03. Classic Theories of Economic Growth and Development.pdf

CLASSIC THEORIES OF ECONOMIC GROWTH AND DEVELOPMENT Jose Angelo V. Gomez, LPT, MBA  LEARNING OBJECTIVES Gain a comprehensive understanding of the major theories of economic development, including classical, structuralist, modernization, and neoclassical theories....

CLASSIC THEORIES OF ECONOMIC GROWTH AND DEVELOPMENT Jose Angelo V. Gomez, LPT, MBA  LEARNING OBJECTIVES Gain a comprehensive understanding of the major theories of economic development, including classical, structuralist, modernization, and neoclassical theories. Evaluate the strengths and weaknesses of each development theory in explaining the economic growth and transformation of societies. Appreciate how various development theories have shaped our understanding of the challenges and opportunities in achieving sustainable and equitable development. CLASSIC THEORIES OF ECONOMIC DEVELOPMENT  Classic Theories of Economic Development Linear stages of Growth Theories and Patterns of International- Neoclassical, Free Market Model Structural Change Dependence Revolution Counterrevolution Rostow’s Stages of The Neocolonial Lewis Two-sector Model Free-market Approach Growth Dependence Model Harrod-Domar Growth Patterns-of-Development The False-Paradigm Public-choice Theory Model Analysis Model The Dualistic- Market-friendly Approach Development Thesis  Linear stages of Growth Model Rostow’s Stages of Growth Harrod-Domar Growth Model  ROSTOW’S STAGES OF GROWTH Stages-of-growth model of development (Walt W. Rostow) – A country passes through sequential stages in achieving development.  ROSTOW’S STAGES OF GROWTH The advanced countries had all passed the stage of “takeoff into self-sustaining growth,” and the underdeveloped countries that were still in either the traditional society or the “preconditions” stage had only to follow a certain set of rules of development to take off in their turn into self-sustaining economic growth.  ROSTOW’S STAGES OF GROWTH Weaknesses The model downplays the importance of structural factors, such as income inequality, political stability, governance, and access to resources, which can significantly impact a country's development path.  ROSTOW’S STAGES OF GROWTH Weaknesses This view ignores the role of government policies in promoting or hindering development, particularly in areas like education, healthcare, and infrastructure.  ROSTOW’S STAGES OF GROWTH Policy Implications Policymakers can use this insight to prioritize investments in transportation, communication networks, energy production, and industrial capacity.  ROSTOW’S STAGES OF GROWTH Policy Implications As countries transition from the traditional society stage to the take-off stage, investments in education and human capital become vital. Policymakers may consider liberalization of trade, deregulation, and reducing barriers to foreign investment to foster economic development.  Linear stages of Growth Model Rostow’s Stages of Growth Harrod-Domar Growth Model  HARROD-DOMAR GROWTH MODEL (Roy Harrod and Evsey Domar) A functional economic relationship in which the growth rate of gross domestic product depends directly on the national net savings rate and inversely on the national capital-output ratio.  HARROD-DOMAR GROWTH MODEL The model starts with the premise that changes in investment, particularly in capital goods (e.g., factories, machinery), can have a significant impact on a country's economic growth and employment levels.  HARROD-DOMAR GROWTH MODEL Weaknesses The model relies on several simplifying assumptions, such as a closed economy (no international trade), a fixed capital-output ratio, and a direct one-to-one relationship between investment and income.  HARROD-DOMAR GROWTH MODEL Weaknesses It doesn't account for factors like technological change, changes in consumer preferences, or variations in the efficiency of investment.  HARROD-DOMAR GROWTH MODEL Policy Implications Governments should consider policies such as public infrastructure spending to boost investment and employment in times of economic downturns.  Linear stages of Growth Model Rostow’s Stages of Growth Harrod-Domar Growth Model  Classic Theories of Economic Development Linear stages of Growth Theories and Patterns of International- Neoclassical, Free Market Model Structural Change Dependence Revolution Counterrevolution Rostow’s Stages of The Neocolonial Lewis Two-sector Model Free-market Approach Growth Dependence Model Harrod-Domar Growth Patterns-of-Development The False-Paradigm Public-choice Theory Model Analysis Model The Dualistic- Market-friendly Approach Development Thesis  Theories and Patterns of Structural Change Lewis Two-sector Model Patterns-of-Development Analysis  Underdevelopment is due to underutilization of resources arising from STRUCTURAL structural or institutional CHANGE THEORY factors that have their origins in both domestic and international dualism.  Development therefore STRUCTURAL requires more than just CHANGE THEORY accelerated capital formation.  It focuses on the mechanism by which underdeveloped economies transform their domestic economic structures from a heavy STRUCTURAL emphasis on traditional CHANGE THEORY subsistence agriculture to a more modern, more urbanized, and more industrially diverse manufacturing and service economy.  