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CHAPTER 5: THEORIES OF GROWTH AND MODERNIZATION

Economic Growth Theories ~ Modernization Theories= imperialism and colonialism have (+) effect on backward countries= trade with industrial countries has (+) effect on backward countries

Classical development economistsA. Capital Accumulation and Balanced Growth

1. Rosenstein ± Rodan = massive industrial development for growth.= growth process must be understood as a series of ³dissimilar equilibria´.

= backward areas have:a. low incomeb. unemployment

= industrialization = ³big push´ like an airplane taking off. With involvement of:a. educationb. large-scale investment programmes.

2. Nurkse = developed Rosenstein ± Rodan¶s major points.= poverty cycles:

a. Demand SideLow level of capital formation Low productivity levels Limited market Littleincentive to invest

b. Supply sideLow incomes Low productivity Lack of Capital Small Capacity to save

Duesenberry effect:tendency of rich people to copy the follow consumption patterns of thosein rich countries reduction in rate of savings for the country.

= to break the poverty cycles:a. create strong incentives to investb. mobilization of investible funds

Do these two by expansion of market through simultaneous massive and balancedcapital investments in industrial sectors.

= we want optimal utilization of foreign aid to initiate accumulation of capital on grandscale.

B. Unbalanced Growth and Income Distribution1. Hirschman 

= need imbalances in backward economies because there are other barriers togrowth than the limited market and lack of capital investments.= greatest problem: lack of entrepreneurship and management of capacity.

= distribute resources on selected key sectors that can pull other parts of the economy along with it.= the rich would use their savings in imported luxury goods, but wealth should still not beredistributed in favour of the poor the poor cannot save.

Trickle Down effect: I personally think this idea¶s BS.2. Kuznets 

= economic growth leads to increased inequality but this would flatten out. Income of poor peoplegrow more slowly but would eventually to grow faster; thus the flattening out.

C. Growth Poles 1. Perroux 

= divided industry into 2 parts:a. Propellant Industries (Dynamic sub-sector)

= these concentrate in small geographical enclavesb. Impelled Industrial Sector (non-dynamic sub-sector)

= backward regions that depend on their linkages with these propellant industries.

They are driven forward by these ³growth poles´.***In contrast to Perroux¶s and Hirschman¶s, some of these growth spots are interlinked to globalnetworks but at the same time, have not induced growth in their surrounding non-dynamic sectors.Parang isolated growth.

D. Modernization and Stages of Growtha. Per capita income = central measure of growthb. economic development = modernization processc. supply of labour = (in traditional sector) starting point for developmentd. savings rate = central determinant for investment rate ~ overall growth ratee. entrepreneurial class = driving force to initiate growth

1. Lewis = model for closed economy:

a. Capitalist Sector: wage earners employed, used reproducible capitalb. Subsistence sector: not using reproducible income, family based, low labour productivity

finding: abundant labour reserves were found in subsistence sectors in theform of the underemployed. They can be transferred in the capitalist sectorwithout affecting the subsistence sector with a wage determined by theaverage in subsistence sector not by productivity in capitalist sector. Voila!

= barrier to economic growth: lack of accumulation of productive capital low savings.= solution: increase rate of savings and investments in backward economies.

= Capitalists have to produce the necessary increase in savings rate. Their profits should be bothsaved and invested.

= need cheap labour to increase capital.= subsistence sector wage is cheap, let them join the capitalist sector and pay thesame wage, but they will become more productive economic growth!

= extended model for an open economy:= trade between developing countries and industrialized countries will not promote growth forthe developing countries.

= cheap labour cheap goods (but for the industrialized countries)2. Rostow 

= two sectors (Like Lewis¶s):a. Traditional Sector b. Modern Capitalist Sector 

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= increase in share of savings and investment in national income for growth.= Stages of Economic Growth: unilinear, universal, irreversible

1. the traditional society2. the establishment of preconditions for takeoff 3. the takeoff stage4. the drive to maturity5. the époque of high mass consumption*** these stages are determined economic, political and cultural conditions.

= Preconditions for takeoff: breaking out of the traditional structure:1. increase in investment rate 

2. emergence of growth sectors (engines of aggregate economic growth)3. establishment of political, social and institutional frameworks to utilize potential in modernsector

= hypotheses:a. increased savings increased investments rate industrial growthb. capital accumulation = central source of growth

= launched an alternative to Karl Marx¶s theory but the non-capitalist road to development was onlypossible with support from the USSR and Eastern Europe.

E. Patterns of Development and Obstacles to Growth 1. Chenery, Syrquin and Laursen

= in a Keynesian approach, source of economic growth: increase of demand for consumer andinvestment goods increase in supply higher equilibrium point.= growth of demand can be increased through public investments but will come from increasedincomes.

= other source of economic growth: capital, technological innovation, education ± assuming thatincreased demand increases supply.

= structuralists add:a. reallocation of labour from low to high-productivity sectors.b. interrelations between different sources of growthc. distinguish industrialized from developing regarding composition of growth sources.

*** highly industrialized countries: growth by capital, technology and educated labour*** developing countries: growth by transfer of labour resources to high-productivity sectors.Process of Diffusion: transfer labour (unemployed and underemployed) to urban industrial sectorwithout affecting agricultural production net growth in total production.= modern large-scale sector expansion may break down the traditional sector too fast =  job-creatingability is less than the growth in unemployment following from breakdown.= limits:

a. low savings rate

b. lack of capital for investmentc. lack of foreign exchange

*** Classical Development Economists: not an important limitation*** Contemporary Development Economics: high priority

d. low growth in agriculturee. limited human resources

= conducted surveys findings:a. developing countries correlated with rising per capita income. The higher the income, thegreater shift from primary to secondary and tertiary sectors.b. distinct stages in the changes of economic structures could not be identified.

= another study: income vs growth rateRate of growth per capita

max

Income per Capita poor middle industrialized(-) (+) (+)

***middle-income countries are in the middle of catching up with industrializedcountries with lower growth rates.

Global Interdependence Theory of Interdependence

= ³Global Keynesianism´ a. Demand Dependence 

= demand for a country¶s production: domestic consumers and foreign buyers.= industrial countries have interest in growth in developing countries because such growth willincrease demand for the industrial consumers¶ goods.

*** Industrialized and developing countries function mutually & may also impede each other.= interdependence is not always symmetrical: high-income are more important than low-incomeeconomies.

b. Supply of Goods = industrial countries are dependent on products from developing countries (raw materials).

c. Welfare Dependence = countries have different comparative advantages = specialization.