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ECN 503 (3)
Chapter 3


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Ryerson University
ECN 503
Mercy Anselm

Ch 3: Classical Theories of Economic Development I. Classical theories of Ec Dev 4 approaches 4 Strands of thought I. The linear-stages of growth model - successive stages of ECONOMIC growth all countries must pass - right mixture of saving, investment and foreign aid were all that were necessary - development became synonymous with rapid, aggregate economic growth II. DEVELOPMENTALTHEORY 1- Theories and patterns of structural change - used modern economic theory & statistical analysis to portray INTERNAL process that “typical” developing country must undergo to generate and sustain rapid economic growth III.DEVELOPMENTALTHEORY 2- International dependence revolution -underdevelopment idewed in terms of internation, domestic power relationships, instituitional and structural economic rigidities and resulting proliferation of dual economies. ***NOTE: dependence theories emphasize external and internal institutional and political constraints of economical development *******  need for new policies to eradicate poverty, provide diversified employment opp. & reduce income inequalities IV. Neoclassical, free-market counterrevolution - emphasized beneficial role of free markets, open economies, privatization of inefficient public enterprises -failure to develop NOT because of exploitive external and internal forced (dev.theories) BUT too much gov’n intervention and regulation in economy. 3.2 Development as Growth and the Linear-Stages Theories (1950s’-1960’s) After ww2 interests in poor nations of the world really began to materialize.  2 strands of thought Utility of massive injections of capital – marshall plan for fin aid for teared up European countries historical experience of the now developed countries  all developed were once underdeveloped emphasis on capital accumulation approach often called capital fundamentalism 1) ROSTOW’S STAGES OF GROWTH under development to Dev (dev = past stage 3) Traditional society (1) ---> precondition for take off (2) infrastructure there for ec dev like roads ---> take off (3) ---> drive to maturity (4) ---> age of mass consumption - To get to takeoff mobilization of domestic and foreign saving generate sufficient investment to accelerate economic growth - Economic mechanism where more investment leads to more growth = HARROD DOMAR GROWTH MODEL –AK model 1) Harrod Domar Growth Model • Net Savings (S) is proportion OF net savings ratio (savings as proportion of disposable income over some period of time) (s) of national income (Y)  S = sY • Net investment (I) = change in the capital stock (K)  Delta K  Investment = Change in capital o Capital output ratio  DeltaK / DeltaY = C o Change in capital stock (K)  deltaK = c*DeltaY • Net National savings must equal to net investment  S = I sY = DeltaK = c*DeltaY SO…. S=sY = c*deltaY = deltaK = I • S/C = DeltaY/Y rate of growth of GDP  which is directly related to national savings ratio s , as S increases deltaY/Y also goes up  inversely proportional to capital output ratio (units required to produce a unit of output) (c) , as C does up Delta Y/Y does down **basic concept = to grow, ecnomies must save and invest a certain amount of their GDP…. More they save and invest the faster they will grow - capital intensive infrastructure increases unemployment CRITICISM FOR STAGES MODEL  pumping capital in would only work if they had the necessary structural, institutional and attitudinal conditions not all developing countries had the resources needed to convert new capital effectively into higher levls of output 3.3 STRUCTURALCHANGE MODELS • Focus on mechanism to transform traditional economy based on subsistence agriculture TO more MODERN, more URBANIZED, more INDUSTRIALLY diverse manufacturing and service economy • Two famous approaches  two sector surplus labor model & patterns of development model • Structural change theory: hypothesis that underdevelopment is due to underutilization of resources arising from structural or institutional factors that have their orgins in both domestic and international dualism. Development requires more than just accelerated CAPITAL formation The Lewis Theory of Dev ( mid 50’s) – W.Arthur Lewis • focused on surface labour in devl countries (pg 116) - will not be asked to draw model, but may ask questions on it • focused on structural transformation of primarily susitainence economy LEWIS TWO SECTOR MODEL  surplus labor from traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promtes industrialization and stimulates sustained development primary focus of model = transfer of labour & growth of output & employment in the modern sector expansion in modern sector speed of expansion determined by rate of industrial investment & capital accumulation industrial investment  excess of profits over wages that are reinvested • underdeveloped two sectors of economy – traditional and modern TRADITIONAL overpopulated & zero marginal labor productivity surplus labour production function (total product of food with variable labour) fixed amount of capital (Ka) unchanging technology Marginal product curve  MPla = 0 because theres a surplus of workers … no more output per extra worker all workers share equally on output real wage depends on average output not marginal product (increase in total output resulting from one additional worker) all workers in excess of La = surplus workers  total product curve stabilizes horizontally & mp=0 MODERN less workers Production function  modern capital stock INCREASES (k1,k2,k3 etc.) because of reinvestment profits by industrial capitalists  product curves shifts UP  multiple product functions Marginal Labour Product Curves  assuming perfectly ompetitve labor markets, curves = DEMAND curves for labor Wa (wage of agriculture) = lower than Wm (wages of modern) Wm – horizontal marginal labour supply line  employers can hire as many surplus RURAL workers and not have the wages increase fixed capital  demand curve for labour determined by laors declining marginal product employers hire until the # of employees reach their real wages (Wm) point F  then determines the total output output paid to workers = rectangle WmFl total output to capitalists to reinvest  WmD1F Self sustaining Growth of modern sector and employment growth wwill continue till transfer done. • agriculture had fixed technology unlike manufacturing, so no possibility of increasing productivity in agricultural sector so kept machinery stable • manufacturing wages tend to higher than agricultural wages Note: criticisms of the model according to malthis the demand for labour will go outward, and workers will come from agricultural sector. but number of works were still OL1 after bringing in new workers. while number of w
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