CHAPTER 5: THEORIES OF GROWTH AND MODERNIZATION Economic Growth Theories ~ Mo erni!

"tion Theories = imperialism and colonialism have (+) effect on backward countries = trade with industrial countries has (+) effect on backward countries C#"ssic"# e$e#o%ment economists A& C"%it"# Acc'm'#"tion "n ("#"nce Growth 1. Rosenstein ) Ro "n = massive industrial development for growth. = growth process must be understood as a series of dissimilar equilibria . = backward areas have! a. low income b. unemplo"ment = industriali#ation = big push like an airplane taking off. $ith involvement of! a. education b. large%scale investment programmes. &. N'r*se = developed 'osenstein ( 'odan)s ma*or points. = povert" c"cles! a. +emand ,ide -ow level of capital formation -ow productivit" levels -imited market -ittle incentive to invest b. ,uppl" side -ow incomes -ow productivit" -ack of .apital ,mall .apacit" to save D'esen+err, e--ect!tendenc" of rich people to cop" the follow consumption patterns of those in rich countries reduction in rate of savings for the countr". = to break the povert" c"cles! a. create strong incentives to invest b. mobili#ation of investible funds +o these two b" e/pansion of market through simultaneous massive and balanced capital investments in industrial sectors. = we want optimal utili#ation of foreign aid to initiate accumulation of capital on grand scale. (& .n+"#"nce Growth "n Income Distri+'tion 1. Hirschm"n = need imbalances in backward economies because there are other barriers to growth than the limited market and lack of capital investments. = greatest problem! lack of entrepreneurship and management of capacit". = distribute resources on selected ke" sectors that can pull other parts of the econom" along with it. = the rich would use their savings in imported lu/ur" goods0 but wealth should still not be redistributed in favour of the poor the poor cannot save. Tric*#e Down e--ect! 1 personall" think this idea)s 2,. &. /'!nets = economic growth leads to increased inequalit" but this would flatten out. 1ncome of poor people grow more slowl" but would eventuall" to grow faster3 thus the flattening out. C& Growth Po#es 1. Perro'0 = divided industr" into & parts! a. Pro%e##"nt In 'stries (+"namic sub%sector) = these concentrate in small geographical enclaves b. Im%e##e In 'stri"# Sector (non%d"namic sub%sector) = backward regions that depend on their linkages with these propellant industries. 4he" are driven forward b" these growth poles . 1111n contrast to 5errou/)s and 6irschman)s0 some of these growth spots are interlinked to global networks but at the same time0 have not induced growth in their surrounding non%d"namic sectors. 5arang isolated growth. D& Mo erni!"tion "n St"2es o- Growth a. 5er capita income = central measure of growth b. economic development = moderni#ation process c. suppl" of labour = (in traditional sector) starting point for development d. savings rate = central determinant for investment rate ~ overall growth rate e. entrepreneurial class = driving force to initiate growth 1. 3ewis = model for c#ose econom,! a. .apitalist ,ector! wage earners emplo"ed0 used reproducible capital

b. ,ubsistence sector! not using reproducible income0 famil" based0 low labour productivit" finding! abundant labour reserves were found in subsistence sectors in the form of the underemplo"ed. 4he" can be transferred in the capitalist sector without affecting the subsistence sector with a wage determined b" the average in subsistence sector not b" productivit" in capitalist sector. 7oila8 = barrier to economic growth! lack of accumulation of productive capital low savings. = solution! incre"se r"te o- s"$in2s "n in$estments in +"c*w"r economies. = .apitalists have to produce the necessar" increase in savings rate. 4heir profits should be both saved and invested. = need cheap labour to increase capital. = subsistence sector wage is cheap0 let them *oin the capitalist sector and pa" the same wage0 but the" will become more productive economic growth8 = e/tended model for an o%en econom,! = trade between developing countries and industriali#ed countries will not promote growth for the developing countries. = cheap labour cheap goods (but for the industriali#ed countries) &. Rostow = two sectors (-ike -ewis)s)! a. Tr" ition"# Sector b. Mo ern C"%it"#ist Sector = incre"se in sh"re o- s"$in2s "n in$estment in n"tion"# income -or 2rowth . = ,tages of 9conomic :rowth! unilinear0 universal0 irreversible 1. the traditional societ" &. the establishment of preconditions for takeoff ;. the takeoff stage <. the drive to maturit" =. the >poque of high mass consumption ??? these stages are determined economic0 political and cultural conditions. = 5reconditions for takeoff! breaking out of the traditional structure! 1. increase in in$estment r"te &. emergence of 2rowth sectors (engines of aggregate economic growth) ;. establishment of political0 social and institutional -r"mewor*s to utili#e potential in modern sector = h"potheses! a. increased savings increased investments rate industrial growth b. capital accumulation = central source of growth = launched an alternative to @arl Aar/)s theor" but the non%capitalist road to development was onl" possible with support from the B,,' and 9astern 9urope. E& P"tterns o- De$e#o%ment "n O+st"c#es to Growth 1. .hener"0 ,"rquin and -aursen = in a @e"nesian approach0 source of economic growth! increase of em"n for consumer and investment goods increase in suppl" higher equilibrium point. = growth of demand can be increased through public investments but will come from increased incomes. = other source of economic growth! c"%it"#0 techno#o2ic"# inno$"tion0 e 'c"tion ( assuming that increased demand increases suppl". = structuralists add! a. reallocation of labour from low to high%productivit" sectors. b. interrelations between different sources of growth c. distinguish industriali#ed from developing regarding composition of growth sources. ??? highl" industriali#ed countries! growth b" capital0 technolog" and educated labour ??? developing countries! growth b" transfer of labour resources to high%productivit" sectors. Process o- Di--'sion! transfer labour (unemplo"ed and underemplo"ed) to urban industrial sector without affecting agricultural production net growth in total production. = modern large%scale sector e/pansion ma" break down the traditional sector too fast = 4o+5cre"tin2 "+i#it, is #ess th"n the 2rowth in 'nem%#o,ment -o##owin2 -rom +re"* own . = limits! a. low savings rate b. lack of capital for investment c. lack of foreign e/change ??? .lassical +evelopment 9conomists! not an important limitation ??? .ontemporar" +evelopment 9conomics! high priorit" d. low growth in agriculture e. limited human resources = conducted surve"s findings!

a. developing countries correlated with rising per capita income. 4he higher the income0 the greater shift from primar" to secondar" and tertiar" sectors. b. distinct stages in the changes of economic structures could not be identified. = another stud"! income vs growth rate
'ate of growth per capita ma/

???middle%income countries are in the middle of catching up with industriali#ed countries with lower growth rates. G#o+"# Inter e%en ence Theor, o- Inter e%en ence = :lobal @e"nesianism a. Dem"n De%en ence = demand for a countr")s production! domestic consumers and foreign bu"ers. = industrial countries have interest in growth in developing countries because such growth will increase demand for the industrial consumers) goods. ??? 1ndustriali#ed and developing countries function mutuall" C ma" also impede each other. = interdependence is not alwa"s s"mmetrical! high%income are more important than low%income economies. b. S'%%#, o- Goo s = industrial countries are dependent on products from developing countries (raw materials). c. We#-"re De%en ence = countries have different comparative advantages = speciali#ation.

poor (%)

middle (+)

1ncome per .apita industriali#ed (+)