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General Introduction
Development economics is a branch of economics that is concerned with the analysis of the
concept and processes of economic development as well as the factors that determine the
pattern and pace of economic growth and sustainable development. Development
evelopment economics
has been defined as “a branch of economics which deals with economic aspects of the
development process in low-income
income countries” (Bell, 1987). Development economics cannot
be restricted to the development problems of low
low-income countries. It is equally relevant to
high-income countries because italso addresses the problems of environmentally and
culturally sustainable development,
development as well as inter-generational equity in development
policies. The fact is that the development problems of low-income
low income countries and those of
high-income
income countries differ in certain respects but are similar in other areas.
Some development economists are of the view that development economic
economics should
incorporate socio-cultural
cultural and political factors in economic analysis of development policies
(Seers, 1969; Todaro, 2008).In
.In this regard, development economics is distinct from pure or
positive economics, which avoids the introduction of normative statements such as the
question of morality in economic behaviour or equity in income distribution. Development
economics takes into consideration certain aspects of morality and equity in respect of
quantifiable development impacts offunctional democratic
democratic institutions or policy
accountability and transparency in governance,, among other social concerns.
concerns In short,
development economics applies and develops the principles and theories of economics to the
concept and dynamics of economic growth and social development and the policy
implications for sustainable wellbeing and development nationally and globally.
globally.
This course in development economics is an introduction to the subject
subject, with
specialattention to the experience of Nigeria and sub-Saharan
sub African countries
ountries, and
particular references to the growth and development of the economy of Nigeria.The course is
divided intotwo
two major parts, namely:
namely
(i) The basic concepts, principles
principles, growth processes, measurements, indicators, and
structural changes of growth and development, consisting of four study sessions;
sessions and
(ii) The core of the subject matter, comprising selected theories
heories of growth and
development, coveringten
ten study sessions,, while the synthesis and summary of
development theories will cover one study session.
1
Study Session 1:
1:The Concept of Economic Growth
Introduction
In this study session, you will be introduced to the concept of economic growth. Economic
growth is basic to the subject of development economics. It has to do with changes in
economic activities. Human society is interested in improvement in living standards
standa and
rising prosperity. The factors involved in the growing prosperity are the subject of
development economics. Basic to this analysis, is the concept of economic growth. This study
session introduces the concept of economic growth and its significance.
significance
Given the estimate of GDP (at constant prices) for 2012 as 888.9 billion Naira and
that of 2011 as 834.0
34.0 billion Naira (CBN
( Statistical Bulletin, 2012).
). Calculate the
growth rate for year 2012.
3
280,000.00
260,000.00
240,000.00
220,000.00
200,000.00
180,000.00
Quarterly GDP at Constant 1990
Prices (Nmillion)
160,000.00
120,000.00
100,000.00
2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013
950,000.00
900,000.00
850,000.00
800,000.00
750,000.00 GDP at
700,000.00 Constant 1990
650,000.00 Prices
600,000.00 (Nmillion)
2007 2008 2009 2010 2011 2012 2013
We may also wish to calculate growth rate of a medium term or long period such between
1990 and 2012. The formula for calculating growth rate GY for national income (Y) for a
period of T years is given as:
where YT is the terminal national income and Y0 is the initial year national income.
For instance, if we wish to calculate gro
growth
wth of GDP between 1990 and 2010,
2010 Y2012 is
terminal GDP while Y1990 is initial year GD
GDP.
P. So if 1990 is year zero, 2010 is year 20, since
4
2010 minus 1990 is 20. GDP at constant 1990 basic prices is 267,550 (million Naira) in 1990
and 776,332 in 2010, the average annual growth rate is:
1 0.055 5.5%
The problem, however, with the use of GDP to calculate economic growth is that
GDP atcurrent market prices is affected by inflation rates, especially in developing countries
that experience rapid, usually double-digit, inflation rates. The GDP series at current prices
are necessarily adjusted for inflation rates through deflation be GDP deflator. After deflation,
relative to a base year, we have what we call GDP at constant prices. What that means is that
we express the GDP at the prices of the base year. For instance, if prices have doubled on the
average between year 1990 (base year) and year 2012, the incomes in 2012 will be divided by
2 (deflator) to compare it with the values in 1990, because every two Naira in 2012
commands the same value as one Naira in 1990. We then state that GDP is expressed at
constant 1990 prices. The GDP at current prices will be different and will be double the GDP
at constant prices. GDP at constant prices is also described as real GDP, because it is a
measure of purchasing power of the GDP in comparison with GDP of other years.
5
Summary of Study Session
Sess 1
1. Economic growthis
is the sustained increase in the output of goods and services in a
country. Economic growth is conventionally measured by the percentage increase in
national income, where national income can be represented specifically by the gross
domestic
mestic product (GDP) or some other versions of national income, such as gross
national product (GNP) or gross national income (GNI)
(GNI).
2. There are various versions of national income. The basic one is GDP which is a
measure of the market value of all goods and services produced with the boundary of
a country during one year.
year Theother versions include GNP andGNI.
6
Self Assessment Questions for Study Session 1:
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 1.1
Economic growth may be defined as:
A. Sustained increase in real national income.
B. Sustained increase in the total output of goods and services.
C. Sustained increase in national income at current prices.
D. Options A and B are correct.
E. Options B and C are correct.
SAQ 1.2
GDP may be defined as:
A. The market value of all final goods and services produced within the boundary of
a country during one year.
B. The gross market value of all final goods and services produced within a year, less
depreciation or capital consumption.
C. The market value of all final goods and services produced in a year less net factor
income payments to abroad.
D. The market value of all final goods and services produced in a year less net factor
income payments to abroad and less net indirect business taxes.
SAQ 1.3
GNP may be defined as
A. The market value of all final goods and services produced within the boundary of
a country during one year.
B. The gross market value of all final goods and services produced within a year, less
depreciation or capital consumption.
C. The market value of all final goods and services produced in a year less net factor
income payments to abroad.
D. The market value of all final goods and services produced in a year less net factor
income payments to abroad and less net indirect business taxes.
SAQ 1.4
GNI may be defined as
A. The market value of all final goods and services produced within the boundary of
a country during one year.
7
B. The gross market value of all final goods and services produced within a year, less
depreciation or capital consumption.
C. The market value of all final goods and services produced in a year less net factor
income payments to abroad.
D. The market value of all final goods and services produced in a year less net factor
income payments to abroad and less net indirect business taxes.
SAQ 1.5
In LDCs, the use of GNP to measure economic growth is not reliable because
A. national incomesare unequally distributed.
B. different sectors produce different goods and services.
C. of rapid inflation in such countries.
D. of all the above.
SAQ 1.6
Some alternative measures of economic growth include:
A. Growth of Indexes of industrial output and agricultural output
B. General price index or inflation rate
C. Growth of foreign exchange reserves
D. Growth of foreign exchange earnings
SAQ 1.7
The difference between real national income and national income at current prices is that:
A. Real national income is national income at current prices deflated by the rate of
increase of the general price level (GDP deflator).
