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General Growth Model

The document discusses several classic models of economic growth and development, including Rostow's stages of growth model, Harrod-Domar growth model, Lewis model of structural change, and theories of international dependence and neoclassical counterrevolution. It also briefly mentions Schumpeter's model of innovation-driven development and endogenous growth theory.

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Nar Carlo Corpuz Arpilleda
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74 views24 pages

General Growth Model

The document discusses several classic models of economic growth and development, including Rostow's stages of growth model, Harrod-Domar growth model, Lewis model of structural change, and theories of international dependence and neoclassical counterrevolution. It also briefly mentions Schumpeter's model of innovation-driven development and endogenous growth theory.

Uploaded by

Nar Carlo Corpuz Arpilleda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Models of Economic

Growth and Development

• General Growth Model

Presented by:
Elisa de Guzman –Arpilleda
GENERAL GROWTH MODEL
 The Classic Theories of Economic Growth and
Development has four approaches namely:
(1) Linear Stages of Growth Model,
(2) Theories and patterns of structural change
(3) International-dependence revolution,
(4) Neo-classical or free market counterrevolution
1. Linear Stages of Growth Model
 One of the first growth theories was that proposed by
American economic historian Walt Rostow in the early
1960s. As a vigorous advocate of free market capitalism,
Rostow argued that economies must go through a number of
developmental stages towards greater economic growth.
 This model suggest that development occurs in defined set of
stages. All developed economies have gone through some
variation of these stages, and all developing countries are in a
variation of one of the stages.
 The oldest and most traditional of all development
models.
Rostow Model (Stages of growth)
a. Traditional society
The characteristics of this stage are:
- Largely agrarian
- Limited infrastructure
- Imperfect information
- Low degree of monopoly power
- Limited market interaction
- Sustenance agriculture
b. Preconditions for take-off into self-sustaining growth
The characteristics of this stage are:
- Growing market interaction
- Increasing access to agricultural technology
- Low levels of market specialization and
diversification
- Start of formal human capital
accumulation
- Rudimentary financial markets
c. Take - off
The characteristics of this stage are:
- Increase emphasis on formal human
capital formation
- Growth of financial markets (albeit
localized ones
- Increased market activity and
international trade
- Early development of international trade
as an important component of total economic
activity
- Development of industrial sector
- Urbanization
- Reduced income inequality
d. Drive to maturity
The characteristics of this stage are:
- Fully developed national financial sector
- Heavy industrialization with specialization
- Model transportation sector
- Exploitation of scale and scope economies
- Urban centers are more important than rural
areas
- Emergence of a middle class
- Extensive international trade
- Formal human capital "industry"
e. Age of mass consumption
The characteristics of this stage are:
- Fully industrialized
- Low dependence on domestic production
- Fully developed financial markets
- Consumer credit industry
- Information infrastucture
- Middle class majority
Harrod Domar Growth Model
-The H-D model adds a formal explanation of the
take-off stage of the Rostow model. The model is based
on the principle that capital accumulation is necessary
for economic growth.
-The Harod Domar Model suggests that economic
growth rates depend on two things:
a. Level of Savings (higher savings enable
higher investment)
b. Capital Output Ratio (efficiency of
investment)
For Harrod and Domar, economies must save and
invest a certain proportion of their income to grow at a
certain rate – failure to develop is caused by the failure
to save, and accumulate capital.
It is argued that in developing countries saving rates
are often low, if left to the free market. Therefore, there
is a need for governments to increase the savings rate
in an economy. Alternatively, developed countries
could step in and transfer capital stock to the
developing countries, which would increase the
productive capacity.
2. Theories and patterns of structural
change –the Lewis Model

 W. Arthur Lewis put forward the model in the


1950s and there have been variations since. It tries
to explain how a developing economy moves from
a traditional agricultural base to a modern
manufacturing led economy.
 The model assumes that a developing economy has a
surplus of unproductive labour in the agricultural
sector. These workers are attracted to the growing
manufacturing sector where higher wages are on
offer. It is also assumed that the wage on offer in the
manufacturing sector is fixed.

