Jan 30 2012

Models of Economic Growth and Development

As we study economic development in year 2 IB Economics, we examine different models for economic growth. Growth in GDP is not the only determinant of economic development, which in order to be measured effectively must account for human welfare determinants such as life expectancy, literacy rates, child mortality rates, distribution of income, and so on. However, it has been shown throughout history that economic growth, or the increase in real output and income, correlates directly with improvements in development factors like those above.

The reason? Increases in national income usually mean at least some levels of improvement in access to basic necessities for the average citizen in a developing country. Also, higher incomes mean more savings, which means greater access to capital for investment by entrepreneurs. More investment leads to greater productivity and rising incomes for those who join the emerging industrial and service sectors that usually accompany economic growth. Furthermore, rising incomes mean more tax revenue for governments, whose spending on public goods like education, health care, and infrastructure result in real improvements in standard of living for not just the emerging upper and middle classes, but the poor as well.

Of course, the following models can be observed to varying degrees among the world’s developing economies today. Some of these models will fail to play out if the institutional and political environment fails to create a stable atmosphere for savings and investment. What you should notice, however, is the underlying importance of savings in all three models. Poor countries suffering from low savings and, even worse, capital flight, are doomed to a cycle of poverty, where funds for investment leading to productivity increases are never made available due to instable institutions like banking and politics. To put a poor country on a path towards economic growth and development, a strategy is needed. Such strategies will be covered in a later post. For now, let’s look at the models:

Harrod-Domar Growth Model:HD model

The model suggests that the economy’s rate of growth depends on:

  1. the level of saving
  2. the productivity of investment i.e. the capital output ratio

The Harrod-Domar model was developed to help analyse the business cycle. However, it was later adapted to ‘explain’ economic growth. It concluded that:

  • Economic growth depends on the amount of labour and capital.
  • As LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development.
  • More physical capital generates economic growth.
  • Net investment leads to more capital accumulation, which generates higher output and income.
  • Higher income allows higher levels of saving.

Lewis Structural Change (dual-sector) Model:

Lewis model

Many LDCs have dual economies:

  • The traditional agricultural sector was assumed to be of a subsistence nature characterised by low productivity, low incomes, low savings and considerable underemployment.
  • The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment.

Lewis suggested that the modern industrial sector would attract workers from the rural areas.

  • Industrial firms, whether private or publicly owned could offer wages that would guarantee a higher quality of life than remaining in the rural areas could provide.
  • Furthermore, as the level of labour productivity was so low in traditional agricultural areas people leaving the rural areas would have virtually no impact on output.
  • Indeed, the amount of food available to the remaining villagers would increase as the same amount of food could be shared amongst fewer people. This might generate a surplus which could them be sold generating income.

Those people that moved away from the villages to the towns would earn increased incomes:

  • Higher incomes generate more savings.
  • Increased savings meant more fund available for investment.
  • Increased investment meant more capital and increased productivity in the industrial sector, higher wages, more incentive to move from low productivity agriculture to high productivity industry, the circle continues…

Rostow’s Model – the 5 Stages of Economic Development:Rostow Model

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

According to Rostow development requires substantial investment in capital. For the economies of LDCs to grow the right conditions for such investment would have to be created. If aid is given or foreign direct investment occurs at stage 3 the economy needs to have reached stage 2. If the stage 2 has been reached then injections of investment may lead to rapid growth.

52 responses so far

52 Responses to “Models of Economic Growth and Development”

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  3. Penelopeon 19 Jan 2012 at 6:14 pm

    I think that it is a Lewis Dual Sector model illustrates the growth that China has experienced. The Lewis dual sector model splits the economy into two sectors, which are manufactured and rural. Productivity is really low in the rural sector then becomes much higher in the manufactured sector, which is what instigated the development. The model suggests that workers from the agricultural sector transfer to the manufactured sector in order to have a higher standard of living. The manufactured sector is attractive because it guarantees higher wages and a higher quality of life. Big firms came in and set up in China in order to attract a lot of cheap labor. Even though it was cheap labor to them, the workers in China experienced a huge increase in their wages. The majority of the workforce in China that was working in the manufactured sector now works in the agricultural sector. Moreover, the profits that are made from the manufactured companies are reinvested into the urban sector. As a result, there is more population in the big cities in China. It wouldn’t be the Harrod-Domar Growth Model because it is mainly to do with savings, which China didn’t have before it developed. It also wouldn’t be the Rostow model because China didn’t fulfill all the stages in this model.

  4. Nathan R.on 20 Jan 2012 at 9:44 am

    I think that China has been following most closely the Lewis Structural Change model for two simple reasons. Firstly the assumptions of the model seem to fit the current situation of China in which a lot of surplus labor for the subsistence farming sector of the economy have migrated to areas with high industrial capacity and become employees of the secondary sector of the economy. The Lewis model effectively splits the economy into a low productivity rural sector and a high productivity industrial sector which is very reflective of the Chinese economy. Poor people in the countrysisde have no access to infrastructure and such aids to development and therefore have an incentive to move to industrial areas for higher wages and hence a higher income and standard of living. Although the Rostow model may also apply as Chinese society slowly moves from the agricultural world to the industrial world, I think that change has been to slow and not inclusive enough to be accurate. There remains too large a portion of people in the Chinese inner provinces such as Henan that depend on subsitence farming for their to be a true generalised move forward on the Rostow model. And the Harrod-Dommar model although also true regarding China's abundance of cheap labor their is currently only a minor lack in infrastructure in Chian as firms from the West were quick to outsource and invest into Chinese firms ensuring that China had the capital necessary for industrialisation. For these reasons I believe that the Lewis Model is most accurate when representing economic development in China.