B. National income at current prices is real national income deflated by the rate of
increase of the general price level (GDP deflator)
C. Real national income is the net national income at current prices
D. National income at current prices is the gross version of real national income
SAQ 1.8
National income at constant 1990 prices is estimated as N776.3b in 2010 and N719.0b in
2009. Calculate the growth rate of national income in 2010.
A. 0.08% B. 0.8% C. 8.0% D. 57.3%
SAQ 1.9
National income at constant 1990 prices is estimated as N834.0 billion Naira in 2011 and
N267.6 billion Naira in 1990. Calculate the average annual growth rate of national income
between 1990 and 2011.
A. 10.2% B. 7.6% C. 5.6% D. 3.5%
8
REFERENCES
Goulet, Denis (1971): The Cruel Choice: A New Concept in the Theory of Development;
New York, Atheneum.
Elevent
Seers, Dudley (1969): “The Meaning of Development” Paper presented at the Eleventh
World Conference of the Society for International Development, New Delhi.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley,
Wesley, New York; Pearson Education, Delhi.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Development Report, Washington D. C. World Bank Publications.
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
9
Study Session 2:Growth
Growth versus Development
Introduction
In this study session, we explain the difference as well as relationship between economic
growth and development. The comparison between growth and development is important
because people often confuse the two, whereas growth brings about increases in resources
reso
and total income but does not necessarily lead to development,
development, a term that is more
comprehensive and profound than growth
growth. The concept of development will be discussed in
contrast to that of growth. The reasons why growth may fail to lead to development
developm will also
be addressed in this study session
session.
2.1The
The Concept and Definition of Development
Regarding the concept of ddevelopment, a simple approach is to define developmentas
development
economic growth accompanied by long-term beneficialsocial and institutional changes
without
ithout inflicting damage to the environment and ecology
ecology.Some economists prefer to use the
term economic developmentwhile some use the term socio-economic
economic development.
development But most
economists prefer not to qualify the term, so thatit does not appear we are restricted to the
economic aspect of development,
development although some may still argue that there is no aspect of
development that leaves out the need for the economy of resources in the pursuit of its
objectives.
Taking a comprehensive approach to the co
concept of development,, and going by the
experience of nations in economic growth and social change, the term “development” has
been given diverse meanings and interpretations over the past decades, from the narrow
economic dimension to the broad socioeconom
socioeconomic perspectives.. The traditional definition of
10
development by economists is that it is a long-term sustained increase in national income per
head. This definition seems to assume that income distribution will not get worse so that if
per capita GNP is rising for a long time, it will positively affect the incomes of every
citizenin such a way as to raise their living standards. Development in this case means raising
living standards for everyone.
Experience has shown, however, that many less-developed countries experienced
long-term economic growth and increase in per capita GNP without succeeding in reducing
the percentage of the people living below poverty line.Specifically, the sustained economic
growth occurred without significant increase in life expectancy or reduction in child
mortality, without improvements in literacy rate or combined enrolment rate, access to safe
water, and without reduction in malnutrition rate and the rate of prevalence of major diseases,
such as malaria, typhoid, and hepatitis. For decades of rising GNP per capita in Nigeria for
instance, the percentage of the people living below poverty line has not reduced and it is
estimated to be currently about 70% (UNDP Human Development Report, 2012). As a result
of this anomaly, development economists extended the conceptof development by including
the issue of income distribution.
Thus,an improvement in the definition of development refers to it as long-term
sustained increase in per capita GNP, not accompanied by widening income inequality. With
this definition, a long-term sustained increase in GNP per capita is expected to positively
affect the living standards of every citizen. Some development economists are still not
satisfied with this definition, as it still leaves out some essential considerations. Such
considerations include the environmental and cultural sustainability of development as well
as inter-generational equity.
The view of the World Bank economists is reflected inWorld Development Report
1991 (p.4), which stated that “the challenge of development is to improve the quality of life”,
and that although improving the quality of life calls for higher income, the challenge of
development is much more than that, as “it encompasses as ends in themselves better
education, higher standards of health and nutrition, less poverty, a cleaner environment, more
equality of opportunity, greater individual freedom, and a richer cultural life”. On its own
part, the United Nations Development Programme (UNDP) qualifies the concept as human
development, which ought to have sustainable impact on life expectancy, per capita income,
level of education, and equity.
Some other distinguished development economists, led by Dudley Seers (1969), Denis
Goulet (1971), Amartya Sen (1985, 1999), and Todaro & Smith (2008), are agreed that the
11
concept of development is a multidimensional process that goes beyond economic growth
and involves the entire social system. In the words of Todaro & Smith (2008:17):
“Development, in its essence, must represent the whole gamut of change by
which an entire social system, tuned to the diverse basic needs and desires of
individuals and social groups within that system, moves away from a condition of
life widely perceived as unsatisfactory towards a situation or condition of life
regarded as materially and spiritually better.”
Reviewing the various views on the concept of development, Todaro & Smith (2008,
pp.20-23) agreed to a synthesis of the views in terms of “Three Core Values of Development”
in accordance with the views of Goulet (1971:87-94) and other like minds, which are
considered practical and universal in the conceptualisation of the “inner meaning” of
development. These core values or components of development are Sustenance, Self-Esteem,
and Freedom.
Todaro and Smith (2008:20-23) elaborated on these concepts as follows: First is that
sustenance is the ability to meet basic needs, including food, shelter, health and protection,
without which living cannot be sustained. Second is that self-esteem is the pursuit of sense of
worth and self-respect, for which they may use other words like authenticity, identity, sense
of belonging, dignity, honour or recognition, although material welfare or wealth is being
viewed as a major ingredient in self-esteem, with the objective of pursuing economic
development for the purpose of national self-esteem or gaining world respect. Third is that
freedom is to be able to choose or the “emancipation from alienating material conditions of
life and from social servitude to nature, ignorance, other people, misery, institutions, and
dogmatic beliefs…” Although wealth increases the capability of man to choose and be free
from servitude, it does not encompass all aspects of human freedom and it does not guarantee
social justice and equity in this respect. Freedom has to include “personal security, the rule
of law, freedom of expression, political participation, and equality of opportunities”.
An alternative and practical approach to the concept of development is to view it
through national development objectivesoften put forward by developing countries. From an
articulation of Nigeria’s national development plans of the 60s, 70s and early 80s, the
introduction of structural adjustment programme (SAP) of the mid-80s in contradiction to
central planning philosophy with its corresponding rolling plansof the 90s, as well as the
recent National Economic Empowerment and Development Strategy (NEEDS),we may distil
the following as the comprehensive national development objectives:
12
(i) Appreciable
eciable growth in national income through industrialisation
industrialis and
diversification of the economy that will raise per capita income appreciably;
appreciably
(ii) Promotion of equitable income distribution and social justice;
(iii) Promotion of self-reliant
reliant economic development (par
(particularly
ticularly in regard to balance
of payments solvency and technological self-reliance);
self
(iv) Promotion of price stability;
(v) Promotion of fuller employment and eradication of poverty;
(vi) Balanced socioeconomic development; and
(vii) Protection of the physical environment and
an ecological balance.
13
Do you consider a GDP growth rate of 3.5%
3.5% appreciable for Nigeria as it is for United
Kingdom?
The GDP growth rate of 3.5% is indeed appreciable for U.K. because her
population is less than 1%, indicating that per capita income and average living
standard will grow significantly as over 2.5% pper
er annum. However the GDP growth rate of
3.5% is not appreciable for Nigeria because her population growth rate is close to 3%
implying that the growth of per capita income and average living standard will be close to
zero and hence insignificant. There wi
will therefore be little or no socio-economic
economic development
for Nigeria.
