There are many expansion and development theories describing how countries develop, why they develop and how development can be prompted. These theories can be put into two specific categories, traditional or traditional theories and modern ideas. When we talk about progress or development here, we indicate the economic development in a country's GDP, and not only developing countries but also how highly developed countries can maintain expansion at a ecological rate. This essay will discuss the four traditional areas of development and development theories that exist, how they differ, and exactly how they have been improved in contrast to new development theory.
The first region of traditional theory is the linear stages-of-growth model, pioneered by Rostow who discovered a design of growth from which he developed a five level theory, throughout which capital, savings and investment are essential for development. Rostow. His five phases were as follows, focusing on expanding countries with large agricultural areas:
The traditional modern culture: characterised by pre-Newtonian technology and technology, labour extensive agricultural methods. A roof to growth is accessible as there is absolutely no technological innovation.
The preconditions for take-off, is the transitional level of development seen as a an intrusion by more complex economies and movements towards a centralized condition and specialisation techniques.
The take-off: the start of steady growth, in the UK this was given birth to out of continuing technological innovation. Cost savings and investment are very important to ensure technological progression, new industries develop and agricultural methods are developed, the composition of the current economic climate is completely improved, and changes in production are highly important.
The drive to maturity is reached after around sixty years; characterized by an 'ability to move beyond the original industries which driven its take-off' (Rostow: 1960) and investment runs at around 10-20
Stage of high mass ingestion: industries focus on durable consumer goods and services; there's a considerable degree of urban migration, and living expectations go up as the welfare status takes condition.
Sir Roy Harrod and Evsey Domar built on Rostow's assumption that personal savings and investment are essential for a country to experience sustained growth. In the Harrod-Domar model they mentioned that some earnings is needed to replace old capital, but this doesn't allow for expansion, as creation will be at the same level. In order to grow, further investment is required to add to the capital stock. First of all, it is assumed that total capital stock, K, is immediately related to GDP, Y, via the capital-output-ratio (k). Subsequently, the net personal savings percentage (s) is assumed to be a fixed ratio of GDP. We are able to now mathematically construct the model:
Net personal savings = net personal savings percentage x GDP
S=sY
Net investment (I) = change in capital stock
I= K
Due to the capital output percentage:
K/Y=k or K/ Y=k
This rearranges to:
K=k Y
Assuming a shut down economy and overlooking the government:
Y=C+S
Or alternatively:
Y=C+I
This means:
S=I
Now we can put each one of these elements together:
I= K=k Y
And
S=sY= k Y= K=I
sY= k Y
Dividing by Y and then through by K, we can rearrange,
Y/Y=s/k
Which expresses that the pace of progress in GDP depends upon both capital-output percentage and the net savings ratio, the higher the personal savings rate, the greater GDP will develop. If we have now take the depreciation of capital into consideration:
s/k = g +
This final equation shows that, as the depreciation of capital () is negative, not all revenue can be reinvested. It is unlikely that workers receiving low earnings in producing countries will save enough to ensure economic development, therefore overseas aid or private international investment may be necessary. For example, if an available economy was now assumed, and k is 3:1, if the country wants to grow for a price of 7% yearly a savings rate of 21% would be needed, which is inconceivable. International aid or investment could replace cost savings, and help the country to build up.
Secondly, structural change theory, as produced by W. Arthur Lewis in his Dual Sector theory of development, described that we now have two sectors in virtually any underdeveloped economy, a traditional, mostly rural subsistence sector and a modern professional sector. In the original sector there may be zero marginal labour productivity, which Lewis called 'surplus labour', deducing that labour could be transferred from the traditional to the present day sector with out a loss of output. The high-productivity modern sector creates income over the price of pay, to reinvest which induces development and development of the commercial sector. Lewis thought that employment development in the modern sector would continue until all the surplus labour was used, and the marginal product of agricultural labour was no more zero.
Thirdly, the international dependence theory discusses the damaging ramifications of dominating wealthy countries, on which growing countries are based mostly. The idea can be put into three subcategories:
Neo-colonial dependence model: developed out of Marxist theory which blamed the capitalist system of exploitation for the lifestyle of underdeveloped countries (periphery), which cannot be self-reliant due to exploitation by developed countries (centre) that happen to be interested in preserving inequality.
False paradigm model: the advice from developed countries is biased, ethnocentric, uninformed and over-complicated. As many politically influential information are informed in the developed countries, they absorb these unacceptable models and for that reason problems cannot be dealt with properly.
Dualistic-Development Thesis: This model shows the continuously diverging dual societies of wealthy and poor countries and can be further split into four arguments:
There are superior and second-rate conditions, signifying highly educated and illiterate people coexist in the international overall economy,
This coexistence is prolonged, it cannot just solve itself,
Inequalities are growing,
The superior elements do nothing to help the second-rate elements capture up; they may even make the inequality worse.
Finally, the previous area of classical theory is the newer Neoclassical Counterrevolution which called for freer marketplaces and extending the private sector, it condemned developing country government authorities for poor source of information allocation leading to inefficiencies and a lack of economic bonuses for development. You will find three methods of neoclassical theory which vary in their opinion of the federal government and its effectiveness:
Free market procedure; argued that the markets alone are useful and induce effective learning resource allocation, and federal government interference is distortionary.