  5. Tim Bon 22 Jan 2012 at 12:09 pm

    I strongly agree with Nathan and Penny that China’s development and current situation may best be described and predicted by the Lewis Structural Change (dual-sector) Model. The model is clearly related to the current situation of China, since it evidently predicts the redistribution of the labor force from the agricultural sector outside the cities towards the secondary sector with high industrial and manufacturing capacity. This shift can be seen in the development of China’s economy over the past years. As the name of the model predicts, a split in the economy of China in an agricultural sector and an industrial sector is represented by the Lewis Structural Change (dual-sector) Model. The traditional agriculture sector described by the model clearly relates to China’s economy, since low productivity, low incomes, low savings and considerable underemployment have impacted China’s development over the past years. The other sector however, can be seen as technologically advanced and in interaction with urban areas, where communication is easy and progress can be seen. Due to this split of the economy a large incentive for relatively poor people from the country side can be seen, as there is a surplus in labor in the agricultural areas, however a need for labor in the manufacturing sector of China. This attraction of labor to urban areas was caused by higher wages, which were offered by the manufacturing firms and the very low productivity of the agricultural sector which not even severed the supply of food. In my opinion the Rostow Model does not represent China’s development to the full extend, since the gap from stage 1 to stage 2 already seems too large for the Chinese agricultural sector, due to the lack in sufficient tools and the lack of productivity which restrains Chinese agricultural businesses from specialization.

  6. Philippaon 22 Jan 2012 at 12:23 pm

    All these models place investment of capital as essential for the increase in productivity and output, leading to economic growth. China's growth has ben no exception to this in that the rapidly developing industrial manufacturing sector has been the main leader in China's economic growth. Although the Harrod Domar growth model explains the situation China was in before economic growth occurred with a surplus of labour and lack of physical capital, the Lewis Structural Change model also incorporates the explanation of the migration from the primary, agricultural sectors to the secondary, manufacturing sectors in highly industrialized areas. The Rowstow model on the other hand goes further than the growth China has experienced as tertiary, service sectors are not yet dominant in China. I therefore think that the Lewis Model best fits China. China's traditional agriculture sector produced low incomes for farmers, therefore low savings and little or no opportunity for investment in capital. Underemployment and low crop returns due to the need to share between an overpopulated village also contributed to a form of a 'poverty cycle' from which the Chinese couldn't escape. However, the introduction of a technological and industrial sector in urban areas provided the opportunity and incentive to work hard to reap benefits for farmers to be attracted to jobs in the manufacturing sectors where incomes and the standard of living would be higher. This shift into higher income sectors means more savings and a greater possibility of acquiring capital for investment by entrepreneurs contributing to further economic growth.

  7. Emmaon 22 Jan 2012 at 1:53 pm

    I think the model above which best shows the growth and development of china over the last few decades is the Lewis Structural Change (Dual-Sector) model. This model outlines a shift from workers being mostly in the traditional agriculture sector to a technology based manufacturing sector. The structure states that the agricultural sector had low productivity and low incomes, which we heard from the pod-cast was definitely the case in China in the past. It suggests that works will move into the manufacturing sector because of the higher incomes and therefore a higher quality of life. We know there is a vast manufacturing sector in China currently, not only do they have a very large trade surplus, but mostly likely half of the objects in the room around us are produced in China from clothing to electronics. Furthermore, the Lewis Structural Change model shows that as more profit is make in the manufacturing sector it is reinvested in capitol growth therefore causing this large production sector to keep expanding which is very reflective of the growth China has experienced. The other models have elements that link to China's development, such as availability to cheap labor, however they do not fit as closely as the Lewis Structural Change model.

  8. Cedricon 22 Jan 2012 at 2:40 pm

    I agree with all the following posts above. Looking at the Lewis Structural Change model, It is quite clear to see that China certainly follows this model. Split into the manufacturing and rural sectors, China's recent history of Communism has clearly followed the trend of moving from a rural based sector producing agricultural goods towards the manufacturing sector. China's rapid economic growth is due to the movement from agricultural sectors towards the manufacturing sector. This movement illustrates the increase in incomes for households leading to larger savings and more savings for further investments. As more and more people move from the rural areas towards urban areas, the increase in human capital and the further investments in the industrial sector account for a higher economic growth for China. This can be seen since higher incomes lead to a larger incentive for people to move from rural areas to industrial areas.

  9. Debbieon 22 Jan 2012 at 3:16 pm

    Each model represents a different way in which economic development and growth could take place. In the example of China and its great economic growth and development over the last few years the Lewis Dual Sector model is best used to explain the process. Before China developed communism had led to the fact that the largest and only sector was the a primary sector, agriculture. As the rules loosen the manufacturing sector in the urban areas become more attractive to the rural people. Which lead to a flow of labor from the primary sector to the secondary sector. The people now working in the manufacturing sector can enjoy high incomes and can therefore also save. These savings become essential for investments and through the shift from agricultural goods to manufacturing good, the nation has been able to grow economically as well as develop.

