ECO2117 L3 1Classic Theories of Economic Growth and DevelopmentClassic Theories of Economic Development: Four Approaches 1.Linear stages of growth model2.Theories and patterns of structural change3.International-dependence revolution4.Neoclassical, free market counterrevolutionDevelopment as Growth and Linear-Stages TheoriesA Classic Statement: Rostow’s Stages of GrowthAccording to Rostow, the transition from underdevelopment to development can be described interms of a series of steps or stages through which all countries must proceed:1.Traditional society2.Preconditions for take-off into self-sustaining growth3.Take-off4.Drive to maturity5.Age of high mass consumptionHarrod-Domar Growth Model(sometimes referred to as the AK model):A functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio (c)Capital-output ratio: A ratio that shows the units of capital required to produce a unit of output over a given period of time.Net savings ratio: Savings expressed as a proportion of disposable income over some period of time.The Harrod-Domar Model Simplified Version
ECO2117 L3 2The Harrod-Domar Model Incorporating Capital Depreciation Equation 3.7 is also often expressed in terms of gross savings, in which case the growth rate is given by: where δ is the rate of capital depreciationNecessary condition: A condition that must be present for an event to occur. For example, capital formation may be a necessary condition for sustained economic growth (before growth inoutput can occur, there must be tools to produce it). But for this growth to continue, social, institutional, and attitudinal changes may have to occur.Sufficient condition: A condition that when present causes or guarantees that an event will or
ECO2117 L3 3can occur; in economic models, a condition that logically requires that a statement must be true (or a result must hold) given other assumptions.Criticisms of the Stages Model The mechanisms of development embodied in the theory of stages of growth do not always work. -Saving and investment are necessary conditionsfor accelerated rates of economic growth but not sufficient conditions.The Marshall Plan worked for Europe because the European countries receiving aid possessed the necessary structural, institutional, and attitudinal conditions. The Rostow and Harrod-Domar models implicitly assume the existence of these same attitudes and arrangements in underdeveloped nations.