2.2The
The Relationship between Growth and Development
Another approach to the understanding ofthe meaning of development is to analyse
the
he relationship between economic growth and concept of development.. First we can view
economic growth as being a necessary condition but not a sufficient one for the occurrence of
development. In other words, economic growth must precede development but it does not
guarantee its achievement.
So one may ask:First,
irst, how is economic growth a necessary condition?And s
?And second,
why is economic growth
owth not a sufficient condition?
14
adequate security to life and property, and sound agricultural sector. Before the nation
achieves sustained economic growth, remarkable institutional changes would have taken
place; all the country requires thereafter are additional social development policies to
transform economic growth to comprehensive and sustainable national development.
(1) Population growth and distribution: Where population growth in a particular region
exceeds economic growth, living standards will keep falling; therefore, unless
economic growth significantly exceeds population growth in the region, development
cannot take place. Population growth may be due to both net birth rate and net
migration. Consider the example of a household with initial population of two,
husband and wife, with initial income of both of N2m per year. The initial average
income or income per head (called per capita income) is N1m. Now suppose after
three years, the household population rises to four, made up of husband, wife, and two
children, while the income of both husband and wife rises to N2.8m (at constant
prices or net of inflation). The average income of the household will then be N0.7m or
N700,000. Clearly, the per capita income has fallen from N1m to N0.7m.The case of
some areas of the Lagos State of Nigeria (such as Mushin, Ajegunle and Agege)
whose population grows faster than income due to excessive migration from other
parts of the country as well as high birth rates will not experience veritable
development.
(2) Income Distribution and Social Justice: Where income inequality widens and
social injustice deepens, the fruit of economic growth may elude the larger majority
with the consequence that their living standards worsen or stagnate. If for example,
government expenditures on education and health do notfavour the poorest 60% of the
population or the share of national income going to the poorest 60% falls, their
average living standards will worsen or stagnate.
(3) Imbalance in Multi-sector development or Sectoral Distribution of Economic
Activities: If there occurs appreciable growth in national income, but certain sectors
are neglected or do not experience growth, the people may remain miserable or
15
experience no improvement in personal enjoyment, happiness, good health and
fulfillment. For example, a situation where the financial sector, oil sector, and
government bureaucracy grew rapidly, but the nation neglected agriculture and rural
development, water supply, security to life and property, transportation and energy
infrastructure, education, health and housing, the people would remain miserable.
Whatever income they earn, armed robbers may harass them regularly; they may use
their cars to fetch water, while others cue for long hours to fetch water at public taps
or private wells; their toilets may be stinking for lack of water; the prevalence of
diseases such as malaria, typhoid, tuberculosis or hepatitis may increase; regular
power outages and endless traffic jams may drive them into insensibility or make
them irritable. The neglect of agriculture and rural development has made impossible
the arrest of rural-to-urban migration, eradication of poverty, and reduction of formal
unemployment and under-employment. In such a situation, we cannot speak of true
development, even if real per capita income was rising significantly.
(4) Environmental Degradation and Disturbance of Ecological Balance: Whatever
economic progress a nation makes, all will be lost eventually if the environment that
represents the source of sustenance is destroyed through mindless economic activities.
In Nigeria, examples include oil spillages, toxic fumes from endless traffic jam in
Lagos and other urban areas, unmanageable solid waste accumulation in the major
urban areas and threats of epidemic and ill-health, desertification in the North, and
threat of drought and famine.
(5) Intellectual. Moral, and Social Aspects of Economic Development: Even if a
nation is able to deal with all the four factors above, true or veritable development
will still elude the nation if there occur intellectual and moral retrogression, and social
disintegration. A situation where Nigerians are getting more dishonest and
fraudulent, more wicked, more inconsiderate, and more impatient cannot be described
as development, since these traits will fuel discontent, grief, discord and odium. These
moral and social problems will eventually backfire on the economy. When, for
example, two business partners cannot trust each other, or they defraud each other, the
partnership will not be sustainable and one party can get rid of the other through hired
assassins. We may consider other situations such as examination malpractices that
have become common place and are being aided by parents and teachers, or political
assassinations and ritual murders that are carried out for pecuniary benefits, or where
the judiciary has become almost impotent in the administration of justice and the rule
16
of law has become a strange affair, or where the youths have become very lazy but
desire to get rich quick. All such moral lapses of society definitely cannot ensure the
sustainability of any economic development that might have been achieved. As for
social disintegration, a situation where the marriage institution is losing its attraction,
divorce rates getting higher, and children born out of wedlock growing, will spell
doom for the economy as the consequent juvenile delinquency becomes a heavy
liability to the economy and society. It is thus evident that economic development
itself depends ultimately upon the moral, intellectual and social development of the
people.
Development policies or strategies that do not take these factors into account are
bound to fail woefully. There is often too much emphasis on economic growth and the
promotion of foreign exchange market equilibrium or balance of payments solvency, whereas
these economic problems are symptoms of deeper moral, intellectual and social problems.
Therefore the popular concept of economic development that restricts itself to long-
term growth of per capita income with the only proviso that income inequality does not
widen or that the share of income of the poorest groups does not decline is inadequate. This
is because it does not address all the other factors mentioned above, which affect a nation’s
veritable development, namely: balanced multi-sector development, progressive economic
and technological self-reliance, environmental protection and preservation, intellectual, moral
and social development, employment and economic stability, all of which in the long-run
determine sustainable economic development.
17
preferable to adopt a set of indicators rather than rely on a holistic one for adequate
measurement of development progress.
The following is a list of major development indicators:
(i) real per capita income or growth of industrial output per head;
(ii) life expectancy;
(iii) child or infant mortality rate
(iv) adult literacy rate;
(v) share of national income of the poorest 40% of population;
(vi) percentage of households with access to clean water and electricity;
(vii) percentage of the people living below poverty line
(viii) external debt as percentage
percen of GNP;
(ix) inflation rate;
(x) crime rate;and
(xi) per capita metric tons of carbon dioxide emissions.
emissions
If some of the indicators improve as compared with the past, without any of them worsening,
we can conclude, a la Pareto, that development is taking place. In practice, we only select a
set of indicators that have comprehensive coverage and are significant for evaluating and
monitoring the pace of development.
Consider
sider the following three sets of five indicators each and select the most
appropriate set for evaluating and monitoring development pace:
Set B is the best set because it has greater coverage of development objectives or
social concerns that either Set A or Set C. Set A has less coverage and has some
heal
duplication in respect of child mortality and life expectancy, both being indicators of healthy
living; child mortality and life expectancy are correlated and an improvement in one will
18
reflect in the other.Furthermore, compared with Set A, Set B is also superior by having an
indicator of income distribution or poverty which set A lacks. You obse
observe
rve that Set C has
some duplication in respect of growth of per capita income and growt
growthh of industrial output
per head, both indicators are highly correlated and measure economic growth. Furthermore,
compared with Set C, Set B has crime rate as an indicato
indicatorr of moral and spiritual development
of the people that Set C lacks.
19
Self Assessment Questions for Study Session 2
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 2.1
Development may be defined as:
A. Long-term sustained growth in national income accompanied by beneficial social
and institutional changes
B. Long-term sustained growth in per capita national income accompanied by
beneficial social and institutional changes
C. sustainable improvements in the quality of life of every citizen without
jeopardising the environment and prospects of future generations
D. Options A and B
E. Options B and C
F. Options A and C
SAQ 2.2
Which of the statements below is incorrect in respect of growth and development?
