Masecochapter 3
Masecochapter 3
Masecochapter 3
Scholars have evolved in their thinking about the development process over time.
Linear-stages-of-growth model
An eclectic approach that integrates aspects of all these theories has emerged.
Emphasized the importance of saving, investment, and foreign aid for economic growth.
Used economic theory and statistical analysis to depict the internal process of structural
change in developing countries.
Aimed to generate and sustain rapid economic growth through structural transformations.
Highlighted the necessity of major new policies to address poverty and income
inequalities.
International-Dependence Revolution
Addressed the need for structural changes within and among nations.
Neoclassical Counterrevolution
Eclectic Approach
Describes development as a series of sequential stages that all countries must pass
through.
Not just descriptive but a way to generalize the development sequence of societies.
The Harrod-Domar growth model is a functional economic relationship where the growth
rate of GDP (g) is directly influenced by the national net savings rate (s) and inversely by
the national capital-output ratio (c).
The model is based on a linear production function with output determined by the capital
stock (K) multiplied by a constant (A), often referred to as the AK model.
It has been applied to policy issues in developing countries, such as the two-gap model.
Every economy must save a portion of its national income to replace capital goods and
achieve growth through new investments.
Net savings (S) is a proportion (s) of national income (Y), represented by the equation S
= sY.
Net investment (I) is the change in the capital stock (K), denoted as ΔK, leading to I =
ΔK.
The capital-output ratio (c) shows the units of capital required to produce a unit of output
over time.
The relationship between total capital stock (K) and national output (Y) is expressed by
the equation K/Y = c.
Net national savings (S) must equal net investment (I), leading to the equation S = I.
The growth rate of GDP (∆Y/Y) is determined by the net national savings ratio (s) and
the national capital-output ratio (c).
Gross savings (sG) can be factored in to account for capital depreciation (δ) in the growth
rate equation.
Economies need to save and invest a portion of their GDP to grow, with the rate of
growth influenced by the capital-output ratio.
Labor force growth and technological progress are also essential components of
economic growth.
Classic Theories of Economic Growth and
Development
Strategies for Economic Growth
Increasing the proportion of national income saved is fundamental for economic growth.
Raising the net savings rate can lead to a higher GDP growth rate.
Countries with higher savings rates can experience faster growth and achieve self-
sustaining development.
The mechanisms of economic growth primarily involve increasing national savings and
investment.
Higher savings rates can significantly impact the rate of GDP growth.
Examples illustrate how increasing the net savings rate can lead to higher GDP growth
rates.
Rostow and others defined the takeoff stage based on the ability to save a certain
percentage of GDP for faster growth.
Economic growth and development rely on increasing national savings and investment.
The main obstacle to development is the low level of new capital formation in poor
countries.
Countries may seek to fill the 'savings gap' through foreign aid or private foreign
investment.
The stages approach justifies capital transfers from developed to less developed nations.
Necessary conditions must be present for an event to occur, but they may not be
sufficient on their own.
The Marshall Plan in Europe succeeded due to existing structural, institutional, and
attitudinal conditions.
Structural-Change Models
Underdevelopment stems from structural or institutional factors, requiring more than just
capital formation.
Examples include W. Arthur Lewis' two-sector surplus labor model and Hollis B.
Chenery's patterns of development analysis.
Surplus labor model where labor shifts from traditional agriculture to modern industrial
sector.
The modern sector's growth absorbs surplus labor, promoting industrialization and
sustained development.
Production function defines the relationship between quantity produced and input
quantity.
Lewis model focuses on labor transfer, output growth, and employment in the modern
sector.
Illustrates the model with the assumption of reinvested profits and constant urban wages.
Overview of Lewis Model
Total Output Determination
Total output of food (TPA) determined by changes in labor (LA), capital (KA), and
technology (tA).
Total product of manufactures (TPM) influenced by labor (LM), capital (KM), and
technology (tM).
Marginal product: Increase in total output from one additional unit of a variable factor.
Surplus labor concept in the Lewis model where workers have zero marginal product.
Sector Specifics
Traditional sector: Surplus labor assumption, equal sharing of output among rural
workers.
Modern sector: Capital stock growth, reinvestment of profits, and demand for labor.
Total product curves for the traditional agricultural and modern industrial sectors.
Shifts in total product curves due to changes in capital stock and technology.
Derivation of average and marginal product curves from total product curves.