Public-choice theory further condemns the federal government, insisting all realtors take action out of selfish motives, which restricts expansion, tool allocation and specific freedom.
Finally the market-friendly procedure recognises the importance of the government's role, as the product and factor marketplaces in growing countries are usually underdeveloped, and market failures are definitely more apparent.
Furthermore the famous Solow neoclassical progress theory fits into this category, and is transitional into modern theories of development. The theory develops on the Harrod-Domar model discussed earlier, by adding labour as a second factor, which is often substituted for capital, and enabling technological change. The Solow model means that economies will converge to the same degree of income, and this technological progress is an exogenous factor which talks about long-term progress; the model is therefore known as an exogenous development model.
Y=F (K, L)
(Where Y is productivity (GDP),
K is capital and L is labour)
And due to constant earnings to size:
Y=F (K, L)
(Where is a good constant)
Using the Cobb-Douglas creation function:
Y=K±(AL1-±)
(Where A is the productivity
of labour)
If =1/L then generally speaking, we can write:
Y/L=f (K/L, 1) or y=f(k)
(Where k is K/L and lower-
case means per employee)
Or specifically:
y=Ak±
This implies that output per worker is dependent on the quantity of capital per staff member, therefore the more capital per worker, the more output that worker can produce. If we have now consider the rate of development of the labour drive per calendar year (n) and of labour production, i. e. the speed of which A raises (»). Providing savings are greater than depreciation (), the total capital stock develops, but capital per employee only develops when total capital stock is greater than the amount needed to equip new staff with the previous degree of capital per worker. The full Solow equation:
k=sf(k) - (+n)k
Shows that the expansion of the capital labour proportion (k) depends on savings (sf(k)) after depreciation and the amount of capital per new worker is taken into account. If we assume a is constant, output and capital per worker are no longer growing, showing this k=0 and k* is the level of capital per staff member:
sf(k*)= (+n)k*
If A is increasing then capital per employee is not changing, but employees become more fruitful and produce result as if there have been extra individuals. The model can even be shown graphically:
The above graph shows the activity towards a well balanced equilibrium, if k is above or below k*, as capital per employee increases or lowers towards equilibrium, k*. To compare this model to the Harrod-Domar model, we can easily see what happens if the speed of cost savings, s, is brought up. A temporary increase in the speed of output development is realised, time for the steady condition of growth down the road, which separates it from the Harrod-Domar method. Within the Solow model, an increase in the personal savings rate will not ensure long term expansion, it only increases the equilibrium, meaning both capital-labour percentage and output-labour percentage rise, but not the speed of development. Shown graphically below, personal savings increase to s':
As this happens the equilibrium end result per person also enhances, so even though the increase in the pace of growth is short-term, it still is a very beneficial to the developing economy.
In juxtaposition to the Solow model, another modern expansion theory, namely the Endogenous development theory respect technology as endogenous: technological change is an outcome of general population and private assets in human capital and knowledge rigorous business, such as ICT and telecommunications. Endogenous development theories can be described by using a basic formula from the Harrod-Domar model: Y=AK, where A is any factor which impacts technology and K now includes physical and human being capital, taking assets in education into account. Investments in individuals and physical capital can produce positive externalities for exterior economies and improve labour output which will offset any diminishing dividends, resulting in sustained long-term progress. This simplification is similar to traditional ideas as it still emphasises the value of personal savings and investment funds for economic expansion, but also different as it refutes that there is convergence of expansion rates across shut economies, credited to personal savings rates and levels of technology differing from country to country. Unlike the Solow model, there is absolutely no natural convergence of per capita incomes finding up to people of developing countries even with similar personal savings and population growth rates. Furthermore the 'high' rates of return offered to international private shareholders by growing countries with low capital-labour ratios are broken down as there little if any complementary investment in human being capital such as education, without human capital investment funds the positive externalities of such purchases can't be realised, and so an even of complementary capital which is significantly less than socially optimum is reached.
Romer's model illustrates endogenous progress theory, by assuming that growth is activated at the firm or industry level as it is positively influenced by the country's total capital stock (K') that could lead to increasing profits at the entire, despite constant earnings being assumed in each industry. In this model real human capital is roofed (A) which is a positive externality and benefits the other organizations in the economy. Algebraically:
Y=AK±L1-±K'†
Assuming each industry uses the same degree of capital and labour:
Y=AK±+†L1-±
If we assume A=0, the resulting development rate for per capita income is:
g-n=†n/1-±-†
Where g and n are productivity and population progress rates respectively. Without enabling spill-overs like in the Solow model and with continuous returns to range, †=0 and per capita development would therefore be zero. But if, like Romer, we assume a confident capital externality (†>0) then g-n>0 and Y/L grows up, if we also allowed for technological progress development would be risen to the scope of the technological progression, denoted by » in Solow's model.
Here we've shown that modern models such as the endogenous development theory and perhaps even Solow's development model, keep some completely different assumptions to people of the original ideas, which is natural as time advances plus more is learned all about what methods are effective and what really motivates economic growth. No one theory is conclusive, and some are just explanatory, such as the structural change models. What's clear is that one factor such as technology or the savings rate, by itself cannot explain why developed countries are developed and producing countries aren't, or how to attain a happy medium. Several factors must be studied into consideration, so when we moved into the more modern models, this became clear, as the old models were not discarded, but put into and built on.