  10. Susanneon 22 Jan 2012 at 3:21 pm

    The Harrod-Domar model states that the rate of growth of output of an economy depends on the proportion of output or income saved. It also illustrates the constraint of many LEDCs, a lack of sufficient savings to finance investment in physical capita. If the level of domestic savings is insufficient to finance the necessary investments for economic growth, domestic savings may be supplemented by foreign aid or foreign direct investment. Despite this model having valid assumptions, I think it is naïve to solely focus on savings. There are numerous other factors faced by LEDCs such as political or cultural barriers. I also think this model ignores the importance of human and natural capital in an economy. Similarly, the Lewis Structural change model tries to eliminate the dual sector, referring to two different circumstances existing simultaneously (e.g poverty and wealth), and moving a predominantly agricultural economy to an industrial one. As already mentioned, China does appear to have followed this model-rapid economic growth and high rural to urban migration. However, I feel that, despite the successful industrial sector, China is still subject to massive social disparities, especially in rural areas. In fact, I think that rural poverty has increased as most economically active members leave, to work in the cities, leaving behind the most unproductive members of society: children and the elderly. Also, due to the rural locations of some villages the absence of merit goods such as education and health care will prevent less affluent people from rising above poverty. In effect, the profits made from the industrial sector should be reinvested into rural areas, in order for such people to escape the cycle of poverty.

  11. Larissaon 22 Jan 2012 at 5:19 pm

    China’s economic development and growth can be explained by the Lewis Dual Sector model. Workers moved from a traditional agriculture sector that includes low productivity, low incomes and considerable underemployment to a manufacturing sector which is technologically advanced with high levels of investment operating in urban environment. The traditional agriculture sector is definitely something that China experienced in the past. The workers moved into the manufacturing sector to improve their standards of living as they would earn higher incomes and the amount of food available to the remaining villagers would increase. Evidence shows that China now shifted to the manufacturing sector because many electronics and clothing is made in China as well as they have a trade surplus; their value of exports exceeds the costs of imports. As more profit is made from the manufacturing sector it can be reinvested in labor and capital to make even more profit. This causes production to increase, increasing China’s growth even more.

  12. francescaon 22 Jan 2012 at 5:56 pm

    I think that the model that best shows the growth of China over the last decades is the Lewis Structural Change model. In china the traditional agriculture sector produced really low incomes for workers who had therefore no savings (and no investment). With the introduction of technology and of a industrial sector, workers were able to work more efficiently and to have higher profits. So the movement from the agricultural sector to the manufacturing sector led to higher incomes and therefore higher savings, creating the possibility to invest more. China’s economic growth is due to this change from primary to secondary sector which made more people move to urban areas and specialize in the industrial sector.

  13. Matt Beattieon 22 Jan 2012 at 7:15 pm

    I believe that the model above which best illustrates the growth and development of China over the previous decades is the Lewis Structural Change model. The model shows the shift of China's mainly rural agricultural production providing no savings under Communism towards producing manufactured goods resulting in a larger amount of savings. A larger amount of savings is a result of workers receiving higher incomes. These higher incomes and savings can lead to investment which would lead to further economic growth. Higher incomes and larger savings would also attract an increasing amount of rural workers to the urban areas increasing the output of the nation.

  14. Markelon 22 Jan 2012 at 8:19 pm

    China's rapid economic growth in the past few decades has been due to its transition from the traditional agricultural sector to a manufacturing sector. Lewis suggested that "the modern industrial sector would attract workers from the rural areas" and this is what has been happening in China. Due to the migration from rural areas to rapidly growing cities and towns, approximately 500 million Chinese citizens have been pulled out of poverty since the manufacturing sector provides them with higher wages and improved standards of living. The Lewis Structural Change (dual-sector) model correctly depicts China's current situation. Many rural citizens continue to move into cities in order to work in the manufacturing sector to earn higher salaries and therefore save more money. Increased savings means that more funds are available for investment so the economy continues to grow. In addition, the high productivity in China's exporting industries has allowed China to stop depending on imports. The current problem however, is the inequality that exists between urban and rural centers in China. Most of the investments are taking place in large cities instead of rural villages so standards of living continue to be considerably lower than those in the urban centers.

  15. bbender11on 22 Jan 2012 at 9:38 pm

    When it comes to which model best describes Chinas growth, I believe it is the Lewis Structural Change Model. The model illustrates a clear shift from the agricultural sector to the manufacturing sector. This is evidently what China has experienced and why it has become such a manufacturing giant. More and more workers in the agricultural sector have moved into the cities to work in industries as the wages are higher thus leading to higher household incomes. The model shows the excess of labor, due to the considerable underemployment, from the agricultural sector which has switched to the manufacturing sector. The higher household incomes lead to an increase in savings as well creating an incentive to invest as well. Higher incomes also improves their standards of living for the workers as compared to in the rural areas. The increased investment triggers a rise in productivity in the industrial sector as more capital is available. The productivity and higher wages attract the workers from the rural areas which increases the output of the nation. This increase in output by the manufacturing sector has contributed to the rapid economic growth in China. Compared to the models the Lewis Structural Change(Dual-Sector) Model is the most accurate fit representing China's economic growth.

  16. Matthew Burnhamon 23 Jan 2012 at 3:13 am

    As has been previously said numerous times, China is following the Lewis Structural Model which shows the growth China has experienced. The model splits the economy into a low (rural) productivity sector and and high productivity sector. That with surplus labour, the traditional agricultural sector will move into the manufacturing sector which would be appealing with the higher wages and better standard of living that comes with it. This fits very well with China with it's large rural agricultural sector that forces Chinese people under the poverty line. The movement into the higher wage sector will allow these people to spend more money and therefore allow the government to reinvest that money into the poor areas to build up things like infrastructure in towns and villages.The Harrod-Domar Growth Model wouldn't fit as well because it focuses more on investment and savings which might better apply to country's with high GDPs and low amounts of poverty.

