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ECON 347 Miami University Exhausted Foreign Reserves Summary

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Chapter 3 Classic Theories of Economic Growth and Development MiamiOH.edu/fsb @MiamiFarmerSchoolMU Production Possibility Frontier (PPF) With Decreasing Marginal Rate of Transformation B, C, D all reflect maximum production technologically possible; X impossible; A technically inefficient 3 MiamiOH.edu/fsb @MiamiFarmerSchoolMU Economics 34 Module 2 Presentation 2. Classical theories of economic growth and development 2a. Introduction to production functions and components of economic growth • Types of technological change • neutral: PPF shifts out parallel • labor-saving: common with computers, Internet, tractors, highspeed looms • capital-saving: rarer, but valuable in DCs where capital is scarce; examples: hand- or rotary-powered weeders and threshers, foot-operated bellows pumps, backpack mechanical sprayers • labor- or capital-augmenting 3 MiamiOH.edu/fsb @MiamiFarmerSchoolMU Effect of Increases in Physical and Human Resources on PPF Neutral Technological Progress 4 MiamiOH.edu/fsb @MiamiFarmerSchoolMU Effect of Growth of Capital Stock and Land on PPF 5 MiamiOH.edu/fsb @MiamiFarmerSchoolMU Effect of Technological Change in Industrial Sector on PPF Caused by invention of transistors, for example International Rice Research Institute’s development of hybrid rice seed IR-8 “(miracle rice”) would have opposite effect (see p. 151 6 of Todaro and Smith) MiamiOH.edu/fsb @MiamiFarmerSchoolMU Why study classic theories? Aren’t these old models? MiamiOH.edu/fsb @MiamiFarmerSchoolMU Why study classic theories? Aren’t these old models? – Today’s models will be classic some day – Each provide valuable insights – Newer models draw on elements of classic theories – Understanding of past development policy Why is it important that you know the people’s names that are associated with the theories? MiamiOH.edu/fsb @MiamiFarmerSchoolMU 3.2 Development as Growth and Linear-Stages Theories ● Post WWII field began without good theory, but did have historical experience ○ Marshall Plan ○ Experience of countries that had developed MiamiOH.edu/fsb @MiamiFarmerSchoolMU 3.2 Development as Growth and Linear-Stages Theories ● A Classic Statement: Rostow’s Stages of Growth: A non-communist manifesto ○ Rostow was an economic historian ○ Principle strategy of development was mobilization of savings as investment MiamiOH.edu/fsb @MiamiFarmerSchoolMU MiamiOH.edu/fsb @MiamiFarmerSchoolMU 3.2 Development as Growth and Linear-Stages Theories ● Harrod-Domar Growth Model (sometimes referred to as the AK model) ○ ○ Growth required new additions to capital stock Additions come from higher rates of savings MiamiOH.edu/fsb @MiamiFarmerSchoolMU The Harrod-Domar Model – Simplified Version MiamiOH.edu/fsb @MiamiFarmerSchoolMU The Harrod-Domar Model Simplified Version Rate of growth determined by the net national savings ratio (s) and the capital-output ratio (c) positively related to s negatively related to c (remember the convergence argument?) MiamiOH.edu/fsb @MiamiFarmerSchoolMU Where in the model is growth of labor force and technological progress? assumes labor is abundant in developing countries technological progress models as a decrease in the required capital-output ratio (more growth for a given investment) MiamiOH.edu/fsb @MiamiFarmerSchoolMU Implications Higher savings better “savings gap” could be met through foreign aid or foreign investment Therefore: transfers of capital and technical assistance from developed to developing world was called for (like the Marshall plan?) Suggests a “World Bank” could lend to cause growth MiamiOH.edu/fsb @MiamiFarmerSchoolMU Criticisms of the Stages Model ● Necessary versus sufficient conditions ○ Marshall plan worked because of the existence of particular institutional structures that were successful before the war ○ developing countries may lack complementary factors (managerial competence, skilled labor, effective governance, secure property rights, etc.) MiamiOH.edu/fsb @MiamiFarmerSchoolMU 3.3 Structural-Change Models ● The Lewis two-sector model: how do economies transform from heavy emphasis on subsistence agriculture to modern, urbanized, industrial manufacturing and service economy? Often applied to explain the recent growth of China MiamiOH.edu/fsb @MiamiFarmerSchoolMU MiamiOH.edu/fsb @MiamiFarmerSchoolMU “One day in August, 1952, walking down the road in Bangkok, it came to me suddenly that both