A. Development is not possible without economic growth
B. Economic growth always leads to development
C. There can be growth without development
D. Economic growth must precede development
E. Growth is a necessary but not a sufficient condition for development
SAQ 2.3
Growth may fail to result in development if
A. Real national income is growing faster than population
B. Population is growing faster than real national income
C. Income distribution is getting more unequal
D. Industrial pollution is not checked
E. All the options above occur except A.
F. All the options above occur except B.
SAQ 2.4
Sustenanceas a component in the concept of development means:
A. Maintenance of buildings and infrastructure.
B. Provision of subsistence allowance for the unemployed.
C. The ability to meet basic needs such as food, shelter, access to safe water, medical
care andsecurity to life and property.
D. The ability of the society to sustain their economic development.
SAQ 2.5
20
Self esteem as a component in the concept of development means:
A. The ability to meet basic needs such as food, shelter, access to safe water, medical
care andsecurity to life and property.
B. The quality of having sense of worth,dignity, identity, sense of belonging, honour
and recognition by others.
C. Provision of subsistence allowance for the unemployed.
D. The acquisition of sound education and good employment.
SAQ 2.6
Freedom as a component in the concept of development means:
A. Freedom from slavery or enslavement by others.
B. Freedom of worship, of lawful association and of expression.
C. Freedom of economic choice and emancipation from servitude to institutions,
superstitions, ignorance, and to other individuals for survival.
D. All the above.
SAQ 2.7
Which is the best development indicator among the following?
A. Human Development index
B. Growth in per capita income
C. Growth in adult literacy
D. Life Expectancy
SAQ 2.8
Which of the following is the best set of development indicators?
A. Per capita income, life expectancy, infant mortality, and child mortality
B. Per capita income, life expectancy, adult literacy, and percentage of household
living below poverty line
C. Per capita income, adult literacy, combined school enrolment rate, percentage of
household living below poverty line
D. Per capita income, percentage of household with access to safe water, percentage
of household with access to electricity, percentage of household living below
poverty line,
21
REFERENCES
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
Goulet, Denis (1971): The Cruel Choice: A New Concept in the Theory of Development;
New York, Atheneum.
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Seers, Dudley (1969): “The Meaning of Development” Paper presented at the Eleventh
World Conference of the Society for International Development, New Delhi.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley,
Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
Well, David M. (2008): Economic Growth 2nd ed. New York, London, Addison Wesley.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Development
evelopment Report, Washington D. C. World Bank Publications.
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
0803336667722
Study Session 3: The Arithmetic and Measurement of Growth
Introduction
In this session, wediscuss the methods of objectively and precisely measuringprogress with
respect to economic growth and various social concerns or development objectives,
describedas the arithmetic
rithmetic of growth.
23
income on account of the need to take price changes into account a comparison of national
incomes from one year to the other. Because often times prices of various goods and services
keep rising significantly especially in less-developed countries, incomes for different years
cannot be compared. For example, if 250 gram loaf of bread cost 120 Naira in 2005 and cost
200 Naira in 2012, one Naira of 2012 is not comparable with that of 2005 because its
purchasing power has fallen in 2012 relative to 2005. To then compare the two years, we
need to take into account the general price inflation. As a matter of fact, the Federal Office of
Statistics (FOS) estimateof the consumer price index for year 2001 was 4,268.0 (with 1985 =
100 as base year). This means that N100 in 1985 is equal in purchasing power to N4,268 in
2001 or N1 in 1985 is equal to N42.68 in 2001. When allowance is made for price changes in
the evaluation of national income at current prices, we obtain the real national incomes based
on a standard price of the base year, and this is referred to as National Income (or GDP or
GNP) at constant base year price. In other words, we have to divide the incomes of 2001 by
42.68 before we can compare it with that of 1985.
The scalar used in dividing the income at current prices to obtain the real income or
income at constant 1985 prices is referred to as GDP Deflator. We have used the consumer
price index as an approximation for price movements for all goods and services. Precisely
we need a slightly different index, known as GDP Deflator, for this purpose. For example,
GDP for year 2004 at 1990 Constant Basic Prices was 416.72 billion Naira, while GDP for
year 2004 at current prices was 8,264.96 billion Naira (or 8.26 trillion Naira). The GDP at
current prices had been divided by 19.833 to obtain the GDP at constant prices; the scalar
used in this case is precisely the GDP Deflator. The GDP Deflator reflects the price inflation
for all goods and services, in the sense that average prices (or general price levels) have risen
from 1990 to 2004 by 19.833 times. This means that what one Naira could purchase on the
average in 1990, would require 19.83 Naira by 2004. We do similar things for the incomes of
all other years before we can make inter-temporal comparison and calculate growth rate of
the economy.
As stated earlier, we look for growth over a long period before concluding whether
economic growth has taken place. For instance, we may consider a period often, twenty, or
thirty years and compute the average annual growth rate for that period. Short run
fluctuations in growth rates may reflect random factors or temporary disturbances like
climatic changes or seasons, festival periods, political disturbances, and business cycles,
rather than economic growth or decline. In the long-run computation of growth rate, the
trend of economic growth or decline will feature.
24
Growth is defined basically as percentage or relative change of a variable and is given
by the following formula:
For the growth in real national income, Y denotes the Gross National Income (GNP) or Gross
Domestic Product (GDP) at constant base-year prices. If we wish to calculate the growth of
industrial production, then Y represents the index of industrial production. If we however
wish to calculate the (compound) average annual growth of national income for a sustained
period of 20 years as it is customary in finding out whether economic development has taken
place within the two decades, then the average annual growth is given by the formula:
Y(t) is the current or projected value for year t, while Y(0) is the initial value. This growth
formula is derived from the discrete exponential function, given below, that describes the
variable (Y), characterised by constant growth g(Y) for the period of t years:
If we take the base year as year 0, i.e. t years back, then the formula becomes:
The formula is the same with the compound interest rate formula in projecting the value that
a fixed deposit (“principal”) will amount to after t years at the rate of interest of r per year.
That is, At = P[1 + r ]t; where At is the terminal amount in year t and P is the principal or
25
initial deposit fixed for t years. Formula (2.3) can be employed to answer various questions
in the arithmetic of growth.
The formula is actually derived from the definition of growth given in (3.1). Equation
(3.1) given as:
If you examine equations 3.4, 3.7, and 3.8, you will note that the growth factor [1+ g(Y)]
carries a power that represents the difference in years (or periods) between the terminal-year
variable and the initial-year or base-year variable. The difference between Yt and Yt-1 in
equation 3.4 is 1, and the growth factor has power 1, i.e. [1+ g(Y)]1 = [1+ g(Y)]. Similarly,
the difference between Yt and Yt-2 in equation 3.7 is 2, and the growth factor has power 2, i.e.
[1+ g(Y)]2, and the difference between Yt and Yt-2 in equation 3.8 is 3, and the growth factor
has power 3, i.e. [1+ g(Y)]3. We can therefore generally state, by method of induction, that
the difference between Yt and Yt-k is k, and so the growth factor will have power k, i.e. [1+
g(Y)]k as shown in equation 3.3 and 3.3’.