  17. Chris B.on 23 Jan 2012 at 8:33 am

    In my opinion, the model which shows the growth and development of China over the last decade the best is the Lewis Structural Change Model. According to this model, people started leaving the rural areas dominated by farming to move into bigger cities dominated by the industrial sector. The wages offered by the industrial sector were greater than the income provided by farming. Therefore, this resulted in a higher quality of life as surplus savings could be used to buy goods that would otherwise have been out of reach for most people. In addition, the profits made by the industrial sector was reinvested to expand it even further. We know that this is the case due to the fact that China makes a vast amount of products that are used in the developed world. This can also be verified by the large trade surplus China has. While the Lewis Structural Model is the main model that applies to China's growth, the Harrod-Domar Model why the increased incomes of the workers led to an increase in the standards of living. Including the Harrod- Domar model into the Lewis Structural Model gives a good approximation of how China has been able to grow.

  18. Alexandreon 23 Jan 2012 at 9:37 am

    Looking at the models described in the above blog post, I think it is quite clear that China has been following the Lewis Structural Change (dual-sector) model. Possessing both a traditional agricultural sector and a manufacturing sector, China has seen its manufacturing sector boom lately. The rapid economic growth that China has been experiencing is due to the movement of the surplus labor into the manufacturing sector. As a result, there is an increase in the income of the households which results in greater savings. These savings allow for greater investment, leading to capital growth. As more Chinese people switch from the agricultural sector to the manufacturing sector, this effect is amplified and leads to more economic growth.

  19. Orpaon 23 Jan 2012 at 9:39 am

    I think that the Lewis Dual Sector model best fits the growth China experienced. This model describes a shift from mainly traditional agricultural labour to mainly technology manufacturing based labour. This structure indicates that the agricultural sector does not have as high productivity as the technology based sector, as well as lower incomes. This can very well be applied to china as we heard in the podcast that their incomes were very low when they were based mainly in the agricultural sector. This model also indicates that moving to the technological sector will increase incomes and subsequently also better that standard of life. Right now China manufactures a vast range of goods and exports these goods all around the world. This massive manufacturing and trading sector in China's economy has lead to them having an immense trade surplus. The Lewis Structural Change model also suggests that as profit is made in the manufacturing sector it is also reinvested into to increase capital growth. This continuous expansion matches the growth that China has been experiencing the past few years . So overall I think the Lewis Structural Change model fits this growth best, however other models have specific elements that would also fit China's growth.

  20. Thomason 23 Jan 2012 at 9:42 am

    I think that China has followed the Harrod – Domar Growth Model rather than the other models since the country’s economy was fully dependent upon agricultural output 30 years ago. Since giving property rights to farmers the economy has experienced enormous growth rates over the last decades, since this right is an incentive for farmers to work harder and to maximize the potential output. However in recent years China has followed the Lewis Structural Change Model as well, since a lot of people have migrated to cities to work in the manufacturing industry, which is China’s greatest source of income today.

  21. Jakeon 23 Jan 2012 at 11:11 am

    I think that the Harrod-Domar Growth Model illustrates China's economy as it was during communist rule. It illustrates that economic growth is dependent on a large amount of physical capital, which is not what China possessed. What China did have though, was an abundant supply of labour. However this supply of labour certainly didn't receive much income and so were not able to make large investments. The lack of investment meant that there was never a large amount of capital accumilation which should have led to a larger output and higher incomes, but unfortunately never did.

  22. IBDP Programmeon 07 Feb 2012 at 2:01 pm

    They get uniformity in their studies with the IB schools in India

  23. cleoon 07 Mar 2012 at 3:59 am

    How does economic growth contribute to economic development?
    Economic growth can lead to more jobs,a higher income rate which can then lead to economic development.
    What is the importance of institutional and political environment in achieving economic development?
    the political and institutional environment has to be one that allows for the economic growth, which in the long run turns into economic development.
    What are some drawbacks of the Harrod-Domar growth model?
    the "easy solutions presented in the Harrod-Domar model are not easy to implement at all.
    What are some criticisms of the Lewis dual-sector model?
    the ib economics textbook lists the following reasons:
    -the assumption that the entrepreneurs will keep adding capital.
    -the assumption that all profits are re-invested
    -the assumption that there is a pool of surplus labor
    the assumption that the wage levels in the manufacturing sector will remain constant (p.346)

  24. cleoon 07 Mar 2012 at 4:03 am

    This is assuming that the wages of the factory workers are better than those in the country and that the cost of living is proportional to an increase in wages. It is very possible that the workers will earn more ans farmers.

  25. jjowetton 07 Mar 2012 at 11:36 am

    1. Increases in national income usually mean at least some levels of improvement in access to basic necessities for the average citizen in a developing country. Also, higher incomes mean more savings, which means greater access to capital for investment by entrepreneurs. More investment leads to greater productivity and rising incomes for those who join the emerging industrial and service sectors that usually accompany economic growth. Furthermore, rising incomes mean more tax revenue for governments, whose spending on public goods like education, health care, and infrastructure result in real improvements in standard of living for not just the emerging upper and middle classes, but the poor as well.

    2. Institutional and political environment is important in that it needs to create s stable atmosphere for savings and investment. If not, economic growth will struggle to play out.

    3. The main criticism of the model is the level of assumption, one being that there is no reason for growth to be sufficient to maintain full employment; this is based on the belief that the relative price of labour and capital is fixed, and that they are used in equal proportions. The model explains economic boom and bust by the assumption that investors are only influenced by output (known as the accelerator principle); this is now widely believed to be false.