problems have the same solution. Throw away the neoclassical assumption that the quantity of labour is fixed. An “unlimited supply of labour” will keep wages down, … The result is a dual (national or world) economy, where one part is a reservoir of cheap labour for the other. The unlimited supply of labour derives ultimately from population pressure, so it is a phase in the demographic cycle. The publication of my article on this subject in 1954 was greeted equally with applause and with cries of outrage.” – Authur Lewis MiamiOH.edu/fsb @MiamiFarmerSchoolMU Assumptions of the model: Two sectors: traditional and modern traditional sector characterized by MPL = 0 (surplus labor) Therefor labor can be transferred from traditional to modern without losing output surplus labor implies increasing hiring in modern sector without raising real wage firms invest profit back into modern sector raising the marginal product of labor MiamiOH.edu/fsb @MiamiFarmerSchoolMU Figure 3.1 The Lewis Model of Modern-Sector Growth in a TwoSector SurplusLabor Economy MiamiOH.edu/fsb @MiamiFarmerSchoolMU Criticisms of the Lewis Model ● ● ● ● Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation (what if profits are not reinvested, or reinvested in labor saving technology? = growth without development) Surplus labor in rural areas and full employment in urban? (generally assumed not the case) Institutional factors? wages rise over time (unions, multinationals hiring practices mean noncompetitive labor market) Assumption of diminishing returns in modern industrial sector (evidence increasing returns exist), assumes away human capital investment MiamiOH.edu/fsb @MiamiFarmerSchoolMU Empirical Patterns of Development – Examples ● ● ● ● Switch from agriculture to industry (and services) Rural-urban migration and urbanization Steady accumulation of physical and human capital Population growth first increasing and then decreasing with decline in family size “Let the facts speak for themselves!” What if we draw the wrong conclusions about causality? MiamiOH.edu/fsb @MiamiFarmerSchoolMU 3.4 The International-Dependence Revolution ● The neocolonial dependence model (need not be intentional) ○ Legacy of colonialism, Unequal power, Core-periphery MiamiOH.edu/fsb @MiamiFarmerSchoolMU 3.4 The International-Dependence Revolution ● The false-paradigm model (Easterly: White Man’s Burden) ○ Pitfalls of using “expert” foreign advisors who misapply developedcountry models MiamiOH.edu/fsb @MiamiFarmerSchoolMU ○ Dualistic-development thesis: (a) different sets of conditions; (b) coexistence is chronic, not transitional; (c) divergence is growing; (d) existence of superior elements does not pull up inferior ones MiamiOH.edu/fsb @MiamiFarmerSchoolMU 3.4 The International-Dependence Revolution ● The dualistic-development thesis Hypothesis (inequalities inherently tend to increase) MiamiOH.edu/fsb @MiamiFarmerSchoolMU MiamiOH.edu/fsb @MiamiFarmerSchoolMU ● Criticisms and limitations ○ Does little to show how to achieve development in a positive sense; accumulating counterexamples MiamiOH.edu/fsb @MiamiFarmerSchoolMU The Neoclassical Counterrevolution: Market Fundamentalism ● Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches ● Conservative, pro-market movement in 1980s: supply-side macroeconomic policies, rational expectations, privatization ● Underdevelopment caused by resource misallocation due to incorrect pricing and state intervention (corruption, inefficiency, poor incentives) ● To do: privatize firms, promote free trade/exports, welcome FDI, deregulate ● Example: India https://www.youtube.com/watch?v=iWufFRnelkM MiamiOH.edu/fsb @MiamiFarmerSchoolMU ● Main Arguments Denies efficiency of intervention ○ Points up state owned enterprise failures (not disciplined by competition) MiamiOH.edu/fsb @MiamiFarmerSchoolMU The ten principles originally stated by John Williamson in 1989, includes ten sets of relatively specific policy recommendations. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Low government borrowing. Avoidance of large fiscal deficits relative to GDP; Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment; Tax reform, broadening the tax base and adopting moderate marginal tax rates; Interest rates that are market determined and positive (but moderate) in real terms; Competitive exchange rates; Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; Liberalization of inward foreign direct investment; Privatization of state enterprises; Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions; Legal security for property rights. MiamiOH.edu/fsb @MiamiFarmerSchoolMU ○ Stresses government failures ■ Public-choice theory (political economy) government actors act from a self-interested perspective MiamiOH.edu/fsb @MiamiFarmerSchoolMU https://www.nationalreview.com/corner/james -m-buchanan-rip-veronique-de-rugy/ (3:20) MiamiOH.edu/fsb @MiamiFarmerSchoolMU ○ Traditional neoclassical growth theory – with diminishing returns, cannot sustain growth by capital accumulation alone ● Solow model added labor and (exogenous) technology to the Harrod-Domar model Result: output growth is caused by increases in labor quality and quantity, increases in capital, or improved technology Market economies will encourage these MiamiOH.edu/fsb @MiamiFarmerSchoolMU Solow Model: Harrod-Domar, and allow for substitution between capital and labor, assuming diminishing returns Growth of capital/labor ratio (capital deepening) depends on savings (HD model) and depreciation (HD model) and capital widening (NEW – adding more workers with existing capital lowers c/l) Population growth in poor countries – what does that imply for convergence? MiamiOH.edu/fsb @MiamiFarmerSchoolMU Endogenous growth theory: Romer Technological spillovers may mean increasing returns to scale (growth is not exogenous – addition to labor or capital, rather it is endogenous – is produced from the spillovers) https://www.youtube.com/watch?v=vMh_QPKGr1Y&list=PLxGnbfQtEcwtKf-fJt-4OnQB7iRryj1- https://www.youtube.com/watch?v=cjyryWknjhA&t=77s https://www.nobelprize.org/prizes/economic-sciences/2018/romer/lecture/ (around 7) MiamiOH.edu/fsb @MiamiFarmerSchoolMU Leaks and Matches (and traps) A city that is 10 times larger than another city is 17 times more innovative A city that is 50 times larger is 130 times more innovative MiamiOH.edu/fsb @MiamiFarmerSchoolMU Questions to discuss in groups https://docs.google.com/document/d/1ggV v8rMvh7x3vPzqQNqAARDbM68aVNDbxdlo5n2bng/edit ?usp=sharing MiamiOH.edu/fsb @MiamiFarmerSchoolMU Module 1 Presentation Economics 347 Outline 0. Introductory matters 1. Introducing economic development—a comparative perspective 1a. Living standards around world, classification of countries 1b. Gross National Income and Purchasing Power Parity 1c. Human Development Index 1d. Differences and similarities among countries 1e. Millennium Development Goals and Sustainable Development Goals 1 How are developing countries different from developed countries based on your own experience or exposure? Module 1 Presentation • Some of world’s biggest questions: why are there great disparities in income, wealth, health, nutrition, education, freedom of choice, women’s autonomy, environmental quality, access to markets, security, and political voice? Port-au-Prince 3 Module 1 Presentation . • How living standards differ around world and within Developing Countries • 4 strata (Lowest/Second-Lowest/SecondHighest/Highest • Strata differ on cooking, food and nutrition, clothing, education, housing, furnishings, water, sanitation, transportation India U.S. 4 What are some ways we talk about different categories? North – South LDC- MDC First World – Third World Rich – Poor Developed – Developing Module 1 Presentation Brazil (UMI) World Bank classifications are here 1a. Living standards around the world, classification of countries • World Bank classifies countries in 2020 into 4 groups by GNI for 2021-22: • Low Income: $1,046 and $4,096 and $12,695 (16% of pop) Ethiopia (LI) 7 Indonesia (LMI) World Income Distribution 8 Video: Rosling’s The Best Stats You’ve Ever Seen 9 Module 1 Presentation 1. Introducing economic development—a comparative perspective 1b. Gross National Income and Purchasing Power Parity • GDP=total market value of all finished goods and services Most basic produced within a country in a set time period comparison of countries • Definition: GNI=GDP + compensation paid to resident is on GNI employees by foreign firms and income from overseas per capita property owned by residents – compensation paid by resident firms to overseas employees and income generated by foreign owners of domestic property Formula: GDP = C + G + I + NX where C: consumption G: government exp. I: investment NX=X-M: net exports X: exports M=imports 10 East Timor (large amounts of foreign aid) (GNI > GDP) Ireland (large amounts of foreign owned production) (GNI < GDP) 4 What is the relationship for your country and why? Module 1 Presentation Argentine debt crisis Saudi Arabian oil production 1
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