ECON DEC chapter 3-2

• Structural transformation of a subsistence economy

  • Presence of 2 sectors: overpopulated rural sector w/ zero marginal labor productivity and a high-productivity industrial sector
  • Transfer of labor from traditional to modern, growth of product output
• Lewis turning point


  Declining labor-to-land ratio (marginal product of rural labor no longer 0) = labor supply curve positively sloped as modern-sector wage & employment grow
• Criticisms of Lewis Theory of Development

  • Assumes labor transfer & employment creation proportional to capital accumulation. But what if profits invested in labor-saving equipment?
  • Contemporary research show little surplus labor in rural areas (except in some countries like China)
  • Urban surplus labor
  • Wages increase amid unemployment
• Patterns of Development Analysis

  • Economic, industrial and institutional structure of an economy transformed to permit new industries as engine of growth
  • Capital accumulation + changes in economic structure needed
  • Constraints (affect level of dev't): Internal - resources, population size, government policies; External – access to capital, technology, trade (countries as part of internatl system)
• Characteristic features of the development process

  • Shift from agri to industrial production
  • Steady accumulation of physical and human capital
  • Change in consumer demand from basic necessities to diverse manufactured goods
  • Growth of cities and urban industries
  • Decline in family size ad overall population
• Proponents of structural change model prefer "facts to speak for themselves" unlike theories such as stages of growth
• The structural change model does not recognize differences, factors influencing development process
• Limitations of emphasizing patterns over theory. May draw wrong conclusions about causality
• The structural change model is optimistic that "correct" mix of policies will generate beneficial patterns
• Neocolonial Dependence Model


  • Underdevelopment as result of historical evolution of highly unequal international capitalist system of rich country-poor country relationships
  • Regardless if intentional, nations are under unequal power relations between the center and the periphery
• Small elite ruling class


  • Interests (knowingly or not) to perpetuate the international capitalist system of inequality
  • Serve or are rewarded by international special-interest power groups tied by allegiance or funding to wealthy capitalist countries
  • Viewpoints inhibit genuine reform efforts and may lead to even lower levels of living and perpetuation of underdvelopment
• Dependence


  Conditioning situation; Expand based on expansion of dominant countries; Dominant countries w/ technological, commercial, capital and sociopolitical predominance can exploit and extract local surplus; Based on the international division of labor – industrial development in some and restricted in others
• Pope John Paul II: 'One must denounce the existence of economic, financial, and social mechanisms which, although they are manipulated by people, often function almost automatically, thus accentuating the situation of wealth for some and poverty for the rest. These mechanisms, which are maneuvered directly or indirectly by the more developed countries, by their very functioning, favor the interests of the people manipulating them. But in the end they suffocate or condition the economies of the less developed countries.'
• False-Paradigm Model


  • Underdevelopment as result of faulty and inappropriate advice by well-meaning, though uninformed or biased advisers from developed country agencies and orgs
  • Inappropriate policies merely serving vested interests of existing power groups (domestic and international)
  • Intellectuals, economists, civil servants trained in alien and "irrelevant" Western concepts
• Dualistic-Development Thesis


  • Divergence between rich and poor nations, rich and poor peoples on various levels
  • Chronic coexistence (not temporary) of wealth and poverty will not be rectified in time
  • Degrees of superiority or inferiority show no signs of diminishing and instead increases
  • Superior element does little to pull up or "trickle down" to the inferior element, may even push it down
• IDR models, amid ideological differences, all reject the emphasis on traditional neoclassical economic theories
• IDR models question validity of the Lewis-type models, reject Chenery observation of "well-defined empirical patterns" that should be followed by poor countries
• IDR models emphasize on international power imbalances and need for economic, political and institutional reforms (internal & world)
• IDR models support expropriation of private assets w/ expectation that public asset ownership and control will help address poverty & unemployment
• • Weaknesses of IDR models: Appealing explanation but no insight on how countries initiate and sustain development
  • Actual economic experience of developing countries that pursued revolutionary campaigns of industrial nationalization and state-run production has been mostly negative
• Neoclassical Counterrevolution


  • Challenges statist models in favor of free markets, public choice & market-friendly approaches
  • Developed nations: favored supply-side macroeconomic policies and privatization of public corporations
  • Developing countries: freer markets and dismantling of public ownership, statist planning and government regulation
• Context of Neoclassical Counterrevolution

  • Emerged in the 1980s during political ascendancy of conservative governments of US, Canada, Britain and West Germany
  • Neoclassicists on the board of powerful international agencies World Bank and International Monetary Fund as influence of International Labor Organization, United Nations Development Program and United Nations Conference on Trade and Development eroded
• Argument of Neoclassical Counterrevolution


  • Underdevelopment resulted from poor resource allocation because of incorrect pricing policies and state intervention (corruption, inefficiency, lack of incentives, etc.)
  • State intervention slows economic growth
  • Neoliberals: economic efficiency and growth will be stimulated by free markets, privatizing state enterprises, export expansion and eliminating government regulation and price distortions
  • Allow "magic of the marketplace" and "invisible hand" to guide resource allocation and stimulate economic dev't
• 3 component approaches of Neoclassical Counterrevolution

  • Free-market approach - markets alone are efficient; competition is effective, technology and information freely available and costless; gov't is counterproductive
  • Public choice approach - new political economy approach; governments do nothing right because of selfish interests; misallocation of resources
  • Market-friendly approach – imperfections in economy and need gov't for market-friendly interventions (social services and climate for private enterprise); acceptance of market failures
• Traditional Neoclassical Growth Theory

  • Liberalization – opening up of markets, draw investment and increase rate of capital accumulation
  • Source of output growth: labor quantity and quality, increase in capital and technology improvement
  • Openness – encourages access to foreign production ideas, technological progress
• Finger-pointing between dependence theorists (many from developing countries, seeing underdevelopment as externally induced phenomenon) and neoclassical revisionists (most from Western economies, blame gov't intervention and bad economic policies)
• Market price allocation may do a better job than state intervention but developing economies have very different structures: Competitive free markets generally do not exist, information is limited, markets fragmented, etc.
• Invisible hand often lifts those already well-off, failing to offer opportunities for upward mobility of the majority
• Lessons from supply-and-demand analysis to arrive at "correct" prices
• In an environment of widespread institutional rigidity and severe socioeconomic inequality, both markets and governments will typically fail.
• Each approach has strengths and weaknesses
• Controversies – ideological, theoretical or empirical – makes the study of economic development challenging
• Evolving patterns of insights and understandings
• Consensus: Significance from each approach

  • Linear stages: crucial role of savings and investment
  • Two-sector model: transfer of resources from low to high-productivity activities, linkages between traditional & modern
  • Dependence theory: importance of world economy and decisions of developed world affecting developing economies
  • Neoclassical: efficient production, role of price systems