THE LEWIS THEORY OF ECONOMIC DEVELOPMENT (Arthur Lewis) Structural transformation The process of transforming an economy in such a way that the contribution to national income by the manufacturing sector eventually surpasses the contribution by the agricultural sector. More generally, a major alteration in the industrial composition of any economy.  THE LEWIS THEORY OF ECONOMIC DEVELOPMENT (Arthur Lewis) Two-sector Model A theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development.  Manufacturing Sector Savings Reinvested → Capital Growth Manufacturing Sector Savings Reinvested → Capital Growth Traditional Surplus Labor Manufacturing Agricultural Sector Sector  THE LEWIS THEORY OF ECONOMIC DEVELOPMENT Weaknesses The model assumes that labor is a homogeneous factor, implying that all labor is equally mobile and can easily transition from agriculture to industry.  THE LEWIS THEORY OF ECONOMIC DEVELOPMENT Weaknesses It assumes that the agricultural sector is characterized by a constant surplus of labor.  THE LEWIS THEORY OF ECONOMIC DEVELOPMENT Weaknesses Structural transformation can exacerbate income disparities if not accompanied by policies that promote equitable growth and wealth redistribution.  THE LEWIS THEORY OF ECONOMIC DEVELOPMENT Policy Implications Policymakers should prioritize investments in industrialization, including the development of manufacturing and other non-agricultural sectors.  THE LEWIS THEORY OF ECONOMIC DEVELOPMENT Policy Implications To facilitate the movement of labor from the agricultural sector to the industrial sector, policymakers should consider labor market reforms. These may include job training programs, labor mobility initiatives, and policies that reduce frictional unemployment.  THE LEWIS THEORY OF ECONOMIC DEVELOPMENT Policy Implications Governments should invest in infrastructure development to connect rural areas to urban centers and industrial zones.  Theories and Patterns of Structural Change Lewis Two-sector Model Patterns-of-Development Analysis  PATTERNS-OF-DEVELOPMENT ANALYSIS It 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. Increased savings and investment are perceived as necessary but not sufficient conditions for economic growth.  PATTERNS-OF-DEVELOPMENT ANALYSIS In addition to the accumulation of capital, both physical and human, a set of interrelated changes in the economic structure of a country are required for the transition from a traditional economic system to a modern one.  PATTERNS-OF-DEVELOPMENT ANALYSIS These structural changes involve virtually all economic functions, including the transformation of production changes in the composition of consumer demand international trade resource use urbanization growth and distribution of a country’s population.  Theories and Patterns of Structural Change Lewis Two-sector Model Patterns-of-Development Analysis  Classic Theories of Economic Development Linear stages of Growth Theories and Patterns of International- Neoclassical, Free Market Model Structural Change Dependence Revolution Counterrevolution Rostow’s Stages of The Neocolonial Lewis Two-sector Model Free-market Approach Growth Dependence Model Harrod-Domar Growth Patterns-of-Development The False-Paradigm Public-choice Theory Model Analysis Model The Dualistic- Market-friendly Approach Development Thesis  International-Dependence Revolution The Neocolonial The Dualistic-Development The False-Paradigm Model Dependence Model Thesis INTERNATIONAL DEPENDENCE REVOLUTION  THE NEOCOLONIAL DEPENDENCE MODEL States that underdevelopment exists in developing countries because of continuing exploitative economic, political, and cultural policies of former colonial rulers toward less developed countries.  THE NEOCOLONIAL DEPENDENCE MODEL States that underdevelopment exists in developing countries because of continuing exploitative economic, political, and cultural policies of former colonial rulers toward less developed countries. Existence of comprador groups—local elites who act as fronts for foreign investors.  THE NEOCOLONIAL DEPENDENCE MODEL Underdevelopment is thus seen as an externally induced phenomenon, in contrast to the linear-stages and structural-change theories’ stress on internal constraints.  THE NEOCOLONIAL DEPENDENCE MODEL Weaknesses It places significant emphasis on the role of external actors, such as former colonial powers and multinational corporations.  THE NEOCOLONIAL DEPENDENCE MODEL Weaknesses The model often presents a simplistic dichotomy between developed and developing countries.  THE NEOCOLONIAL DEPENDENCE MODEL Weaknesses It may not fully capture the dynamic nature of international economics, including changing trade patterns, global power shifts, and evolving economic policies.  THE NEOCOLONIAL DEPENDENCE MODEL Policy Implications Policy efforts should focus on diversifying the economy away from a heavy reliance on a few primary commodities or industries.  THE NEOCOLONIAL DEPENDENCE MODEL Policy Implications Governments should prioritize the development of domestic industries and manufacturing sectors.  THE NEOCOLONIAL DEPENDENCE MODEL Policy Implications Reevaluate trade policies to ensure they are equitable and beneficial for domestic industries.  International-Dependence Revolution The Neocolonial The Dualistic-Development The False-Paradigm Model Dependence Model Thesis  THE FALSE-PARADIGM MODEL States that underdevelopment is due 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.  