Another pertinent formula in the growth process is the calculation of the growth of
per capita national income, where national income may be precisely represented
byGNP(Gross National Product) or GNI (Gross National Income) or GDP (Gross Domestic
Product). The per capita national income refers to average income of the people, which is
more relevant to the living standards of the people and national economic welfare, assuming
26
income inequality does not get wider. Growth in per capita GNP or per capita industrial
production thus serves as an indicator of changes in the standards of living of the people as
well as national economic development. If we know the growth g(Y) of national income
(denoted by Y) and the growth g(N) of population (denoted by N), then the growth of per
capita GNP, g(y) can be derivedapproximately as:
g(y) = g(Y) – g(N), y = Y/N. (3.9)
Per capita GNP(y) isGNP (Y)divided bypopulation(N).Formula (3.9) above is valid for any
variable y defined as equal to the ratio of two other variables Y/N. For example, if Y is index
of industrial production and N is population, theny=Y/N is industrial output per head, and g(y)
is the growth of industrial output per head of the population derived as the growth of
industrial production g(Y)minus the growth of populationg(N). We can prove equation 3.9 by
means of the basic equation 3.4 that defines growth or simply by the definition of y as y =
Y/N.
If y = Y/N, then logny = lognY – lognN. Noting that y, Y, and N vary with time, we
can write more accurately y(t) = Y(t)/N(t) and logny(t) = lognY – lognN(t). Taking the
derivatives, we have:
Alternatively, the proof can utilise the basic equation 3.4 that defines growth, i.e.
Yt = Yt-1[1 + g(Y)].
27
"+, -1 + /( )0
*" *"+, -1 + /(*)0 *"+, -1 + /(*)0
1"+, -1 + /(1)0
-,2 ( )0
i.e. -1 + /(*)0 -,2($)0
;
Since the cross products, /(*)/(1), being fractions, it will be close to zero, especially when
each term is very small. For example, if /(*) is 0.03 (or 3%) and /(1) is 0.02 or 2%, then
the product is 0.0006 which is zero to two decimal places or 0.001 to three decimal place or
0.1%. Therefore we can approximate /(*) as equal to /( ) /(1) as formulated in
equation 3.9, for any variable y = Y/N.
From the formula given in equation (3.3) or (3.3’), we can answer several questions
about economic development. Consider the equation once more, as given below:
To solve for g(Y) we manipulate the equation sequentially to isolate g(Y). This gives us:
Suppose we wish to calculate the average annual growth of the Nigerian economy for the
twenty-year period of 1981 to 2001.All the information we need is the GNP at constant prices
28
for the same base year for 1981 and 2001. GDP at constant 1984 factor cost for 1981 and
2001 are respectively70.40 Nb and 125.35 Nb (CBN, 2001). The average annual growth rate
of GDP during the two decade is thus given by:
If we wish to calculate the growth of per capita GNP,g(y), then we use formula (3.9).
We need information about the growth of population g(N). Suppose the growth of population
is 2.5%, then growth of per capita GNP is
This signifies that growth of per capita national income is less than 1% for the two decades,
meaning that economic development in Nigeria is negligible.
Growth can also be calculated using the growth formulas (3.3), (3.3’) and (3.9) above
for other economic variables relevant to economic development. Such variables, apart from
GNP (or GDP) and industrial production are foreign exchange earnings from various
commodity groups such as manufactured products, food products, and non-factor services.
Significant growths of exports of those commodity groups compared with the imports are
indicators of economic development. Growth in the GDP share of manufacturing sector is
also a veritable indicator of economic development. Balanced economic development is
reflected by the growth of the percentage of households that have access to modern amenities
like safe water and steady electricity. Other measures of economic development are in the
form of ratios and averages, at certain points in time, rather than growth rates over a period of
time. Examples are: (i) adult literacy rate, which is a ratio of literate adults to adult
population, expressed as a percentage; (ii) infant mortality rate, which is the ratio of infants
that die within one year to total infants born in any given year; (iii) child malnutrition rate,
which is the ratio of underweight children in the total population of children; (iv) life
expectancy, which is the average lifespan of the people that die in any given year; (v)
foreign-debt service ratio of export earnings, which is the ratio of foreign-debt service
payments to export earnings; (vi) poverty index, which is the ratio or percentage of the total
population living below $1 a day, or a composite average of a set of indices including those
of per capita income, literacy rate, and life expectancy, the index being a ratio of a nation’s
average to the world’s best.
29
For example, if all gainful employment, denoted by Lt, increased from 22 to 30
million during the period 2000-2012, we can calculate the average annual growth rate of
employment year as follows:
g(Lt) = (Lt/L0)1/t – 1 = (30/22)1/12 – 1 = 0.026 = 2.6% (to 3 decimal places).
Employment rate is defined as the ratio of those who are gainfully employed to the total
number of those willing to work for pay. In other words, employment rate is the percentage
of the labour force that is gainfully employed. Labour force constitutes those who are willing
and have the legitimacy to work for pay. The labour force excludes children, those who are
not willing to work for pay like the full-time housewife or self-sponsored volunteers in
humanitarian services, those too old to work, and the severely disabled or permanently too
sick to work. The ratio of labour force to population is called labour participation rate.
Unemployment rate is the complement of employment rate and refers to the proportion of the
unemployed in the labour force. So if unemployment rate is 20%, employment rate is 80%.
Now, if population grows faster than employment rate, then unemployment rate will be
growing; if population grows at the same rate as employment, unemployment rate will remain
constant. And if population growth rate is less than employment growth rate, unemployment
rate will be falling.
An important development indicator is the combined primary and secondary school
enrolment. If the combined enrolment is growing faster than population, the combined
enrolment rate will be rising, and is indicative of progress in development that will eventually
translate to growing adult literacy rate. School enrolment rate is the proportion of school-age
children that are enrolled in school. If 6 million children are in primary school out of 10
million aged between 5 and 11 years that are expected to be in primary school, then primary
school enrolment rate is 6/10 or 60%. Such a ratio will increase if the primary school
enrolment grows faster than population, otherwise not. We can calculate the growth rate of
school enrolment during a specified period if we have statistics of the initial number and that
of the terminal year.
For example, suppose the population of children aged between 5 and 17 years that are
expected to be in primary or secondary school is 25 million in 2000 and is estimated to grow
at the rate of 2.5%. And suppose also that the enrolment of children in primary and secondary
schools is 10 million in 2000 and 14 million in 2012. We can infer whether the combined
enrolment rate is rising or falling. We can do that in two ways: One is to calculate the growth
rate of the combined enrolment and compare with that of the population of the school-age
30
children. Another method is to calculate the population of the school
school-age
age children in the
terminal year 2012, and compare the ratios in 2000 with that of 2012.
By the first method, the growth rate of enrolment (Et) is given as:
g(E) = (E2012/E2000)1/12 – 1 = (14/10)1/10 – 1 = 0.028 = 2.8%.
That is, the combined enrolment rate is growing at the rate of 2.8%
31
(b) Suppose employment is growing
growing at the rate of 2% while population is growing at the
rate of 2.5%, what will happen to employment rate and unemployment rate over time?