    4.Like the Harrod-Domar growth model, the Lewis dual-sector model can be criticised for its assumptions: that the entrepreneurs will keep adding capital, that all profits are re-invested, that there is a pool of surplus labour, that the wage levels in the manufacturing sector will remain constant.

  26. jjowetton 07 Mar 2012 at 11:38 am

    I agree with all of your answers. Although I do think that you could have elaborated on the 3rd question. The Harrod-Domar model is based on many assumptions, just like you pointed out for the Lews dual-sector model. The model explains economic boom and bust by the assumption that investors are only influenced by output (known as the accelerator principle); this is now widely believed to be false.

  27. tsekineon 08 Mar 2012 at 5:32 pm

    I always thought that it was the economic development that leads to the overall economic growth. However, looking at these models of economic growth, I suppose they both work hand-in-hand to a certain extent. If we consider these models of growth, we can see that in the end, the more money people have, the more ‘developed’ they can be. In the case of Harrod-Domar’s growth model, increased savings lead to increased investment, capital stock, output and finally increased income. This income can be spent on whatever the person desires. And the “increase” in income means that people can spend their income on more and other things. If people were only able to manage buying necessities, they are now able to provide education for themselves perhaps. Same for Lewis’ model, an increase in labor leads to a growth in the manufacturing sector (thus economic growth), and ultimately, this would lead to more disposable income/money. Furthermore, according to Rustow’s theory of development, it seems as if economic growth is necessary in order to experience economic development or achieve the greatest level of development (after achieving each level of growth).

    In all honesty and in reality, institutions and politics is what guides people and brings stability into the economy (as we can see in many corrupt governments of LDCs, the economy isn’t doing very well). I am assuming that institutional environment in this context is referring to social, and educational factors. In other words, health cares and schools if I was to be specific and if I am not wrong. For clear reasons, education and health care are both significant factors of economic development. Therefore having a stable and strong “institutional” environment is vital in achieving a successful economic development. However, I would like to make it clear that I am only talking about education and health care. I am aware that institutions consist of many other things other than just education and health of the people. In terms of politics, there is a lot to talk about. For example the issue with capital flight (and in regards to economic growth/lack of capital). A country with an unstable political power will most likely lead people to fear and insecurity of having capital in their possession in the nation, which would lead to capital flight.

    I can’t come to a main/the biggest drawback of the Harrod-Domar model but we can take a look at the conclusions of the model. Firstly, it is said that economic growth depends on the “amount of labor and capital”. What about the quality of labor? What this model is saying is that, economic growth can be achieved as long as the quantity is there. However, what good is there if there is no productivity whatsoever from the labor force? I also think that the problem with LDCs not being able to achieve a substantial economic growth and development is not only because of the lack of capital, but due to factors such as political instability (as well as the lack of development – which I mentioned in regards to the quality of labor). Here’s the thing, I would not have mentioned ‘political instability’ if this model was targeting towards “developing countries”, but I am doing so because it is targeting the “LDCs – Least Developed Countries”, where most have a rather unstable/corrupt government. I strongly feel that this model is mainly to achieve economic growth, and not development. One could be successful and experience a substantial increase in the cycle of the model, but what happens to the rest?

    We can definitely conclude and state that a shift or the allocation of labor from agriculture to a focused manufacturing sector would lead to growth in various ways, as seen in the industrial revolution in Russia in the early 1800s. Taking a look at the Lewis model (and many other models/theories in economics), I must say that these models are very one-sided. They never talk and discuss about the opposite, and what would happen if things did not go according to plan; the counterclaim. The main problem here is the wording. Industrial firms could offer wages that would “guarantee” a “higher quality of life”. What do “guarantee” and a “higher quality of life” mean? Can a “higher quality of life” just simply mean that people are living from $2 a day to $4 a day? Or does it look at a more substantial improvement? There is also a huge problem (like I said time and time again) in regards to the quality of labor that is recruited from the rural area to the industrial sectors. Is a farmer likely to have knowledge on how to work a machine? Therefore, the “increased productivity” that is stated in the model does not necessarily fit in with reality. In regards to incentives, if industrial sectors are recruiting poor agricultural farmers from rural areas, the industrial sectors are not likely to have a luxurious working environment for the workers. This would ultimately demotivate the workers, instead of providing incentives to work harder.

  28. nmolenkampon 08 Mar 2012 at 5:39 pm

    How does economic growth contribute to economic development?

    Economic growth often means an increase in income and therefore an increase in savings and investment. When these factors improve, it usually means that the access to basic necessities for the average citizen in a developing country becomes easier, also for the poorest. This could in the long run improve their standards of living, because they will have more money to spend on their education or living conditions. Also the government will get more tax revenue when incomes go up, this means that the government as well, could spend more on for example education or infrastructure.

    What is the importance of institutional and political environment in achieving economic development?

    The importance of institutional and political environment is that they have a lot of power and are able to regulate economic development.

    What are some drawbacks of the Harrod-Domar growth model?

    One of the drawbacks of this model is that an increase in savings is not guaranteed in developing countries, because if income goes up, people are more likely to spend it on consumption or on assets, such as food and a bicycle. Another drawback is that making capital use more efficient is not very easy in developing countries. There is often a shortage of skilled and educated labour and a lack of managing skills.

    What are some criticisms of the Lewis dual-sector model?

    The assumptions are the biggest limitation to this model. It for example assumes that there is a large agricultural sector with a surplus of labour that is not productive and so will move to the manufacturing sector, however this is not always the case.
    It also assumes that all profits will be reinvested, while some money might flow out of the country.

