve and are rewarded by international special-interest power groups (e.g. multi-national corporations, multilateral assistance organizations like the IMF), which are tied by the allegiance or funding to the wealthy capitalist countries. Often, elite activities tend to hinder any reform efforts that might benefit the population at large leading to perpetual underdevelopment.
The contin continuin uing g pover poverty ty in the deve develop loping ing worl world d is largely attributed to the existence and policies of the industrial capitalist countries and their extensions in the form of small but powerful elite groups in LDCs. Underd Underdev evelo elopme pment nt is is seen seen as as an an ext extern ernall ally yinduced phenomenon. Dependent countries can only expand as a reflection of the expansion of the dominant countries. Dependence causes the dependent nations to be both backward and exploited. Revolu Revolutio tiona nary ry stru strugg ggles les or at least least the the restructuring of the world capitalist system are therefore required.
The False-Paradigm Model
Less Less radic radical al than than inter interna natio tiona nall depe depend ndenc ence e mod models, els, these these mod models els attr attribu ibute te underdevelopment to faulty and inappropriate advice provided by wellmeaning meaning but often uninformed, biased international advisers from developed-country developed-country assistance agencies and multinational donor organizations.
The The advice advice given given fails fails to recog recogniz nize e resilie resilient nt tradi traditio tiona nall social social struc structur tures, es, the the highly unequal unequal ownership of land and other property rights, the disproportionate disproportionate control of elites over domestic and international financial assets and the very unequal access to credit.
The The policy policy adv advice ice gen genera erated ted from from classi classical cal and and neo-cl neo-classi assical cal mode models ls in many cases merely serve to protect the interests of the existing power groups, both domestic and international.
Also Also local local univers university ity intelle intellectu ctuals als,, high-g high-gov overn ernme ment nt official officials s and othe otherr civil servants receive training in developed-country developed-country institutions where they learn inapplicable theoretical models.
