Economic Growth

1 January 2017

Growth is associated with structural, social change and change in the important institutions of the economy. These institutions evolve within the development process. Institutions are the result of past historical and social developments. Since different countries have different pasts, institutions will vary. “Development is about improving the quality of people’s lives, expanding their ability to shape their own futures” Development is the process of expanding the real freedom that people enjoy, with expansion of freedom viewed as the primary end and the principle means of development”. Development is multi-faceted and therefore difficult to measure as oppose to economic growth. Policies that work well in one country may not work in others. Cumulative causation: Development is not a smooth process as it is related to vicious and virtuous cycles. Cumulative causation suggests that difference will magnify whereby convergence (a mainstream economic concept) will not be achievable.

Cumulative causation destructs the concept of equilibrium.

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Neo-classical economics suggests that deviation from equilibrium will lead to increasing deviations. Conversely, the view of convergence, it is believed that growth rates, income etc will all converge. After WWII, USA had a big lead over most countries. Countries such as Japan and the NICS took advantage of ‘backwardness’ and caught up. This ability is through diffusion – importing or copying their products/technology. Once a ‘blue print’ of plans are developed, latecomers have free access. . Economic growth = factors that explain increased output Economic development = concerned with changes in technology, structural, social and institutional arrangements that output is produced ( includes non-economic issue Development = institutions and attitudes of society MYDRAL: upward movement of the entire social system – economic factors – non-economic factors In LDC, higher productivity and greater equality are linked; SR: growth and equity can clash SR efficiency does not always maximise LT growth; tradeoff b/w SR costs and LR gains.

Growth will change SR efficiency in favour of LR; not Pareto efficient. NAYYAR: brings about improvement in living conditions whereby providing food, clothing, shelter, health and education. THE WORLD BANK: create sustainable improvement in the quality of life for all people. ( simply focusing on output is not enough SEN: enhancement of living conditions ( more than economic growth as it ignores distribution, externalities and nonmarket factors. Also about increased freedoms – political freedom: human rights economic facilities: distribution of GDP ( better nutrition, access to health etc – social opportunities: ability to participate in economic and political life History and society are important to development process; reinforced by interdependence Human Development Index ( multidimensional development index by UNDP Problems with HDI: – ignores environmental problems and distributive issues eg.

GDP Any factors influencing interpersonal behaviour or institutional factors will have a profound effect on economic performance. E. g. ttitude to risk, role of women, class structure, race, religion, rural-urban differences, size of social unit, role of literacy, size of family, cultural personality, role of institutions. Anything that hinders communication will hinder growth and development. National social attitudes are engrained intergenerational The role of State: Neoliberal (economic rationalism): free markets produce the best outcomes under just about all circumstances. Markets viewed as sacrosanct. But- free markets don’t always work as we never have a perfect market:

The problem with unemployment in underdeveloped countries differs fundamentally from that in developed economies. – unemployment in developed: arise from inadequacy of demand. In periods of depression, unemployed labor co-exists with unemployed capital – unemployment in underdeveloped: arise from shortage of capital i. e. even if you ^ demand in undeveloped, there is not enough productive capacity to employ everybody Kalecki proposed that by ^ investment, it will not only ^ demand but also accelerate expansion of productive capacity whereby assisting growth in national income

Competition forces capitalists to invest KEYNES: as capitalism develops, demand for labor grows quicker than supply. Reserve army of the unemployed is extinguished and labor is scarce. ( ^ wages ( v profits ( v growth and demand LEWIS model of dual economy – closely related to Kaldor/Kalecki: – traditional/ noncapitalist = agricultural; no wages, share products/profits – modern/ capitalist = manufacturing; wages, output, profit Labor surplus in agricultural sector = MPL = zero i. . output of last worker = 0 – wages tend towards subsistence ( labor can move out of agricultural sector to manufacturing with little (or no) loss to output ( expand capitalist sector Role of agriculture: richer countries have smaller % labor force in agriculture/primary.

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