Other Growth Theories of mainstream economics

1. Lewis Model:Dual 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

• 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.

How does the Mechanism work?

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/modernized

Urban Sector versus Backward/‘Suppressed’ Rural Area

-Income Inequality is as a ‘magnet’

Lewis Model is Unbalanced Economic Growth Strategy(不均衡的经济发展战略）

• This is a practical strategy.• Let’s 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

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

*Quantitative Analysis:Income (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)

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

• 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 industry;Production 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（大众消费） ; Domestic Aggregate Demand is the major determinant of Business (Cycles)

- Consumer durable industries; Service sector

Major Contribution of Rostow’ Model

Emphasis of ‘Take-Off’

-Economic Development is not a continuous process;

-There should be some Event for Great Transformation.

*Case Studies: Catalyst for Take off

Catalysis for Take Off= Exogenous Shocks

JapanMeiji Revolution; Korean War

KoreaPresident Park, Jeong Hee; Vietnam War

ChinaDeng Xiao Ping’s ReformJiang Ze Min’s “Southern Journey(Nan Xun)”Iraq War?

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.

Read a small paper on Rostow Model