Continuing to review the two remaining classic theories of economic development:

1
Lecture 4

• Continuing to review the two remaining classic
  theories of economic development
• Dependency theories
• Neo-classic counter revolution

2
Dependency models

• In use during 1970s
• In developing countries, there are institutional,
  political and economic rigidities that create
  obstacles to growth.
• Stressing external factors dependence and
  dominance relationship with rich countries.
• The main dependency models
• The neocolonial dependence model
• The false-paradigm model
• The dualistic-development thesis

3
The Neocolonial Dependence model

• Based on Marxist views.
• Underdevelopment is due to the historical
  development of an international capitalist
  system.
• Unequal power relationships between the center
  (the developed countries) and the periphery (the
  least developed countries).
• Economic inequalities are preserved or increased
  by the workings of the system.
• Solution? Restucture the world capitalist system!

4
The false-paradigm model

• Underdevelopment created by following the advice
  of misinformed development experts.
• Special attention placed on developed country
  assistance agencies and multinational donor
  organisations.
• Overemphasising the economic development role
  played by the main growth-generating policies
  that are applied in rich, industrialised
  countries with well-functioning market systems.

5
The dualistic-development thesis

• (National or international) dual systems of
  economic development/growth
• can coexist
• can be chronic
• may increase
• may raise poverty
• Economic growth may not trickle down to those
  worst off in society/the global economy.

6
Dependency models

• Fundamentalist in their original concept forms.
• No focus on economic determinants of development
  in the form of investment, national resources,
  population size etc.
• Adding aspects to the previous understanding of
  economic development in their light versions
• Economic power imbalances favour the rich and can
  directly or indirectly hurt the poor.
• Examples Trade negotiations, tax systems etc.

7
The neoclassic counterrevolution

• Highly influential in the 1980s
• Governing the policy agenda of the World Bank
  and the International Monetary Fund (IMF).
• Main objective To liberalise markets and reduce
  state intervention.
• Consisting of three approaches
• Free market analysis Based on the view that free
  markets are efficient.
• Public choice model Based on the view that
  everybody acts in their own self-interest.
• Market-friendly approach Based on 1 and 2 but
  combined with the view that policy intervention
  could generate economic development by improving
  the functioning of markets.

8
The Solow Neoclassical Growth Model

• Expanding the Harrod-Domar model.
• Labour is included in the model.
• Aggregate production function is
• Y Ka(AL)1-a
• Y Total output
• K Capital stock
• A Labour productivity
• L Labour force
• a is the proportion of capital input and (1- a)
  is the proportion of labour input in aggregate
  production.

9
The Solow Neoclassical Growth Model

• The labour force contribution to output depends
  on
• its productivity
• Assuming that A grows over time represents
  technological development.
• But A is exogenously determined, so what drives
  the technological change remains unexplained by
  the model
• This is why the Solow model is sometimes called
  an exogenous growth model.

10
Traditional neoclassical growth theory

• There are 2 production factors labour and
  capital.
• There are diminishing returns to capital (and
  labour, respectively) in production.
• K/L is lower in developing countries than in
  developed countries.
• MPK is higher in developing countries rates of
  returns to investments are higher in developing
  countries.
• This implies that an open developing economy
  attracts foreign growth-generating investments.