  29. tsekineon 08 Mar 2012 at 5:47 pm

    In regards to tax revenues. Isn't it contradicting? If savings ultimately lead to an increase in income, which leads to a higher tax revenue for government… Are people truly experiencing an increase in income? And if that's the case, is economic development inevitably a government effort and not a at an individual level? (Can individual development be achieved by an themselves?)

    I don't really think the main criticism of the model is the "level of assumption". Every single 'model' and theories are based on assumptions, or at least in the human/social sciences that is. Human sciences try to comprehend their phenomena of their studies, whereas the natural sciences (a little irrelevant but) seek to explain their phenomena of their studies. I'm sure I am contradicting my own comments in the blog, but the whole point of these models is to be comprehended and the fact that it is "false" as you say, is what makes it a 'model'.

  30. tgreeneon 12 Mar 2012 at 2:21 pm

    1. Economic growth usually raises people’s income which contributes to economic development.
    2. It creates a stable environment for savings and investments.
    3. It says growth only depends on the level of savings and the productivity of investments.
    4. It relies on the assumption that the agricultural sector is subsistence based and the industrial sector is technologically advanced.

  31. tgreeneon 12 Mar 2012 at 2:22 pm

    @nmolenkamp:
    I agree with your answers. There are also a few other assumptions in the second model, such as that the agricultural sector is subsistence.

  32. Noah Flanikenon 13 Mar 2012 at 4:29 am

    1.How does economic growth contribute to economic development?

    Economic growth means that the population will experience an increase in net incomes. An increase in incomes will allow the people to have access to more basic necessities such as health care and education, which will both contribute to an increase in economic development.

    2.What is the importance of institutional and political environment in achieving economic development?

    A country must have a stable institutional and political environment in order to achieve economic development. A corrupt government will prevent a country from increasing their savings and will not invest the money correctly in order to improve the economic development of the country.

    3. What are some drawbacks of the Harrod-Domar growth model?

    This model is based on the assumption that a country can increase its level of saving. However this level of saving must come from somewhere and as we have seen already, less developed countries are often fighting an uphill battle. Since they do not have enough investment they cannot generate enough savings, which in turns restarts the cycle.

    4. What are some criticisms of the Lewis dual-sector model?

    This model assumes that there is an excess of people in the agricultural sector and not enough people in the manufacturing/industrial sector. This model assumes that more people can just be put into the industrial sector, when in fact if a less developed country does not have the room for growth in its industrial sector it may not have the capital required to increase the potential growth in the industrial sector.

  33. Noah Flanikenon 13 Mar 2012 at 4:34 am

    You make a good point in your answer to question 4. It is also important to remember that people living in rural areas and involved in the agricultural sector cannot just be transported whenever and wherever to start working in the industrial sector.

  34. djohnon 13 Mar 2012 at 2:26 pm

    1) How does economic growth contribute to economic development?
    Economics development is the pathway to economic growth, because a country first needs to grow from the inside and then start shaping its exteriors, which is its growth. Economic growth is actual growth which means an increase in the production of a country’s goods and services produced in a given time period and if the production increases means that the country is gaining more profit and the employers are getting a higher income. These factors are steps towards economic growth whereas in economic development, it is the measure of well fare and well being. Economic development includes indicators such as education, healthcare and social indicators. If the citizens start getting a higher incomes they can educate themselves and their families which means that if every family does this the country on a whole will grow and this include economic development and growth.
    2) What is the importance of institutional and political environment in achieving economic development?
    There are several different barriers to economic development and in institutional and political environment there are barriers which stop a country from reaching economic development. Such barriers are how nowadays a lot of children are deprived from full education and healthcare for children and adults and all the citizens. Due to more barriers such as lack of infrastructure and weak institutional framework and unequal distribution of income a country does not reach economic development. The political environment is mainly referring to the government and due to corruption being one of the main factors countries do not develop even with all the resources. Institutional environment refers to laws, rules and regulations and if citizens do not abide by the law this also stops a country from developing. So without a government and law a country will not be able to develop and the government and laws help to develop a country but at the same time if the government is corrupted and the people do not heed to the law then this again will be a barrier to economic development.
    3) What are some drawbacks of the Harrod-Domar growth model?
    Few limitations of the Harrod-Domar growth model is that it mainly focuses on how to protect the developed countries and does not focus on the developing countries when it is the developing countries that need more attention as they need help setting up their markets and trading whereas developed countries are already developed and they have a high literacy rate which developing countries do not have as much as developed countries. Another drawback is that in the growth model increasing the savings ratio is difficult in developing countries because developing countries have very low marginal propensities to save as mainly the citizens spend most of their income on daily supplies or necessary goods which they need.
    4) What are some criticisms of the Lewis dual-sector model?
    The few criticisms that have come about the Lewis dual-sector model is that the model assumes that entrepreneurs will keep adding capital but this will not be likely as they will be more interested in investing in new technology and this reduces employment and increases the unemployment rate, that leads to another limitation which is that the unemployment rate is increasing because the model assumes that there is a pool of surplus rural labour but it has come to be seen that there are high chances of the urban area having a higher unemployment rate and the rural area having a small surplus in labour.

  35. djohnon 13 Mar 2012 at 2:32 pm

    Good Response! I agree on the point that you mention about how that if the citizens get a higher income then they have more money to spend on necessary things such as an education or health care and this will definitely take time but this can all work if only there were not any barriers involved but then again that is unreal because barriers are a part of economic development and growth.

