State lead Growth?

The paradigm of development that dominated after the Second World War emphasized state directed, inward-orientated, import-substitution industrialization. Improving the living conditions of the masses was to be achieved through nation wide development plans emphasizing self sufficiency. The analythical framework for deriving investment was the Harrod-Domar model and a simple Keynesian aggregate savings function.

State lead Growth?

Increased public sector investment was acieved by nationalization and the creation of new public enterprises. Many countries experienced rapid growth in the 50s and 60s because of favourable external environment. This growth was however not sustained and the masses benefited marginally.

State lead Growth?

Initial East Asian rapid growth was attributed to special circumstances including massive foreign aid to Korea and Taiwan. In addition they pursued an export led strategy ensuring their success through industry specific incentives. Their success has lead to a rethinking of the state driven approach and the neo-classical/neoliberal policies of the IFI.

Changing role of the state

Neoclassical period The neo-institutionalist perspective *Note: must read chapters 1- 3 Chang, Ha Joon (2003). Globalisation, Economic Development and the Role of the State. New York: St. Martins Press.

Theories of Modernization
Modernization is the total transformation of a traditional or pre-modern society into the type of technology and associated social and political organization that characterizes the Western world. Countries develop out of a functionalist, evolutionary, system theory of social development that is linear.

Theories of Modernization
Development as modernization leading to modern growth, thus involves the modernization of social relationships and institutions, political relationships and institutions and economic relationships and institutions, or the shift from traditional to modern society. The locus of change is the modern sector, centered on the rationalist values of the enlightenment era and the cultural rise of the modern nation state.

Features of economic modernization

Influenced by keynesian ideas and the Marshall plan. Distinction made between backward or traditional countries and advanced or modern capitalist countries. The goal is to show how countries make the transition to a modern industrial country. The transition to modernization is marked by sustained and higher rates of growth caused by rising levels/rates of savings/investment

Features of economic modernization

The engine of growth is the capitalist class in the modern sector, given their profit maximizing, individually rational, modern values and behaviour. Under conditions of international trade, there tends to be a presumption that such international economic interactions will have a favourable net impact, with the expectation of global economic convergence i.e. the poor catching up with the rich.

Links between growth and modernization theory

Classical growth theories: Harrod (1939) and Domar (1946) Harrod-Domar growth model; Solow-Swan Neo-classical growth model and Lewis (1854) Dual Economy growth model. The essence of these models is that growth is driven by savings/investment or the rate of capital accumulation.

Modernization theories: Classical Growth Theories

Harrod-Domar model: Starting with the national income, we

have that: Yt = Ct +St where: Yt = national income; Ct = consumption; St = savings. But we also have that:

(1)

Yt = Ct + It

(2)

where: Yt = output, which is consumed, or used for investment.

Classical Growth Theories

St = It (3) Investment can be used to increase a country's capital stock. This can be expressed through the following equation: Kt+1 = (1-)Kt + It (4) Where Kt is the capital stock and (delta) is the rate of capital depreciation. Now, savings rate, s, is just St/Yt, and capital-output ratio, (theta), is Kt/Yt. Putting (3) and (4) together and moving terms around, we get to the HarrodDomar equation: g = s/ - where g is the growth rate. (5)

How g was derived

That is: Kt+1 = (1-)Kt + It (4) Given that St = It, we have: Kt+1 = (1-)Kt + St. If Kt = Yt and St is sYt, we have: Y(t+1) = (1-)Yt + sYt. So: Y(t+1) = (1-)Yt + (s/)Yt Y(t+1) - Yt = (-+s/)Yt g = s/ -

Classical Growth Theories

What we can see from equations 5 is that as savings rate, s, goes up, growth is accelerated; the same occurs as capital-output ratio declines. Thus, these are the two key variables in the Harrod-Domar model.

Important features of the Harrod-Domar model:

savings are treated as a policy instrument (exogenous variable), when, in reality, it is an endogenous variable; The model assumes capital-output ratio is constant, which implies that savings have a growth effect. That is, if savings are increased, investment increases in the same proportion. This implies higher capital accumulation thereby accelerating output growth.

Classical Growth Theories

Solow-Swan model: you are to look at
the elements of the model in relation to productivity growth.

Economic modernization
Lewis develops a model of growth which explicitly recognizes developmental differences between countries and makes a further distinction within developing countries by characterising them as dual economies. Labour surplus traditional sector and modern sector in developing countries.

Economic modernization
Traditional sector is agriculture based low technology, capital and worker productivity. Modern sector high productivity manufacturing or urban centered industrialization requires growth in savings and increased capital accumulation.

Economic modernization
Other approaches to modernization Big Push (Rosenstein), Strategic Push (Hirshman) and Stages of Growth (Rostow)

Rostow's Stages of Growth

Walt Rostow wrote in the late 50's and early 60's in response to the many seemingly successful Marxist theories of economic development Marxist writers had developed a number of stages through which a country had to pass, Rostow came up with a similar list.

Stage One: Traditional Society

A traditional society is one whose structure is developed within limited production functions, based on Pre-Newtonian science and technology, and on Pre-Newtonian attitudes towards the physical world. (p. 4)

Low productivity agriculture is a large % of the economy Political power dominates economic power Low rates of investment ( < 5% of GDP) Inefficient property rights

Stage Two: Preconditions for Take Off

Conditions: Transfer resources from agriculture to manufacturing Shift from regional to national/international focus Must shift away from having children People must be rewarded not for their connections but their economic abilities

Stage Three: Take-off

Short period (20-30 years) of intensive growth
In this short period we get increase in investment: [I] regard as a necessary but not sufficient condition for the take-off the fact that the net investment rise from 5% to over 10% (p. 37) development of a leading sector emergence of new institutions The take-off is the interval when the old blocks and resistances to steady growth are finally overcome. The forces making for economic progress, which yielded limited bursts and enclaves of modern activity, expand and come to dominate the society. Growth becomes its normal condition. Compound interest becomes built, as it were, into its habits and institutional structure. (p. 7)

Stage Four: Drive to maturity

for these purposes we define it as the period when a society has effectively applied the range of (then) modern technology to the bulk of its resources. (p. 59) Occurs roughly 60 years after take-off-- Increase in investment (10% to 20%) Development of modern capitalist economy and self-sustained growth Pass to Stage Five: High Mass Consumption

Problems with Rostow

Role of Investment (necessary condition, but sufficient?) In Britains case Rostow calculated that investment needed to increase from 5% of GDP to 10% of GDP between 1750 and 1800.

From Crafts, Investment: 1750=5%, 1800 = 7%, 1850 = 10% Is this a theory? Are the stages distinct? What qualifies as a leading sector?