Discussion on four key assumptions that do not align with current economic contexts.
The Lewis model assumes that the rate of labor transfer and employment creation in the
modern sector is directly proportional to the rate of modern-sector capital accumulation.
The model assumes surplus labor in rural areas and full employment in urban areas,
which contradicts contemporary research indicating little surplus labor in rural locations.
It assumes a competitive modern-sector labor market with constant real urban wages,
which is negated by factors like union bargaining power and multinational corporations'
practices in developing countries.
The model assumes diminishing returns in the modern industrial sector, whereas evidence
suggests increasing returns, posing challenges for development policymaking.
Total output increases substantially, but total wages and employment remain unchanged,
leading to a scenario where extra output accrues to capitalists as profits.
Illustrates a scenario of unequal income distribution where extra income and output
growth benefit a few capital owners while the majority of workers see little improvement
in income and employment levels.
The Lewis turning point, where wages in manufacturing start to rise, was identified with
China's wage increases in 2010.
Acknowledges the need for significant modifications in assumptions and analysis to align
with the reality of contemporary developing nations.
Based on the empirical work of economist Hollis B. Chenery and colleagues, examining
patterns of development in developing countries postwar.
Contrasts with the earlier stages model by recognizing developing countries as integral
parts of the global economic system.
Chenery's model builds on the research of Nobel laureate Simon Kuznets on modern
economic growth in developed countries.
Discussion questions
1 of 6
1. Discuss the four major classic theories of economic development and growth as outlined
in the note. How do these theories differ in their approaches to development?
The note discusses four major classic theories of economic development and growth: the linear-
stages-of-growth model, theories and patterns of structural change, the international-dependence
revolution, and the neoclassical, free-market counterrevolution. The linear-stages model views
development as a series of successive stages of economic growth, focusing on saving,
investment, and foreign aid. The structural change theories emphasize the transformation of
economic structures from traditional agriculture to modern industries. The international-
dependence revolution views underdevelopment in terms of power relationships and institutional
rigidities. The neoclassical counterrevolution emphasizes free markets and privatization. Each
theory offers a unique perspective on development, focusing on different aspects and strategies.
2. Explain the Harrod-Domar growth model and its implications for economic growth. How
does this model relate to the concept of capital-output ratio?
The Harrod-Domar growth model describes the relationship between the growth rate of GDP and
the national net savings ratio and the national capital-output ratio. It states that the growth rate of
GDP is determined by the savings ratio and inversely related to the capital-output ratio. The
model shows that economies must save and invest a proportion of their GDP to grow. The
capital-output ratio represents the units of capital required to produce a unit of output over time.
The model highlights the importance of investment and saving in driving economic growth and
the efficiency of capital utilization in generating output.
3. Critically analyze the Lewis two-sector model of economic development. What are the
key assumptions of the model, and how do they impact its applicability to contemporary
developing nations?
The Lewis two-sector model focuses on the transfer of surplus labor from traditional agriculture
to modern industry to drive economic growth. It assumes surplus labor in rural areas, competitive
urban labor markets, and diminishing returns in the industrial sector. However, these
assumptions may not hold in contemporary developing nations. Surplus labor is rare, urban
wages tend to rise, and modern technology may lead to capital-intensive growth. The model's
assumptions limit its applicability to current contexts, requiring modifications to reflect the
realities of modern economies.
4. Discuss the concept of structural change in economic development. How does the
structural-change theory differ from the Lewis two-sector model?
Structural change theory focuses on transforming economic structures from traditional to modern
sectors. It emphasizes changes in production, consumer demands, and resource use. Unlike the
Lewis model, it considers capital accumulation as necessary but not sufficient for growth.
Structural change theory recognizes domestic and international constraints on development and
the importance of access to external resources. It differs from the Lewis model by highlighting
broader economic transformations beyond labor transfer and capital accumulation.
6. Evaluate the criticisms of the Lewis two-sector model and its implications for economic
development. How do the assumptions of the model impact its effectiveness in explaining
contemporary economic realities?
The Lewis two-sector model has been criticized for assumptions like surplus labor in rural areas,
competitive urban labor markets, and diminishing returns in the industrial sector. These assumptions
may not align with modern economic contexts where surplus labor is scarce, urban wages rise, and
technology leads to capital-intensive growth. The model's limitations in reflecting current economic
conditions affect its effectiveness in explaining contemporary realities, requiring adjustments to better
capture the complexities of modern economies.