  36. Michael Mayeron 13 Mar 2012 at 5:05 pm

    - How does economic growth contribute to economic development?
    Economic growth contributes to economic development because an increased GDP and more money in an economy facilitates the development of infrastructure and such.
    – What is the importance of institutional and political environment in achieving economic development?
    Political stability will facilitate economic development by aiding an efficient and effective method for economic development.
    – What are some criticisms of the Lewis dual-sector model?
    The Lewis dual-sector model holds assumptions, like the one that investors will keep investing capital. These are big assumptions to make.

  37. Michael Mayeron 13 Mar 2012 at 5:06 pm

    So without a political and institutional environment, economic growth and therefore development is impossible?

  38. ebisioon 13 Mar 2012 at 5:18 pm

    •How does economic growth contribute to economic development?
    A national income rise leads to an increase in tax revenue for government. Consequently, government can spend more in public goods like education, health care and infrastructures. Improvements in education and infrastructure and greater levels of health care improve the real standard of living of the population.
    •What is the importance of institutional and political environment in achieving economic development?
    The stability of institutional and political environment is fundamental to crate saving and investments that are both essential in achieving economic development.
    •What are some drawbacks of the Harrod-Domar growth model?
    Increase the efficiency in developing countries is not easy because of the low level of human capital and the low marginal propensity to save. In fact, in developing countries it is common for the human resources to be undernourished and poorly educated and thus low-skilled. On the other hand, in less developed countries it is more likely that a rise in income leads to more consumptions instead of an increase in saving.
    •What are some criticisms of the Lewis dual-sector model?
    Entrepreneurs would begin to invest in technologically advanced, labor-saving capital reducing the increasing in employment. The wage levels in manufacturing sector would not remain constant.

  39. Will Overhauseron 13 Mar 2012 at 7:08 pm

    How does economic growth contribute to economic development?

    A greater national income usually leads to better access for amenities for the average citizen. It also can lead to more savings, and hence more investment and capital.

    What is the importance of institutional and political environment in achieving economic development?

    The institutional and political environment has to make it possible for development to occur. This most often would mean eliminating corruption that might misuse the growth rather than use it to develop the country.

    What are some drawbacks of the Harrod-Domar growth model?

    Raising the savings ratio in developing countries is not easy, and a lack of skilled and educated laborers makes it difficult to improve efficiency and increase capital.

    What are some criticisms of the Lewis dual-sector model?

    The model assumes profits will be reinvested into the system, but capital flight could very well occur. It also assumes there is a surplus of rural agricultural workers to move into the cities.

  40. Quinn Richardsonon 13 Mar 2012 at 11:30 pm

    1.Economic growth essentially provides the ground work for economic development. This is because economic growth sets the environment for economic development. As the economy grows, there are more employment opportunities and thus more and more people receive a wage. They are thus able to spend more which improves their standard of living. These people will earn more, become healthier, live longer, and contribute more overall to society.
    2.A strong institutional and political environment gives MNCs and other investors confidence when investing in these LEDCs. A sense of certainty must be obtained by firms or else they would not spend their money in those countries. This also allows citizens to have confidence in their governments and thus would have less tendencies to rebel against authority.
    3.The Harrod-Domar growth model relies upon significant investment into these countries. This can result in a perpetual cycle of debt which can render a LEDC bankrupt. This model takes a “leap of faith” when it says that investment will result in growth.
    4.This model assumes that there would be a significant employment requirement in the cities that comes as a result of the shift from agrarian to industrial economies. There could be mass unemployment as those who seek jobs the cities are denied. The new industries may not be labour intensive and thus this would contribute to unemployment. This model also assumes that the profits made would stay in the country however in modern times, many of the developing countries rely upon MNCs which may invest their profits elsewhere.

  41. Quinn Richardsonon 13 Mar 2012 at 11:35 pm

    @Will Overhauser

    I agree that the lack of skilled labour makes it difficult to improve efficiency. The training of the workforce can take time and other resources as well. MNCs may decide in the end to invest instead in countries that have already established an educated workforce. It is important that national governments implement educational programs that can quickly transform an economy.

  42. Gunnhilduron 15 Mar 2012 at 2:33 pm

    How does economic growth contribute to economic development?
    Economic growth is the increase in the amount of the goods and services produced by an economy over time. When the productivity of a country increases it is very likely to increase the standard of living for an average citizen.

    What is the importance of institutional and political environment in achieving economic development?

    Many models that deal with economic development require a stable atmosphere so people in the country are encouraged to save and invest. Political and institutional environment is the factors that determine the stability of this. These factors are therefore very important since they are one of the underlying conditions for an economic development to occur.

    What are some drawbacks of the Harrod-Domar growth model?

    One of the objectives of the Harrod-Domar growth model is to increase the level of savings in an economy and the theory they suggested to do so seems to be well thought out and appears to work. However, there are problems when it is applied to the developing countries and since they are the countries that people need to focus and it creates drawback of the Harrod-Domar growth model. The reason for why it is very difficult to increase the savings ratio in developing countries is because the people in the country spend almost everything they earn (since they have a very low income) and do therefore not save any money.

    What are some criticisms of the Lewis dual-sector model?

    The Lewis dual-sector model has been criticized for few reasons. For example the model predicts that entrepreneurs will keep adding capital and more and more people would be employed, in reality however, it is likely that the entrepreneurs will begin to invest in technologically advanced capital that would in fact slow down the increase in labor. Another criticism of the model is that it does not include the likeliness of capital flight, which is in fact very common in the developing country. When capital flight occurs the profits made will leave the economy and development would slow down.

