Development Economics

Semester 1, 2020-2021
 What we study in our last lecture?
• What are characteristics of the Developing
World?
• Linear stages of growth model: Rostow's
stages of growth

11/2/2020
• Quiz

• What are Rostow's stages of growth?

11/2/2020
Rostow's stages of growth
• Stage 1: the traditional society
• Stage 2: the precondition for take off into self-
sustained growth
• Stage 3: take-off
• Stage 4: the drive to maturity
• Stage 5: the age of high mass consumption

11/2/2020
 What we will learn?
• What is Harrod-Domar Growth Model?
• The Lewis Development Model

11/2/2020
Linear stages or growth theories

Harrod-Domar Growth Model

• Roy F. Harrod in 1939 and Evsey Domar in 1946
• Based on Keynesian saving and investment
theory
• Crucial role of capital
• Purpose: Steady Growth
11/2/2020
Definition:
The economic growth of a country is determined
by the level of saving and the capital output
ratio.
Saving ratio-Investment-Capital Stock-Output-
Income-Saving
11/2/2020
 S = sY (1)
I = ΔK (2)
total capital stock, K, bears a direct relationship to total national income or output, Y, as expressed by the
capital-output ratio c as follows that
K/Y = c
We can also write
ΔK/ΔY = c
Or
ΔK = cΔY
Because net national savings, S, must equal net investment, I, we can write this equality as
S=I

S = sY = cΔY = ΔK = I

11/2/2020
simply
sY = c∆Y
Dividing both sides of above Equation first by Y and
then by c, we obtain the following expression:
∆𝑌 𝑠
=
𝑌 𝑐

11/2/2020
 GDP growth rate (∆Y/Y) = s/k
If s=6% and k=3, then GDP growth rate=2%.
Given k=3, to raise growth rate to 4%, we need
to increase the saving ratio from 6% to 12% with
6% of foreign saving
11/2/2020
Criticism of Investment Models

• Many LDCs have not been able to take-off or

achieve maturity despite massive foreign
investment

• Many nations have neglected the development of

institutions, organizations, and infrastructure
required for industrialization
11/2/2020
The Lewis Development Model
Arthur Lewis
• Rural agricultural sector
– Low or even zero Marginal Product
of Labor
• Urban industrial sector
– Rising demand for unskilled labor
to be trained for industrial growth
results in greater employment and
more profits and higher wages
• Rural-Urban migration
– To find jobs and earn higher wages

11/2/2020
Demand for Labor

Wage R: Rural U: Urban

W: Wage E: Employment
D: Labor Demand S: Labor Supply

WU SR
WR Investment in urban areas
increases the demand and
DU1 DU2 employment for rural labor.

E1 E2 Employment
Assumptions
• Dualism - coexistence of highly productive modern industrial sector
with traditional overpopulated rural sector.
• Surplus labor in traditional sector has zero marginal labor
productivity.
• Labor transfer in the modern sector in proportional to capital
investment in the modern sector.
• The wages in the urban industrial sector is assumed to be constant
and above the wages that prevailed in the rural subsistence
agricultural sector.

11/2/2020
Criticisms of Lewis Model
• Industrial technology is generally capital intensive/labor-
saving. Hence, the demand for unskilled rural labor would
not increase employment.
• Rate of labor transfers and employment creation may not
be proportional to rate of modern-sector capital
accumulation.
• Industrialization must be supported by agricultural
development to supply an ever-increasing supply of food
items and raw materials
11/2/2020
Demand for Labor

Wage No increase in employment when

technology is labor saving

SR
WU
WR Wage
DU1
DU2
E1 = E2 Employment

3-16
 What we learn?

• What is Harrod-Domar Growth Model?

• The Lewis Development Model

11/2/2020
 Email: mjaved@wiut.uz
rachidjaved@gmail.com
@rachidjaved

11/2/2020