Economic Development Theories

Study Notes

Theories and Models of Development

Historic Growth and Contemporary Development

High rates of increase in Total Factor Productivity (TFP) indicate an economy's efficiency in utilizing resources, often due to technological innovations, improved skills, and better organizational methods.
TFP growth is a crucial driver of economic expansion, allowing for higher output without a proportional increase in input.

Six Characteristics of Modern Economic Growth

High rates of growth of per capita income, indicating an improvement in the average standard of living for individuals within an economy.
High rates of increase in TFP, leading to sustainable economic growth.
High rates of structural transformation, involving shifts in the economy's structure from agriculture to manufacturing and services sectors.
High rates of social and ideological transformation, accompanying economic growth with changes in social structures and roles.
International economic outreach, characterized by increased participation in international trade, foreign direct investment, and technological exchange.
Limited spread of economic growth, with benefits often unevenly distributed within and across countries.

Classic Theories of Development

Linear-Stages Theories:
- Rostow's Stages of Growth: economies must go through several developmental stages toward greater economic growth.
- Each stage can only be reached through the completion of the previous stage.
Harrod and Domar Model:
- Formula: g = S/K
- Economies must save and invest a certain proportion of their income to grow at a certain rate.
Structural-Change Models:
- The Lewis Model: focuses on the need for countries to transform their structures, away from agriculture and towards industrial activity.
- Model Ideology: industrial firms start to make profits, which can be reinvested into further industrialization, and capital starts to accumulate.

Market-Friendly Approach

Recognizes imperfections in LDC product and factor markets and the key role of governments in facilitating development.

Solow Neoclassical Growth Model

Y = AF(K, L)
"Y" denotes an economy's gross domestic product (GDP)
"K" represents the stock of human and physical capital
"L" describes the amount of unskilled labor in an economy
"A" represents a determinant level of technology
Output growth results from increases in labor quantity and quality, capital, and technological improvements.

International-Dependence Revolution

Poor countries are dependent on developed countries for markets and capital.
Unequal exchange: developing countries receive a small portion of the benefits, while developed countries exploit national resources.
Inability to control: developed countries can exploit developing countries' resources and control the distribution of value.

Contemporary Models of Development and Underdevelopment

The New Growth Theory: Endogenous Growth
- Human capital, innovation, and knowledge are essential factors for endogenous growth.
False-Paradigm Model: attributes underdevelopment to faulty and inappropriate advice from international organizations.
Dualistic Development Thesis: represents the existence and persistence of increasing divergences between rich and poor nations and people.

Neoclassical Counterrevolution

Argues that underdevelopment results from poor resource allocation due to incorrect pricing policies and too much state intervention.
Promotes free markets, privatization, and free trade to stimulate economic efficiency and growth.

Underdevelopment as a Coordination-Failure

Emphasizes that complementarities between several conditions are necessary for economic development.
Coordination failure: agents' inability to coordinate their behavior leads to an outcome that leaves all agents worse off.

Concepts

Free-Market Analysis: assumes competition is effective, technology is freely available, and information is correct and nearly costless to obtain.
Public-Choice Theory: argues that the government can do nothing right, and that reform is needed to guide resource allocation and stimulate economic growth.
Kreme's O-Ring Theory of Economic Development: modern production requires many activities to be done well together in order for any of them to amount to a high value.

Description

Explore the concepts of Total Factor Productivity, its relationship with economic growth, and the characteristics of modern economic growth. Learn how economies utilize resources efficiently and drive expansion.