(a) Adult literacy will keep falling because population is rising faster than
school enrolment. In particular if literacy
literacy rate is 54%, i.e. ratio 54 to 100; after a year,
54 will grow by 2% to become 55.08 while 100 will grow to become 102.5 so that the
ratio becomes 55.08/102.5 which is 53.7% meaning that literacy rate falls from 54.0%
to 53.7%. After 5 years, ratio 554
4 growing at 2% will grow to 59.62 while 100 will
grow at 2.5% to reach 113.14 so that the literacy rate becomes 59.62/113.14 which is
52.7%. This means that literacy rate will keep falling when enrolment growth rate
lags behind population growth rate.
(b) With
ith employment growing at 2% while population grows at 2.5%, employment rate
will keep falling while unemployment rate will keep rising. If we denote employment
by L and unemployment by U, and population by N, then employment
employment rate is L/N
while unemployment rate U/L = (N
(N-L)/N = 1 – L/N. Now L/N is falling because N is
growing more rapidly than L. Similarly unemployment
unemployment rate is rising because L/N is
falling so that 1 – N/L is rising.
32
3. Since developmenthas to do with improvements in the living standards and quality of
life, there is need to derive growth in per capita terms. Thus if y = Y/N where Y is the
basic variable (such as GNP), and N is population size, then the growth of y given by:
g(y) = g(Y) – g(N).
Self Assessment Questions for Study Session 3
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 3.1
Growth rate is defined as the
A. Value of a variable in a given year or period as a percentage of its value in a
previous year or period.
B. Value of a variable in a given year or period as a percentage of its value in the
following year or period.
C. Percentage change of variable Ytfor year tor period t, i.e.(∆Yt/Yt-1)100%.
D. Per capita value of the variable Y, i.e. Y/N, where N is population.
SAQ 3.2
Average growth rate of variable Yover a period of tyears is given as:
SAQ 3.3
Suppose real GNP of a country rose from 2400 $b in 2011 to 2520 $b in 2012, calculate the
growth rate of GNP.
SAQ 3.4
Developing countries’GNP grows at the rate of 4.7% per annum while their population
growth rate is 2.2%. On the other hand, developed countries’ GNP grows at the rate of 3.2%
per annum while their population growth rate is 0.5%. What are the growth rates of per capita
GNP for developing countries as a whole and that of developed countries, respectively?
33
SAQ 3.5
Given that the Index of industrial production is 2150 in year 2000 and then rose to 3200 in
2012 while the population growth rate is estimated as 2.5% per annum, calculate the average
growth rate of industrial output per head per annum.
SAQ 3.6
Evaluate Nigeria’s development, given that the average annual growth rate of GNP per capita
between 1960 and 2012is 1.2% while the percentage of the population living below poverty
line has increased from 60% to 70%.
A. It is a case of growth without development
B. Development has not taken place at all
C. It is a definite decline in national development
D. All the above is correct
SAQ 3.7
Which of the statements below is correct?
A. Rise in population growth rate is consistent with national development.
B. Rise in the manufacturing sector output share of GDP is consistent with
development.
C. Rise in the agricultural sector output share of GDP is consistent with national
development
D. Rise in the primary commodity export share of total export is consistent with
national development
SAQ 3.8
For development, positive growth rate is definitely not good for?
A. Hospital enrolment C. Child mortality
B. School enrolment E. Access of households to safe water
SAQ 3.9
Given thatper capita GNP for Nigeria is $1,650 in 2012, project per capita GNP in 2020,
assuming Nigeria is able to sustain a growth rate of 5% per capita GNP.{Hint: YT =
Y0(1+gY)T where YT is the projected per capita GNP, Y0 is the initial per capita GNP, gY is its
growth rate and time T = 2020 – 2012 = 8.}
SAQ 3.10
GNP at constant 1990 prices rose from 253.0 billion Naira in 1985 to 888.9 in 2012.
Calculate growth rate of real per capita GNP assuming population growth is 2.8% during the
period.
34
SAQ 3.11
Index of industrial production fell from 100 in 1990 to 107 in 2012. With population growth
rate of 2.8%, the growth of industrial output per head is:
SAQ 3.12
Growth of per capita GNP is less than 2% per annum according to official statistics during
the period 1990-2010. However,the index of manufacturing production and that of industrial
output per head have been declining during the period, while the proportion of the people
living below poverty line has either increased or remained constant. Therefore, our
conclusion about Nigeria is that:
A. The growth rate of GNP per capita is bogus or misleading
B. Overall development is yet to take place in Nigeria
C. Industrial development has not really taken place
D. Nigeria is experiencing retrogression in socioeconomic development
E. All options above are correct
F. None of the options above is correct
35
REFERENCES
Barro, Robert J. (1995): “Inflation and Economic Growth” Bank of England Quarterly
Bulletin (May 1995); 166-76
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Seers, Dudley (1969): “The Meaning of Development” Paper presented at the Eleventh
World Conference of the Society for International Development, New Delhi.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
Well, David M. (2008): Economic Growth 2nd ed. New York, London, Addison Wesley.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Development Report, Washington D. C. World Bank Publications.
36
Should you require more explanation on this study
study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
37
Study Session 4: Structural Changes in Economic Development
Introduction
This study session examines and explains the systematic changes that are expected to occur
as the country proceeds on the path of development. Such systematic changes have to do with
the growth, relative prominence or significance, and roles of various sectors of the economy.
The structural changes thus constitute fundamental evidence about the pace of economic
development, if any. It also serves as ingredients to development policies in the sense that the
structural changes may be stimulated directly to achieve industrial growth and social
development.
38
(iii) High rates of structural transformation of the economy in the form of growing
sectoral shares of manufacturing industry, services and entertainment industry,
while agricultural and rural-based activities experience continual fall in their
sectoral shares of national output and employment, and growing urban industrial
complexes, large business concerns, as opposed to small scale enterprises and
informal activities;
(iv) High rates of social and ideological transformation, in the form of changes in
attitudes, evolution from superstitious beliefs to rationality and scientific
explanations of events, greater social justice and equalisation of economic
opportunities, growing education, literacy, and skills development, etc.;
(v) International economic outreach, in the form of rising exports and growing
participation in international markets; and
(vi) Limited international spread of economic growth to one-third of world population,
signifying that in spite of tremendous growth in the world economy, a lot of third
world countries could not benefit or be carried along.
With respect to structural transformation of the economy, Branson, Guerrero and
Gunter (1998), Well (2008), World Bank (2009), and Perkins, et al (2014) have classified the
structural changes comprehensively into a fairly large number of groups. In particular,
Branson, Guerrero and Gunter (1998:3-6) in their empirical studies classified them into the
following ten groups:
(1) Sectoral composition of output
(2) Investment ratio of GDP;
(3) Consumption and savings ratio of GDP;
(4) Government budget pattern;
(5) Inflation and money supply;
(6) Import and balance of payment structure;
(7) Composition of exports;
(8) Concentration of export products;
(9) Market power in world export markets; and
(10) Financial market development.
Critical among these structural changes are rising GDP share of the manufacturing sector and
falling GDP share of the agricultural sector. For example, the GDP share of the
manufacturing sector for less-developed countries is below 10%, agriculture is more than
40% while services sector is below 30%. For the industrially advanced countries, agricultural
39
share is below 5%, manufacturing about 25% while services can be as high as 70%. Services
in industrially advanced countries are dominated by the entertainment industry. On the other
hand, the share of manufactured good exports in total exports is below 25% for most
developing countries while it is above 80% for most industrially advanced countries.
