Other Growth Theories of mainstream economics

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Other Growth Theories of mainstream economics
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1. Lewis ModelDual Sector Model of Economic
Growth

• many LDCs had dual economies with a traditional
  agricultural sector and a modern industrial
  sector
• Traditional Sector has too much labor at
  subsistence level. It has to release excessive
  labor.
• MPlabour 0 Y C S T C I G
• Modern Sector absorbs labor and becomes the
  source of economic surplus or savings

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How does the Mechanism work?

• The lack of development was due to a lack of
  savings and investment. The key to development
  was to increase savings and investment.
• Lewis saw the existence of the modern industrial
  sector as essential if this was to happen. A
  growing industrial sector requiring labour
  provided the incomes that could be spent and
  saved. This would in itself generate demand and
  also provide funds for investment. Income
  generated by the industrial sector was trickling
  down throughout the economy.
• Urban migration from the poor rural areas to the
  relatively richer industrial urban areas gave
  workers the opportunities to earn higher incomes
  and crucially save more providing funds for
  entrepreneurs to investment.

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Policy Implications of Lewis model

• Induced Displacement of Population from Rural to
  Urban Sector
• Government may use push and pull factors using
  Institutions or System
• -Vanity Effect as a magnet Glamorous/modernize
  d Urban Sector versus Backward/Suppressed
  Rural Area
• -Income Inequality is as a magnet

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Lewis Model is Unbalanced Economic Growth
Strategy(??????????)

• This is a practical strategy.
• Lets reflect on side-effect/problems
• -Sustainability in the long-run Ravaging impacts
  of labor saving technology How much and how
  long is the modern sector absorb the surplus
  labor? What will happen to no-longer-needed
  surplus labor?
• -Inequality between agricultural industrial
  sectors
• Income Inequality Urbanization issues
• Urban/Modern Sector may not Save but Spend Urban
  Consumerism
• Rural-Urban Migration is larger than what the
  urban sector can absorb Rural Poverty simply
  becomes Urban Poverty

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Case Studies Casual Analysis

• England in 18th Century
• Enclosure Movement
• U.S. in 19th century
• Slave-Emancipation
• Japan
• Korea in the 1970s and the 1980s
• New Village Movement (Sae-Ma-Eul-Un-Dong)
• Taiwan (part of China)
• China

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Quantitative AnalysisIncome (Distribution)
Inequality and Economic Growth

• Income Inequality is measured by Gini-Coefficient
  
• Some international comparisons argue as economy
  grows, Gini Coefficient generally rises first and
  then fall
• It is in line with Lewis theory Income
  inequality is not only inevitable, but also
  necessary for economic growth
• - Case studies of Korea, Japan, and China
  (presentation)

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2. Rostow's Model- the Stages of Economic
Development.

• In 1960, the American Economic Historian, WW
  Rostow suggested that countries passed through
  five stages of economic development

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• Stage 1 Traditional Society-dominated by
  subsistence (defined as no economic surplus,
  meaning output being consumed by producers rather
  than traded)
• -trade being carried out by barter, meaning
  goods being exchanged directly for other goods
• -Agriculture being the most important
  industryProduction being labor intensive using
  only limited quantities of capital.
• Stage 2 Transitional Stage (the preconditions for
  takeoff)-Increased specialization starting to
  generate surpluses for trading.
• -an emergence of a transport infrastructure to
  support trade External trade also occurs
  concentrating on primary products Entrepreneurs
  emerge
• -savings and investment grow.
• Stage 3 Take Off-Rapid Industrialization or
  Industrial Revolution
• - Growth concentrated in a few regions of the
  country and in one or two manufacturing
  industries.
• - The level of investment reaches over 10 of
  GNP.
• - The economic transitions are accompanied by
  the evolution of new political and social
  institutions that support the industrialization.
• - The growth is self-sustaining investment
  leads to increasing incomes in turn generating
  more savings to finance further investment.
• Stage 4 Drive to Maturity-Industrial
  Diversification producing a wide range of goods
  and services reliance on exports and imports may
  start decreasing
• Stage 5 High Mass Consumption- Mass
  Consumption(????) Domestic Aggregate Demand is
  the major determinant of Business (Cycles)
• - Consumer durable industries Service
  sector

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Major Contribution of Rostow Model

• Emphasis of Take-Off
• -Economic Development is
• not a continuous process
• -There should be
• some Event for Great Transformation.

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Case Studies Catalyst for Take off

• Catalysis for Take Off Exogenous Shocks
• Japan
• Meiji Revolution Korean War
• Korea
• President Park, Jeong Hee Vietnam War
• China
• Deng Xiao Pings Reform
• Jiang Ze Mins Southern Journey(Nan Xun)
• Iraq War?

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• Limitations
• Deterministic Path for All?
• Rostow predict that every economy is going
  through the same stage.
• However, some economies are stuck in the first
  stage forever while other economies take off.
• -leaving a room for cultural explanation
• It does not set down the detailed nature of the
  pre-conditions for growth What sparks the
  take-off?
• -Exogenous Shocks as a Catalyst for Great
  Transformation?
• It is not very helpful as a policy prescription.
  Perhaps its main use is to highlight the need for
  investment.
• Explaining the fast is always easier than
  Predicting the future.

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Read a small paper on Rostow Model