objectives today discuss how potential sources of growth are used in theories of economic...
TRANSCRIPT
Objectives today
Discuss how potential sources of growth are used in theories of economic development
Economic Growth and Development Theories Classical model Growth stage theories Dual economy models Dependency theories Exogenous growth theories Endogenous growth theories Transactions costs/collective action
Classical Model (late 1700’s & early 1800’s)(Malthus)
Wages are at subsistence level Favorable event leads to capital accumulation Increased demand for labor Wages in short run Population growth Demand for food Land fixed so food prices , real wages population
This (Classical) Model failed to consider the following factors and therefore did not predict correctly:
Factors which lower birth rates Technological progress
Therefore, in Classical model, law of diminishing returns constrains growth in the long run
Growth stage theories
Fred List (mid 1800’s) – stages based on shifts in occupational distributionSavagePastoralismAgricultureAgriculture and manufacturingAgr., manufacturing, and commerce
He called for import substitution
Growth stage theories (continued)
Karl Marx (late 1800’s) – stages based on changes in technology, property rights, and ideology Primitive communism Ancient slavery Medieval feudalism Industrial capitalism Socialism and communism
He felt class struggles drive classes through these stages.One class has land and capital. Other class has labor.
Growth stage theories (continued)
W. W. Rostow (1950’s) Traditional society Precondition for takeoff Takeoff Drive to technological maturity Age of high mass consumption*Sectors decline due to declining income and
price elasticities of demand*Capital accumulation and technological change
will lead to emergence of leading sectors
Growth stage theories (continued)
Colin Clark (1930’s)AgricultureManufacturingTertiary or services
Growth results from: Increased output per worker in any sectorWorkers moving from sectors with low
output per worker to high output per worker
Technological change important
Harrod-Domar model (1950)
Savings leads to economic growth Output per unit of capital up leads to
economic growth
Led policymakers to focus on capital-led industrial growthThe H-D model: g=s/k where:
g = rate of growth in national income
s = savings rate
k = ratio of capital to output
Main features of labor-surplus dual-economy model 2 sectors – agriculture & industry Marginal product of labor in agriculture Wage rate in agriculture equals average
product of labor in agriculture Land fixed Wage rate higher in industrial sector Marginal product of labor in industry equals
the wage rate
(features continued)
Labor moves from agriculture to industry Profits reinvested in capital items resulting in
greater M P & demand for labor Shifts in M P of labor creates more profits, etc. This happens as long as marginal cost of labor
is constant If marginal cost of labor (wage rate) goes up,
profits stop increasing as fast and eventually the process stops.
Q
P
Profit
Wages
Agricultural Marginal Product
Modern (Ind.) SectorTraditional (Ag.) Sector
Industrial Marginal Product
Redundant labor
Industrial Total Product
Agricultural TotalProduct
Marginal product curve
W
N3 N2 N1 N0 Labor
Labor Labor
P2
P1
P0
LaborL4L2L1L00
0
0
0
P3
Why might the marginal cost(supply) curve of labor turn up?
Surplus labor used up so industry must offer higher wages
Supply of food does not keep up with the demand for food so wages must rise
What does this say about the need for technological progress in agriculture?
Weaknesses in the model
Says nothing about the cost of moving people and food
May not have excess labor in some countries Says nothing about cost of and how to
develop the agricultural sector Assumes profits reinvested in labor-intensive
industries (what if not invested or invested in capital-intensive industries due to subsidies)?
Ignores international trade
Can extend model to open economy If natural resources are poor: can export
labor-intensive industrial goods (examples: Taiwan & Korea) and import food
If natural resources rich: can export agricultural products and use foreign exchange to develop industry (examples: Thailand & Malaysia)
Dependency theories (1950’s, 60’s, 70’s
Center – developed countries and elites within developing countries
Periphery – poor in developing countries
Center develops at the expense of the periphery
Why dependency?
Center has monopoly power Low price and income elasticities for goods
produced by the periphery High price elasticity of demand for goods
imported by the periphery from the center
Result: periphery receives less and less for exports and pays more and more for imports
Lessons from each theory
Classical theory – savings & capital investment important Diminishing returns to labor
Growth stage theories – structural change with development Class struggles over distribution
Dual economy theories – food is important wage good Surplus labor may facilitate capital formation Technological change in agriculture important
Dependency theories – interdependent world History important Political and social power important
More Recent Development Thinking Role of Human capital Importance of Institutional differences
Rule of lawEnforceable property rightsNeed to minimize policy distortions
Importance of freely flowing information
Transactions costs, Collective Action, and Institutions Costs of transacting are key obstacles
holding countries back from developing. Transactions costs include the costs of
adjustment, information, measuring attributes, and negotiating, monitoring, and enforcing contracts
Because of these costs, people take advantage of others
Transactions costs, Collective Action, and Institutions (continued) People often act collectively to influence
public decisions in ways that help them but hurt society at large
Therefore with transactions costs and collective action, institutions and asset distribution matter
Need institutions to control behavior through property rights, laws, and policies
Conclusions Agriculture can provide labor, food, and capital
for overall economic development Rising food prices relative to industrial prices is a
symptom of the need to invest in new technologies for agriculture
In light of transactions costs and collective action, and societies that become less personal as development occurs, institutions are needed that establish and enforce the “rules of the game”