Classic Theories of Economic Development

1. Classic Theories of Economic Development Todaro: Chapter 3 Part II

2. Overview Structural Change Models Patterns-of-Development Analysis International-Dependence Revolution The Neoclassical Counterrevolution: Market Fundamentalism

3. Patterns-of-Development Approach Increased savings and investment are perceived as necessary but not sufficient conditions for economic growth. Along with accumulation of human and physical capital, a set of interrelated structural changes are needed to make the transition from traditional economy to a modern one. Changes in: Composition of consumer demand International trade Resource usage Production Urbanization The growth and distribution of the population

4. Based on extensive empirical work conducted by Hollis B. Chenery and his colleages using cross-sectional and time-series data, patterns of development analysis identified several characteristic features of the development process.

5. International-Dependence Revolution Neocolonial Dependence Model False-Paradigm Model Dualistic-Development Thesis

6. Neocolonial Dependence Model Direct outgrowth of Marxist thinking. It lays the blame for the existence of underdevelopment on the shoulders of the historical evolution of a highly unequal capitalist system of rich country-poor country relationships. The dominance of the unequal power relationships between the center (the rich countries) and the periphery (the developing countries) renders the attempts by the LDCs to be self-sufficient and independent difficult. Also the members of the elite class in the developing countries have interests that help to perpetuate the international capitalist system of inequality and conformity. Directly and indirectly the elite class serve and are rewarded by international special-interest power groups (e.g. multi-national corporations, multilateral assistance organizations like the IMF), which are tied by the allegiance or funding to the wealthy capitalist countries. Often, elite activities tend to hinder any reform efforts that might benefit the population at large leading to perpetual underdevelopment.

7. The continuing poverty in the developing world is largely attributed to the existence and policies of the industrial capitalist countries. Underdevelopment is seen as an externally-induced phenomenon. Revolutionary struggles or restructuring are therefore required.

8. The False-Paradigm Model Less radical than international dependence models The faulty/ biased advice given fails to recognize traditional social structures, unequal ownership of land and other property rights, the disproportionate control of elites and the very unequal access to credit. The policy advice serve to protect the interests of the existing power groups. Also local university intellectuals, high-government officials and other civil servants learn inapplicable theoretical models.

9. Dualistic Development Thesis The concept of dualism represents the existence and persistence of increasing divergences between rich and poor nations, and rich a poor peoples on various levels. Four elements of dualism:

10. Structural-Change vs. International Dependence Structural Change Emphasis is on traditional neoclassical theories designed to generate GDP growth Optimistic that the right mix of economic policies will generate beneficial patterns of self-sustaining growth Underdevelopment is a result of internal constraints such as insufficient savings and investment or lack of education and skills. International Dependence Emphasis is on international power imbalances and the need for fundamental economic, political and institutional reforms both domestic and worldwide. Pessimistic in that they offer an appealing explanation of underdevelopment but they offer little formal or informal explanation of how countries can initiate and sustain development. Underdevelopment is an externally induced phenomenon

11. The Neoclassical Counterrevolution The counterrevolution called for freer markets and the dismantling of public ownership, statist planning, and government regulation of economic activities. Neoclassical counterrevolution argues that underdevelopment is the result of poor resource allocation due to incorrect pricing policies and too much state intervention by overly-active developing-nation governments and that state intervention often slows the pace of economic growth.

12. The Free Market Approach Public-choice theory Market-friendly Approach

13. Traditional neoclassical models of growth are a direct outgrowth of the Harrod-Domar and Solow models, which both stress the importance of savings. The Solow Model expanded on the Harrod-Domar formulation by adding a second factor of production � labour � and by introducing a third independent variable � technology � to the growth equation.

14. Solow Model Exhibits diminishing returns to labor and capital separately and constant returns to both factors jointly. Technological progress became the residual factor explaining long-term growth. The level of technological progress was assumed to be exogenous.

15. The problem with the arguments of the neoclassical counterrevolution is that most LDC economies are so different in structure and organization from the developed countries that the behavioural assumptions and policy prescriptions are often incorrect.