  43. Heppleron 19 Mar 2012 at 1:59 pm

    Economics growth can help economic development as seen in the Harrod-Domar growth model. An increase in GDP will lead to more savings and more spending. More savings and spending will lead to economic development because there will be a greater amount of money invested in the economy in development programs such as building roads and schools.

    Corruption can prevent economic development because money will not be used in the best interest of the people but rather in the best interest of the upper class or the select group of people surrounding the leader.

    The model operates under Thr assumption and increase in income will be met with an increase in savings. Frequently, an increase in earnings is met with an increase in spending on staple goods because the people cannot afford enough food or housing type goods.

    The model assumes there are people who can be moved the the manufacturing sector from the agricultural sector to increase the size of the market.

  44. Huanni Wuon 20 Mar 2012 at 3:58 pm

    1. How does economic growth contribute to economic development?
    Whereas economic growth measures the monetary gain of the country, economic development is associated not only with the level of wealth in the country but also the human welfare determinants such as life expectancy, literacy rates, child mortality rates, distribution of income, and so on. But in most cases, the latter depends upon the former meaning economic growth is the base structure of economic development. Harrod-Domar growth model suggests that when the people in the developing county have increasing income, there would be increasing saving ratios and thus increasing funds available for investment; more investment leads to improvement in productivity and income raise. The raising income then can join in the flow of money and create a beneficial economic cycle.

    2. What is the importance of institutional and political environment in achieving economic development?
    In order for the money to be effectively invested, the government in developing countries should ensure a stable institutional and political environment with minimum corruption. In developing countries where funds for investment are rather limited, it is important to use the money available efficiently. The institutional and political environment may affect the proper progression of stages of development as the models mentioned in the blog suggest (Harrod-Domar model, Duel-sector model, Rostow’s model). For example, if the institutional environment in the country doesn’t encourage saving (if the country has very low interest rate and holds a norm that work against saving), it is possible that the money gained from increasing income is spent and thus can’t get into the economic cycle.
    3. What are some drawbacks of the Harrod-Domar growth model?
    Firstly, Harrod-Domar model assumes that the labors available in developing countries are “effective” labors and thus concludes “it is the lack of physical capital that holds back economic growth and development”. However, in many cases this isn’t true, due to the low level of education and the simple skill requirement for these labor (in agricultural sector). The quality of labor is also an issue for developing countries’ economic growth. Therefore, more physical capital doesn’t necessarily generate economic growth because of the probability of ineffective use of the capital.
    Secondly, the model suggests higher income lead to higher levels of saving, which is also uncommon in developing countries. The overall level of income in developing countries is low and people many people struggle at the edge of living. Any increased income would probably be spent on necessities instead of being saved. The little amount of saving doesn’t help these people to get significant interest return anyway. Therefore, the propensity of saving in developing counties is usually low.
    4. What are some criticisms of the Lewis dual-sector model?
    Lewis dual-sector model suggests that as an economy grows, the labor would gradually moves from agricultural sector to manufacturing sector, from rural area to urban area, leading to increasing income, savings, investment, and thus rate of economic growth. However, the rural-urban migration may not be as smooth and costless as the model suggests and is associated with issues such as overpopulation, unemployment, imbalance between agricultural and manufacturing sector etc. As the farmers transfer to manufacturing workers, the city would gradually become crowed with surplus of labor. It leads to both accommodating issues and social security concern. As the manufacturing sector demand skills of operating the machines, company recruiting the low skilled labor (labor from agricultural sector) may have to spend money and time training them to improve labor quality. Moreover, as more focus is put on the agricultural sector, there may be imbalance growth between agricultural sector and manufacturing sector. There will be less people willing to work in farm, leading to decreasing farm production. The building of factories also does damage to farm land.

  45. Jackson Moteon 23 Mar 2012 at 3:05 pm

    Adding to the importance of institutional and political environments in achieving economic development:

    Without a regulated economic and political government, the country will be unable to sustain the new growth that the country has begun to experience. We can see a clear relationship to market failure if a government does not act accordingly to support to growing economy.

  46. Jackson Moteon 23 Mar 2012 at 3:17 pm

    How does economic growth contribute to economic development?

    Economic growth contributes to economic development by raising a country from a cycle of poverty. As seen in Harrod and Domar's model, increased investment will lead to a cycle of development in which a country can raise their standards of living. If the citizens within a country are provided with higher income, there will be a higher rate of savings. Also, the government will be able to tax the income more meaning that an increased amount of money can be spent on improving education and standards of living for all.

    What is the importance of institutional and political environment in achieving economic development?

    An institutional and political environment in very important in achieving economic development because this environment would regulate the increase in income as well as manage wealth distribution effectively. As we studied in our Market Failure section, without an efficient and wise government, the strategy for economic development cannot be successful.

    What are some drawbacks of the Harrod-Domar growth model?

    The Harrod-Domar growth model has one major drawback; if it is not regulated effectively, it will fail completely. Each step depends on the previous because it is a closed cycle of development. If one step does not occur due to government error or economic downturn, the next step will be unable to be completed and the country will return to a cycle of poverty.

    What are some criticisms of the Lewis dual-sector model?

    The Lewis dual-sector model assumes that the agricultural sector has low productivity and attempts to turn this to high productivity. This model also assumes that technological advancement in the industrial sector is high.
    In my mind, this is too much assumption for one model.

  47. qteeon 25 Mar 2012 at 8:38 am

    thnk u 4 a great job u r doing u are realy a blessing…

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  49. Christylon 03 May 2012 at 4:29 pm

    I'm just curious, where would you place a developing country's economy like South Africa on the Rostow’s Model – the 5 Stages of Economic Development?

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