THE FALSE-PARADIGM MODEL These experts are said to offer complex but ultimately misleading models of development that often lead to inappropriate or incorrect policies.  THE FALSE-PARADIGM MODEL These experts may include 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.  International-Dependence Revolution The Neocolonial The Dualistic-Development The False-Paradigm Model Dependence Model Thesis  THE DUALISTIC-DEVELOPMENT THESIS 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. In fact, it may actually serve to push it down—to “develop its underdevelopment.”  International-Dependence Revolution The Neocolonial The Dualistic-Development The False-Paradigm Model Dependence Model Thesis  Classic Theories of Economic Development Linear stages of Growth Theories and Patterns of International- Neoclassical, Free Market Model Structural Change Dependence Revolution Counterrevolution Rostow’s Stages of The Neocolonial Lewis Two-sector Model Free-market Approach Growth Dependence Model Harrod-Domar Growth Patterns-of-Development The False-Paradigm Public-choice Theory Model Analysis Model The Dualistic- Market-friendly Approach Development Thesis  Neoclassical, Free Market Counterrevolution Free-market Approach Public-choice Theory Market-friendly Approach  States that underdevelopment results from poor resource allocation due to incorrect NEOCLASSICAL COUNTERREVOLUTION pricing policies and too much state intervention by overly active developing-nation governments.  In developed nations, this counterrevolution favored supply-side macroeconomic policies, rational expectations theories, and the privatization of public NEOCLASSICAL corporations. COUNTERREVOLUTION In developing countries, it called for freer markets and the dismantling of public ownership, statist planning, and government regulation of economic activities.  Neoclassical, Free Market Counterrevolution Free-market Approach Public-choice Theory Market-friendly Approach  FREE-MARKET APPROACH An unregulated market performs better than one with government regulation. Any government intervention in the economy is, by definition, distortionary and counterproductive.  Neoclassical, Free Market Counterrevolution Free-market Approach Public-choice Theory Market-friendly Approach  PUBLIC-CHOICE THEORY Governments can do (virtually) nothing right. States that self-interest guides all individual behavior and that governments are inefficient and corrupt because people use government to pursue their own agendas.  PUBLIC-CHOICE THEORY Politicians use government resources to consolidate and maintain positions of power and authority. Bureaucrats and public officials use their positions to extract bribes from rent-seeking citizens and to operate protected businesses on the side.  Neoclassical, Free Market Counterrevolution Free-market Approach Public-choice Theory Market-friendly Approach  MARKET-FRIENDLY APPROACH States that successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy in areas where the market is inefficient.  MARKET-FRIENDLY APPROACH This approach recognizes that there are many imperfections in a developing country’s product and factor markets and that governments do have a key role to play in facilitating the operation of markets through market-friendly interventions.  Neoclassical, Free Market Counterrevolution Free-market Approach Public-choice Theory Market-friendly Approach  Weaknesses Neoclassical theory often relies on assumptions of perfect competition, which NEOCLASSICAL rarely exist in the real COUNTERREVOLUTION world.  Weaknesses Neoclassical economics assumes that individuals and firms are rational NEOCLASSICAL decision-makers who COUNTERREVOLUTION always make choices that maximize their utility or profit.  Weaknesses This approach may not address situations where government action is NEOCLASSICAL necessary to correct COUNTERREVOLUTION market failures, provide public goods, or address externalities.  Policy Implications Encourage market- oriented reforms that reduce government NEOCLASSICAL intervention and promote COUNTERREVOLUTION free markets. This may involve privatizing state- owned enterprises, liberalizing trade, and removing price controls.  Policy Implications Establish and enforce strong property rights to encourage investment and NEOCLASSICAL entrepreneurship. COUNTERREVOLUTION  Policy Implications Embrace trade liberalization by reducing tariffs, trade barriers, and NEOCLASSICAL restrictions on foreign COUNTERREVOLUTION investment.  IN SUMMARY… Governments do fail, but so do markets; a balance is needed. Must attend to institutional and political realities in developing world. Development economics has no universally accepted paradigm. Insights and understandings are continually evolving. Each theory has some strengths and some weaknesses.  Classic Theories of Economic Development Linear stages of Growth Theories and Patterns of International- Neoclassical, Free Market Model Structural Change Dependence Revolution Counterrevolution Rostow’s Stages of The Neocolonial Lewis Two-sector Model Free-market Approach Growth Dependence Model Harrod-Domar Growth Patterns-of-Development The False-Paradigm Public-choice Theory Model Analysis Model The Dualistic- Market-friendly Approach Development Thesis END