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1

4 Classic theories of growth:

1) Linear stages of growth, e.g rostow

2) Structural change models, e.g lewis

3) International-Dependance revolution

4) Neoclassical counterrevolution, e.g swan solow

2

Linear stages of growth:

Development theory whereby countries pass through stages of growth

Development synonymous with rapid, aggregate economic growth

3

Rostow (linear) stages of growth:

1) The traditional society: 200 yrs
- limited tech and hierarchical social structure

2) The pre conditions for take off: 100 yrs
- revolution in agriculture
- increase transport investment for enlarged market and product specialization

3) the take off: 20-30 yrs
- lots of investment, emergence of political structure

4) the drive to maturity: 40 yrs
- technological innovation

5) the age of mass consumption
- real incomes per capita rise, urban workforce

4

Critique of rostow:

1) stages not clear

2) does not explain how and why country moves from one stage to another at a point in time

3) cannot be operationalized due to lack of demarcation rules

4) savings and investments necessary but not sufficient conditions for growth

5) rostow assumed same conditions in developing as in in developed world

5

Lewis 2 sector model

- emphasizes labour transfer from agriculture (traditional) to modern (industrial) sectors

- surplus labour in traditional sector

- output expansion in industrial sector results in labour transfer and industrial employment expansion

- urban wages constant

- capital formation in modern sector drives economic growth

6

Lewis turning point

Process of modern growth self sustaining

- employment expands until surplus of labour absorbed by modern sector, after can only transfer at higher cost of loss in food production, since declining labour-land ratios mean MPL no longer = 0

7

Critique of lewis model:

4 Key assumptions questionable

1) rate of labour transfer and employment creation in modern sector proportional to rate of K accumulation

2) Full employment in modern sector while surplus in traditional generally invalid

3) Typically real urban wage rises over time instead of remaining constant

4) Diminishing returns in modern industrial sector, increasing returns?

8

Hollis Chenery 1968, growth is achieved through:

- short from agricultural to industrial production
- accumulation of human and physical capital
- changes in consumer demand
- urbanisation
- decline in family size and fertility rate

9

International dependance rev:

developing countries as beset by institutional, political and economic rigidities, both domestic and international are caught up in a dependence and dominance relationship with rich countries

10

Critique of international dependence rev:

- offers appealing explanations as to why countries remain underdeveloped but offers no alternatives

- most successful countries open to world economy: singapore, south korea

11

Neo-classical revolution:

Developing countries poor performance due to: resource misallocation, heavy corruption

Policy solutions: free markets, less regulation

12

Fundamental growth ingredients:

- Capital accumulation
- Growth in population
- Technological progress

13

Most importance source of economic growth:

- labor augmenting technological progress
- capital-augmenting technological progress

14

Cornerstone of neoclassical theory:

to increase rate of K accumulation

15

Swan solow model:

- Closed economy
- 2 factors capital K and labour L
- constant returns to both factors
- no tech change
- no public saving
- private saving proportional to income

16

Production function swan solow

Y = f(KLT)

- Y flow of output at time t

- L - labour force at t

K = capital stock

T = tech at time t

17

Attributes of production function:

1) constant returns to scale

2) intensive form

3) postive/diminishing returns

18

Swan solow

Technology is exogenous in model

Relationship between Y and K endogenous

19

Steady state value of K which maximizes consumption per worker

Golden rule level of capital