Lesson 3 - Classic Theories of Economic Growth and Development

Linear Stages Theory

focused on theories and patterns of structural change, used modern economic theory and statistical analysis in an attempt to portray the internal process of structural change that a "typical" developing country must undergo if it is to succeed in generating and sustaining rapid economic growth.

Rostow's 5 Stages of Growth

a theory of economic development, associated with the American economic historian Walt W. Rostow, according to which a country passes through sequential stages in achieving development.

Traditional Society

stage in which the dominant activity in a society is subsistence farming and the social structure is rigid and unchanging and resistant to technology; dependent on rural economy.

Transitional stage

specialization, surpluses, and infrastructure; dependent on social appreciation of education and skill development.

Take Off

industrialization, growing investment, regional growth, and political change dependent on suburban economy.

Drive to Maturity

diversification, innovation, less reliance on imports, investment; dependent on growth and developed economies.

High Mass Consumption

advanced technology fuels mass production and mass consumption as people now "need" countless goods; the service sector becomes dominant and dependent on the global economy or market-managing economies.

Walt W. Rostow

the leading proponent of stages of growth.

Harrod-Domar Model

often referred to as the AK model because it is based on a linear production function with output given by the capital stock K times a constant, often labeled A. In one form or another, it has frequently been applied to policy issues facing developing countries.

Capital-output ratio

a ratio that shows the units of capital required to produce a unit of output over a given period of time. (k)

Net savings ratio

expressed as a proportion of disposable income over some period of time.

Structural Change Model

it employs the tools of neoclassical price and resource allocation theory and modern econometrics to describe how this transformation takes place.

Basic model of Lewis theory

one of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis

Lewis two-sector model

A theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development.

Self-sustaining growth

Economic growth that continues over the long run based on saving, investment, and complementary private and public activities.

Lewis Turning Point

The process of modern-sector self-sustaining growth and employment expansion is assumed to continue until all surplus rural labor is absorbed in the new industrial sector. Thereafter, additional workers can be withdrawn from the agricultural sector only at a higher cost of lost food production because the declining labor-to-land ratio means that the marginal product of rural labor is no longer zero.

International-Dependence Revolution

It viewed underdevelopment in terms of international and domestic power relationships, institutional and structural economic rigidities, and the resulting proliferation of dual economies and dual societies both within and among the nations of the world.

Neocolonial Dependence Model

legacy of colonialism, unequal power, Core periphery

False-paradigm model

Pitfalls of using "expert" foreign advisors who misapply developed-country models

Dualistic-Development Thesis

superior and inferior elements can coexist; Prebisch-Singer Hypothesis

Criticisms and limitations

does little to show how to achieve development in a positive sense; accumulating counterexamples.

Neoclassical Counterrevolution: Market Fundamentalism

refers to the rise of market-oriented policies championed by the World Bank and other institutions, promoting the idea that market fundamentalism—or a strong belief in free, unregulated markets—is the best path to economic growth and development.

Statist Model

free markets, public choice, and market-friendly approaches; argues about denying the efficiency of intervention and government intervening.

Traditional Neoclassical Growth Theory

with diminishing returns, cannot sustain growth by capital accumulation alone

Underdevelopment

An economic situation characterized by persistent low levels of living in conjunction with absolute poverty, low income per capita, low rates of economic growth, low consumption levels, poor health services, high death rates, high birth rates, dependence on foreign economies, and limited freedom to choose among activities that satisfy human wants.

Galtung's Center-Periphery Model

Center—economically developed world, Periphery - developing countries.

Dualism

is the existence and persistence of substantial and even increasing divergences between rich and poor nations and rich and poor peoples on various levels.