Development

The Re-Balancing of Economic Powers

Gianni Vaggi

• Publisher: Palgrave Macmillan
• Year: 2018
• Print ISBN: 9783319548784
• eBook ISBN: 9783319548791
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

This book provides a brief history of the notion of development and related policies. Readers will find an overview of the main development notions and debates from 1950 to the 2015 Sustainable Development Goals. The author argues that sustainable development is equal to empowerment within a specific historical setting; development is a dialectic relationship between people's empowerment and the existing social and economic structures. The book examines some well-known growth theories from Harrod in 1939 to contemporary debates views about the role of the state and the market. Some major structural changes are also examined from economic growth in Asia to international finance: the author contends that contemporary issues on development can be better understood with the help of the founding fathers of economics, from the Mercantilist era to Marx. They help to understand the difficult relationship between development and market forces within different models of social and economicreproduction. The author contends that the main development challenge is that of building a global partnership in a system with enormous differences in economic powers and offers some examples of how to re-balance the existing economic powers particularly in trade and finance.

© The Author(s) 2018

Gianni VaggiDevelopmenthttps://doi.org/10.1007/978-3-319-54879-1_1

Begin Abstract

1. In the Beginning, There Was Economic Growth

Gianni Vaggi¹

(1)

Department of Economics and Business, University of Pavia, Pavia, Italy

Gianni Vaggi

Email: [email protected]

Abstract

After World War II, development was regarded as an increase in income per capita . This chapter reviews the main growth theories since Harrod’s 1939 model. Solow emphasizes convergence in the income per capita of all countries and the ‘catching up ’ by developing countries . In neoclassical models, economic growth ‘trickles down’ to all people and countries. Other authors emphasize different aspects of development. Lewis underlines the dualistic nature of developing economies while the structuralist approach stresses the importance of import substitution and export promotion. The dependency of periphery economies on the centre is underlined by dependency theorists, who focus on the role of social and economic structures and of the international division of labour. A final section analyses the emergence of the market efficiency hypothesis.

Keywords

Economic growthConvergenceStructuralismMarket efficiency

End Abstract

Once upon a time, there was economic growth. Development was largely understood as being economic development, which was economic growth, and mainly defined in terms of the increases in income per capita , Y/L, that is, the ratio of the Gross Domestic Product , GDP = Y, to population L. Economic growth would overcome poverty, which is identified as a low-income per capita .

With no pretence of comprehensiveness, this chapter presents some of the most relevant growth models since World War II. These models are not all unanimous in their analysis of the process of economic growth, and they imply different policy recommendations. With great simplification, we can classify growth theories into two broad groups: the mainstream one, which largely adopts the assumption of neoclassical economics , and the heterodox approaches , which highlight the role of social and economic structures . Section 1.2 deals with the first group while Sects. 1.3 and 1.4 describe the alternative views. The final section will focus on market efficiency.

1.1 Harrod: When the Economic Cycle Becomes a Growth Theory

Modern theories of economic growth originate as an answer to two major historical events. First, the great depression of 1929–1932, which was followed by Roosevelt’s New Deal . The central issue concerns the conditions which determine the level of output and employment. The second event is the reconstruction of the economies of Western Europe and Japan after World War II, which had a very important impact on the growth models of the forties and fifties.

A 1939 paper by Roy Harrod can be regarded as the starting point of the theories of economic growth (Harrod 1939). Seven years later, an American economist, Evsey Domar, independently arrived at very similar conclusions, and quite often we hear of the Harrod-Domar growth model (Domar 1946). The most influential contribution to modelling economic growth is Robert Solow’s 1956 paper (Solow 1956), which has led to several misunderstandings about Harrod’s contribution, including ascribing to him a notion of equilibrium which was developed by Solow .¹

Harrod is not concerned with long-run growth but with the trade cycle , and in particular, with the low phase of the cycle and the impact this has on employment, along Keynesian lines (Harrod 1939: 16).² The focus on the stock of capital as the main constraint in the determination of income growth is quite understandable in the historical conditions of the late thirties.³

Harrod does not explicitly mention a production function but makes some assumptions:

A1.

Technology is characterized by a fixed ratio of capital to output: the capital–output ratio C, K/Y, where ‘C stands for the value of the capital goods required for the production of a unit increment of output’ (Harrod 1939: 16)⁴;

A2.

Capital goods last forever, as there is no wear and tear;

A3.

The output Y can either be used for consumption, or it can be saved and invested;

A4.

s is the propensity to save , call it the saving ratio ; that is, total savings S divided by total output, s = S/Y; s is given and constant;

G is the growth rate of output, ΔY/Y. With a fixed C, economic growth depends on the amount of new capital available, ΔK; that is, net investments , I = ΔK. If ex-ante investments are equal to the available savings, then I = S, in which case Harrod derives what he calls the ‘fundamental equation’:

(1.1)

G_w is the warranted rate of growth : that is, ‘that rate of growth which, if it occurs, will leave all parties satisfied that they have produced neither more nor less than the right amount’ (ibid.: 16). However, in general the actual growth rate G is not equal to G_w, and, above all, there is no built-in market tendency for the actual growth rate to move towards the warranted one (ibid.: 30).

The actual growth rate G depends on four ‘fundamental conditions’ (ibid.): long-run capital expenditures; the capital coefficient, ΔY/ΔK; the propensity to consume and the current account balance. Each amount has a stimulating effect on economic growth (ibid.).

Apart from the second condition, which is concerned with technology , the other three refer to the typical Keynesian components of aggregate demand in an open economy: consumption, investments and net exports . Aggregate demand plays an essential role in the determination of the actual growth rate of the economy.

However, Eq. (1.1) is often used as a supply-side model of long-run growth ; this misinterpretation of Harrod’s contribution depends on the fact that Eq. (1.1) is considered as if it referred to the actual growth rate and not to the warranted one. The misreading of Harrod’s contribution is due to the failure to appreciate the fact that he adopts the Keynesian distinction between ex-ante and ex-post investments (Harrod 1939: 19). The former are investments as they are planned by business people, while the latter are investments which include inventories from unsold output; investments are equal to overall savings just as in the case of an accounting identity.

This misinterpretation of Harrod’s contribution removes the role of demand in the determination of economic growth and misses what he feels are the reasons the actual growth rate can permanently diverge from the warranted one.

Halsmayer and Hoover remind us of ‘Harrod’s major longer-term concern with the constitutional tendency of the economy to slip into recession when saving rates were relatively high’ (Halsmayer and Hoover 2016: 587), a point on which we will come back in Sect. 3.​4 below. In the final pages of the paper, Harrod discusses the role of active policies (Harrod 1939: 31–33). Harrod indicates that a low rate of interest might have a ‘depressing influence’ on savings (ibid.: 32).⁵ However,...

Table of contents

• Cover
• Front Matter
• 1. In the Beginning, There Was Economic Growth
• 2. Towards a Broader Definition of Development
• 3. The Economy Strikes Back; Convergence, Divergence and Imbalances
• 4. The Founding Fathers and the Long-Run Visions
• 5. Sustainable Reproduction, on Use and Exchange Values
• 6. Making Global Partnership Work
• Back Matter