Economic Development

2nd Sem prelim period

Power Balance Theory

Popular in north- south, Southern economies were exploited by northern economies.

Poor countries exported raw materials to industrial countries in exchange for goods.

Price of raw materials in relation to price of manufactured goods tend to deteriorate.

Structuralist approach

Models Economic growth as a process of a shift in resources

Stresses rigidities that hinder this shift and studies how the shift in output among sectors takes place over time as development progresses

Shifts from agriculture to industrial output and services

Lewis-Fei Ranis Model

Traditional sector has low capital accumulation and labor skill , Low productivity and low earnings

Meanwhile, Modern sector has high productivity and pays higher wages

New growth theory

Developed by younger economists dissatisfied with the solow-swan model

Endogenize technical change by using external economies and spillovers

Effects of technology and education can help increasing returns to scale , drives growth process to higher levels of income instead of slowing growth to diminishing returns.

Mechanism by which technology is transferred from one firm to another in an industry within the country then across international borders.

Asian growth miracle

High rate growths for the last 40 years from a group of countries in southeast asia

Late 1980’s and early 1990’s when government policy shifted toward supporting a more open and competitive environment

When did southeast asia grow rapidly

Import substitution

Policy environment most developing countries adopted

Countries have a comparative advantage and so they should export these products.

Also argued that since income were low saving rates were also low , inflows of investments and financial aid were needed to life growth

What does import substitution theory state

Outward looking trade policies and the acquisition of foreign technology.

What policies did japan and east asian countries apply

Openness, Macroeconomic Stability, labor market flexibility, education policies

Primary factors of asian growth miracle

Initial conditions and sector policies

Secondary factors of the asian growth miracle

Labor intensive industries

Where did the emphasis shift in southeast asia

Shift from import substitution to export promotion, led by the shift regime

Shift that led to lower tariff rates on exports and imports

Technological transfer

Served to reinforce the shift in export emphasis

Acquiring foreign technology

Copying it without license

Entering into joint ventures(FDI)

(east asia followed 1st route while southeast followed 2nd)

How was openness applied

A lot of gov’t intervention in industrial and financial sectors in some countries and few in others

The government intervention did not seem to have a direct affect on performance

Corruption, Lack of political will, domestic unrest

Why was growth slower in Philippines and Sri Lanka

Diminishing returns as more resources are put into secondary and tertiary education,

Rapid rate of income growth that tended to outstrip the corresponding growth in human development

Reasons for eroding of educational advantages of asia

Behrman and Shneider

Concluded that schooling and attainment in miracle economies was not particularly outstanding.

Than that of the industry at the beginning of the proess

Productivity in agriculture is higher than that of ____

The beginning of industrialization

Surplus from the increase in profitability of agriculture fueled where?

Monsoon weather cycle

Weather cycle that led to reliance in rice production

Cobb-Douglas Production function

What production model stated that variable factors were efficiently allocated but biological assets were not

Econometric model

What model stated that all resources were allocated efficiently

Linear programming

Potential output was higher than the actual output,

There are inefficiencies but these could be removed by improving copping patterns

Tentative conclusion: Traditional Agriculture is efficient but minor improvements can be made.

(Mellor and Mudahar, 1992)

Subsistence Farming

Maximize Family’s chances of survival not maximizing profit

Cultural Value

Uncertainties of change

Inadequate insurance for fallback

Reasons farmers resist innovation and modernization

Landlords, Lack of government Guarantee, Lenders captured all profits , Complementary inputs were not made available

Disincentives to increasing agricultural Productivity

Green revolution, improvements in fertilizer and irrigation

Phenomenon created by Development of higher yielding variety of rice

Farm size, there is an inverse relationship between farm size and overall farm productivity in traditional agriculture

Changes in land tenure- owner operated farms, Tenancy arrangement where farmers give landlords a share of harvest. Rents out land to farmers

What did not help

Keeping an undervalued exchange to maintain appropriate trading terms.

How to help agriculture

Mechanization and demand for labor.

√ Technological transfer, growth, and equity.

√ Genetic Engineering.

√ Zero tillage.

√ Research and development.

√ Food prices and linkages to energy.

√ Shifts out of primary grain production

Modernization of agriculture

Harris-Todaro model

Unemployment can coexist with rapid labor movement to the city

Forward linkage

Tells us how a product is related as an input into production

Reach a variable size of production that takes full advantage of economies of scale

better transport and communication

How can firms be efficient

Foreign Direct Investment (FDI)

Important source of capital and expertise especially for export oriented industries

Brute force application of the Harrod-Domar Model augmented by the growth of population

Reason for rapid growth according to Krugman(1994)-Lau(1996)-Young (1992-1995)

It requires continous process of learning , innovation. Experimentation and continuing structural change.

Amsden(2001) Hobday (1995) Nelson and Pack (1998) stated that

Products are being exported more intensely

A country has more comparative advantage according to Balassa(1965) when:

Innovation

A creative process of abandoning old ways of doing things and adopting new methods

Incomplete information and a certain amount of risk, Rural sector provides a social capital

Factors affecting migration decisions

Decrease output in source country, increase output in host country

Economic impact of migration

Industrial policies

These policies were benign and competition flourished in most countries

Infant industry protection ploicy

In korea and taiwan, these policies were strictly enforced and favored export industries were monitored for efficiency and export peerformance

high levels and growth rates of savings and investment in miracle economies

Variables that increased dramatically as a percent of income

Increased productivity in miracle economies

Measures of TFP show a contribution to output growth until the middle of 1980

Embodied Technical progress

Something to do with the changing nature of inputs

Disembodied Technical Progress

Relates to the way factors are combined in the workplace

Conditional Convergence

Less restrictive form of convergence

log [Y(year)-Y(year)]= a+b log Y (year)

Formula for testing hypothesis of convergence