Economic Growth and Development Theories

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.