 Entrepreneurs in the manufacturing sector will make


a profit because they charge a price above the fixed
wage rate. The model then assumes that these profits
will be reinvested in the business in the form of more
fixed capital.
 Firms productive capacity is thus increased and
entrepreneurs will demand a greater amount of
labour. More workers will be employed from the
surplus found in the agricultural sector. The process
continues until all surplus labour from the
agricultural sector has been employed. The
manufacturing sector has grown and the economy has
moved from a traditional to industrialized one.
3. The International-Dependence
Revolution

 Developing countries face institutional, political and


economic rigidities, both on the domestic and the
international front and are caught in a dependence
and dominance relationship with rich countries.
 Three major streams of thoughts can be sorted out:
a. Neo-Classical Dependence
This is an indirect outgrowth of Marxist
thinking that attributes the existence and continuance
of underdevelopment between the rich and poor
countries primarily to the historical evolution of a
highly unequal international capitalist system. In this
system rich countries are intentionally exploitative or
unintentionally neglectful and the international
system is dominated by unequal power relationship
between the centre and the periphery. This makes it
difficult for the poor nations to develop.
The situation is perpetuated by the power groups
(landlords, entrepreneurs, military leaders, merchants,
public officers and trade union leaders etc.). These
groups enjoy high incomes, social status, political
power and constitute an elite ruling class whose
principle interest is to knowingly or unknowingly lies
in the perpetuation of the international capitalist system
of inequality for which they are rewarded. Therefore
underdevelopment is seen as an externally induced
phenomenon.
b. The False-Paradigm Model
Attributes underdevelopment to faulty and in
appropriate advice provided by well- meaning but
often uninformed, ethnocentric international experts
from developed countries or multinational donors –
also suspect are the western trained university
teachers and bureaucrats and technocrats.
c. The Dualistic-Development Thesis
Dualism represents the increasing gap
between rich and poor nations and rich and poor
people at all levels.
Some developing countries of rich industrial
sector with coexistence of poor peasants are example
of this thesis.
4. Neoclassical Counterrevolution
 Emerged in the 1980s during political ascendancy of
conservative governments of US, Canada, Britain and
West Germany
 Challenges statist models in favor of free markets,

public choice & market-friendly approaches


 Developed nations: favored supply-side
macroeconomic policies, rational expectations
theories and privatization of public corporations
 Developing countries: free markets and dismantling

of public ownership, statist planning and


government regulation
Three Component Approaches of Neoclassical
Counterrevolution

a. Free-market approach
b. Public choice approach
c. Market-friendly approach
Other Theories under General
Growth Model
1. Schumpeter’s Model Of Economic Development
 Schumpeter assumes a perfectly competitive
economy which is in stationary equilibrium.
 In such a stationary state, there is perfect
competitive equilibrium. No profits, no interest rates,
no savings, no investments and no involuntary
unemployment.
 Development consists in the carrying out of new
combinations for which possibilities exist in the
stationary state. New combinations come about in
the form of INNOVATIONS.
 The Schumpeterian model of economic
growth moves round the inventions and
innovations. This model is explained with
the: Process of Production, Dynamic Analysis of
the Economy, Trends of Growth, The Demise of
Capitalism.
2. Endogenous Growth Theory

 Holds that economic growth is primarily the result of


endogenous and not external forces.
 Endogenous growth theory holds that investment in

human capital, innovation, and knowledge are


significant contributors to economic growth.
 The theory also focuses on positive externalities and

spill over effects of a knowledge-based economy


which will lead to economic development.
 The endogenous growth theory primarily holds
that the long run growth rate of an economy
depends on policy measures.
 The implication is that policies that embrace

openness, competition, change and innovation


will promote growth.

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