40
(2) The dominance of foreign ownership and management of the industrial economy;
and
(3) The inadequate and inappropriate infrastructure.
However, the economic structure operates not in isolation, but in conjunction with the
social, political, and geographical structure. In respect of these other structures, a full
appreciation of them requires multi-disciplinary approach to development studies. But
economists are aware of the major aspects of these socio-political structures. These major
aspects that are most relevant to less-developed countries include:
(1) The socioeconomic dualism in terms of the rural versus urban, formal sector
versus the informal sector economic activities;
(2) The socioeconomic and political classes;
(3) The political instability, inadequate democratic institutions and rule of law;
(4) The level of security to life and property;
(5) The land-tenure system;
(6) The unfavourable attitude to work in terms of the levels of loyalty to the goals of
the enterprise, dedication to work, enterprising and creative spirit, and politeness,
all of which reflect the culture, beliefs and religious practices;
(7) The tremendous and pathological level of corruption;
(8) The choking rate of urbanisation; and
(9) The largely tropical and hot climate, with extremes of wetness and dryness.
It is easy to show that economic development will be severely hampered by these
structural factors if they are not adequately taken into consideration. Let us briefly illustrate
how some aspects of the structure of less-developed economies affect their development
prospects and effectiveness of policies.
Consider the objective of industrial diversification and development, and consequent
reduction in the overwhelming dependence on a single primary product, crude oil, for export
earnings and government revenue, in the case of Nigeria. Government of Nigeria has
supposedly been pursuing this policy since the mid-70s, as published in annual budgets. But
no success has been recorded as the nation still earns over 95% of its export earnings from
crude oil exports, from the mid-70s to date.
The reason for the chronic failure of the diversification policy is to be found in the
economic, social and political structure of the economy that has not been given adequate
consideration in the formulation and implementation of the diversification policy. First,
internationally competitive manufacturing industries can never emerge in any significance
41
without substantial improvement in the adequacy and appropriateness of infrastructure.
Secondly, competitive manufacturing industries cannot thrive in an environment of economic
and political instability.
Economic stability refers to domestic price and foreign exchange market stability;
where Nigeria cannot check its inflation rate (that runs above 20% average in the last two
decades) and keep it around world standards of below 5%, price competitiveness of locally
produced goods will be jeopardised. It is obvious that political instability (in the form of
frequent occurrence of religious, political and ethnic riots that claim many lives) will not
permit investments in long-term industrial projects. Foreign exchange market stability and
balance of payments equilibrium are two critical issues affecting the prospects of the
economy.
Policies were therefore designed in the form of foreign exchange market deregulation
to check excess foreign exchange demand, promote foreign exchange supply and balance of
payments equilibrium. This policy has failed and is still failing because certain critical
aspects of the structure of the political economy are not given adequate consideration in
policy formulation. Demand for foreign exchange is erroneously thought to be dependent on
the exchange rate so that the higher the Naira exchange rate to the dollar, the less foreign
exchange will be demanded, ceteris paribus. Looking at the structure of the Nigerian
economy, demand for foreign exchange is fuelled greatly by the excessive looting of the
treasury as exemplified by the celebrated case of petroleum subsidy fraud running into
billions of Naira in 2012. Those who, through government contracts and bank frauds for
example, desire to transfer their loot out of the country cannot be discouraged by the high
exchange rate since the rate is not expected to fall. Those who wish to transfer their
legitimate wealth abroad for stability of value on account of rapid inflation rate that erodes
the value of Naira will also not be discouraged by high Naira exchange rate. Those foreign-
owned enterprises and multinationals who wish to transfer their profit abroad in an economy
dominated by foreign entrepreneurs will also not be discouraged by the high Naira exchange
rate.
Therefore, as long as the economic structure nurtures excessive corruption, exhibits
rapid inflation rate, and is dominated by foreigners who are in the habit of transferring home
their profits and other incomes, excessive foreign exchange demand cannot be checked
through Naira devaluation or depreciation engendered by deregulation. Increase in the
supply of foreign exchange on the other hand cannot be significant as long as the structure is
42
characterised by poor infrastructure, economic and political instability and inadequate
security to life and property.
In conclusion, the structure of a less-developed economy generates its development
problems that cannot be satisfactorily resolved without analysing the constraints of the
structure and taking them into account in development policies.
43
Summary of the Study Session 4
1. Kuznets’ (1966, 1971) pioneering six characteristics of structural changes in
economic development was discussed as well as further elaboration and division into
major groups by other authors, including Syrquin, Taylor, and Westphal
Westphal (eds.) (1984)
and Branson, Guerrero and Gunter (1998). Basically structural changes in the process
of economic development result in changing sector
sectoral composition
position of economic
activities: The manufacturing
facturing share of output rises whilee primary sector’s
sector’ share falls,
exports becoming more dominated by manufactured goods and the share of primary
commodities declines progressively, and savings and investment ratio rise.
2. For structural changess of an under
under-developed economy, the
he monopoly and oligopoly
market structure predominates in the industrial economy, with the dominance of
foreign ownership and management of the industrial economy. Moreover, inadequate
and inappropriate infrastructure in the energy and transport and communication sector
persists. Importss are dominated by manufactured and intermediate goods while the
exports are dominated by primary commodities.
3. There are some common
ommon characteristics of under
under-developed countries that are distinct
from characteristics of under
under-development. These include their
ir location generally in
tropical regions and the consequent special
specialisation
ation in the production of agricultural
produce and agro-allied
allied products. Relatively high share of exports of primary
commodities may not be an indication of relative under-development
under development for developing
countries. From sociological point of view, relatively low female labour participation
may not also be an indication of underdevelopment because of cultural and religious
orientation of the developing countries.
4. A major aspect of the structur
ructure of Nigerian economy and the major characteristics of
her under-development is the predominance of crude oil and other primary goods in
their exports. The non-oil
oil share of exports remained persistently very low owing to
severely inadequate infrastructure in energy and transportation sectors as well as price
instability, political instability, excessive fraudulent practices and inadequate security
to life and property.
44
Self Assessment Questions for Study Session 4
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 4.1
Evidence of structural change in economic development does not include:
A. Rising investment ratio of GDP
B. Rising savings ratio of GDP
C. Risingexport share of primary commodities
D. Falling consumption ratio of GDP
SAQ 4.2
A clear evidence of economic development as manifested by structural change is:
A. Growing population
B. Growing national income
C. Continually rising share of the manufacturing sector output in GDP
D. Continually rising share of the agricultural sector output in GDP
SAQ 4.3
The following set whollybelongs to structural changes in economic development:
A. Rising investment ratio; falling consumption ratio; rising export share of
manufactured goods; and falling GDP share of agricultural output.
B. Rising savings and consumption ratios; rising investment ratio; rising export share
of agricultural produce; and rising GDP share of industrial output.
C. Rising savings and investment ratios; rising export share of manufactured goods;
and rising GDP share of agricultural output.
D. Rising savings and investment ratios; rising export share of agricultural produce;
and rising GDP share of agricultural output.
SAQ 4.4
The following set constitutes common characteristics of less-developed countries:
A. Relatively high population growth rate; low savings ratio of GDP; low
consumption ratio of GDP; and high export share of primary commodities.
B. Relatively high population growth rate; low savings ratio of GDP; high
consumption ratio of GDP; and high export share of industrial products.
C. Relatively high population growth rate; low savings ratio of GDP; high
consumption ratio of GDP; and low export share of primary commodities.
D. Relatively high population growth rate; low savings ratio of GDP; high
consumption ratio of GDP; and high export share of primary commodities.
45
SAQ 4.5
One of the following is not necessarily a set of characteristics of under-development.
A. Relatively high populationgrowth rate; low savings ratio of GDP; relatively low
female labour participation rate; and low female literacy rate
B. Relatively low female labour participation rate; relatively high export share of
primary commodities; and relatively high prevalence of malaria disease.
C. Relatively low female labour participation rate; high export share of primary
commodities; and high prevalence of communicable diseases.
D. Relatively high population growth rate; relatively high export share of primary
commodities; low female literacy rate; and high child mortality rate.
46
REFERENCES
Central Bank of Nigeria (2000): The Changing Structure of the Nigerian Economy and
Implications for Development; Lagos; Realm Communications Ltd.
Chenery, H. B. and L. Taylor (1968): “Development Patterns Among Countries and Over
Time” The Review of Economics and Statistics 50(4), pp. 391-416.
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Seers, Dudley (1969): “The Meaning of Development” Paper presented at the Eleventh
World Conference of the Society for International Development, New Delhi.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
Well, David M. (2008): Economic Growth 2nd ed. New York, London, Addison Wesley.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Development Report, Washington D. C. World Bank Publications.
47
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
48
Study Session 5: The Classical Model of Growth
Introduction:
The original theory of economic development may be deduced from classical economic
theory although the focus was not economic development. With time, the subject of
economic development gained prominence and neo
neo-classical economists
nomists direct their attention
more specifically to an analysis of economic growth and long
long-term
term development. However,
we can deduce a theory of growth from economic theories of the classical
lassical economists.
Πt = Vt – Wt – i – Rt (5.2)
With rising rent Rt over time t,profit Πtwill be falling until it reaches zero. At that point,
investment and output will stop growing, reaching what is called thesteady state. This
process is the major factor that eventually arrests further investment and further growth.
Several factors may initiate the growth process. They include expanding external
market, new technology, discovery of new resources, and favourable economic system. The
consequent economic growth will only lead to bigger economy or bigger national output
without any impact on living standards or average income of the populace.
51
accommodated
mmodated a bungalow with ten inhabitants is able to accommodate a story
building with as many floors as desired or sky
sky-scrapers
scrapers that can house hundreds or
thousands of residents and offices. For instance, farmland has improved its yield
continuously as a result
esult of chemical, biological, and mechanical technological
advances such that the crop yield of a dozen hectare could be obtained from one
hectare or less. Land could not exert constraint to productivity of labour and
capital as expected.
(iii) Technical progress
ss or technological advance has continued unabated and so the
steady state where national income ceases to grow is not obtainable.
However, the prediction of the classical economists prove valid for some countries
where technological progress fails to occu
occur and where the population expands with workers
prosperity and family planning is not effective.
Summary
ummary of Study Session 5
1.The major factors that explain economic growth in the classical theory is labour and
capital as variable factors with land as fixed factor of production. The law of
diminishing returns was assumed to operate on account of fixed land, which drives up
rent on land.
2. Capital and investment depend on expected returns on investment,
t, which eventually
comes to zero as a result of rising rent on land as it becomes increasingly scarce with
further economic expansion.
3. Labour depends on population, which grows whenever there is economic expansion
resulting in higher wage rate above subsi
subsistence
stence level. The rising labour supply brings
down wage rate in a competitive labour market so that wage rate falls back to
subsistence level, and living standards return to the original low level. And with
subsistence wage, population stops growing.
4. At the
he end, we have a steady state where national income, capital stock, labour supply
and population all stop growing and remain constant. Thus economic growth results
only in higher population and higher national income without sustainable
improvements in living
ving standards, a phenomenon of growth without development.
5. The classical growth theory has failed to correctly predict the trend of most industrial
economies because its assumption of diminishing returns to the productivity of labour
52
and capital has proved incorrect in the long run since land has not posed any
significant constraint to productivity growth. Also, the prediction that population will
grow with rising prosperity of workers when economic growth sets in has failed
because the populace in many countries have been able to check population growth
through family planning and the desire to maintain higher standards of living.
6. Adam Smith did not share the same view with mainstream classical economists as he
recognisedthe role of technological change in economic growth as a result of capital
formation and fabrication. Other factors recognised by Adam Smith include
expanding external markets, liberal economic system, and specialisation in the
production of export products.
53
Self Assessment Questions for Study Session 5
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 5.1
The assumption of full employment in the classical theory refers to:
A. Full employment of labour and capital stock as factor inputs.
B. Full employment of labour force, i.e. equilibrium tends to prevail between labour
supply and labour demand.
C. Full employment of capital stock only, i.e. tendency towards full capacity
utilisation of installed plant and machinery.
D. Full capacity utilisation of land as a factor of production.
SAQ 5.2
Consider the following definitions: (i) Steady state implies a situation where the growth rates
of the following variables become zero: population and labour force, capital stock, profit rate,
and national income. (ii) Steady state is a situation of constant growth of population and
labour force, capital stock, and national income. (iii) Perfect competition is a situation where
buyers and suppliers are innumerable and independent such that price is determined through
equilibrium of supply and demand in all product and factor markets. (iv) Perfect competition
is a situation where all sellers charge equal prices and buyers cannot influence the market
prices.
A. Definitions (i) and (iii) are correct.
B. Definitions (ii) and (iii) are correct.
C. Definitions (i) and (iv) are correct.
D. Definitions (ii) and (iv) are correct.
SAQ 5.3
What are the major factors that explain economic growth in the classical growth theory?
A. Capital formation, labour supply, and land
B. Capital formation, skilled manpower, and land
C. Capital formation, manpower development, and technological change
D. Technical progress and labour supply
E. Technical progress only
SAQ 5.4
What major factor sets limit to the onset of economic expansion in the classical growth
theory, and how?
A. Inadequate capital formation and inadequate skilled manpower.
B. Diminishing marginal productivities of capital, labour and land.
54
C. Land as a fixed factor of production resulting in rising costs of rent on land with
diminishing marginal productivities for capital and labour.
D. As wage rate rises with economic growth, population and labour supply grow,
resulting ultimately in falling equilibrium real wage back to subsistence level.
SAQ 5.5
Why does economic growth in the classical model fail to lead to sustainable increase in the
average living standards?
A. Inadequate capital formation and inadequate skilled manpower.
B. Diminishing marginal productivities of capital, labour and land.
C. Land as a fixed factor of production resulting in rising costs of rent on land with
diminishing marginal productivities for capital and labour.
D. As wage rate rises, population and labour supply grow, resulting ultimately in
falling equilibrium real wage to subsistence level.
SAQ 5.6
Why do we conclude in the classical growth theory that economic growth does not lead to
development? Because
A. growth results in widening income inequality.
B. the rise in national income leads to corresponding rise in population size so that
average income (or wage rate) remains the same at subsistence level.
C. of environmental degradation that accompanies economic growth.
D. the growth in national income does not result in diversification of the economy.
SAQ 5.7
The classical growth theory has failed to correctly predict modern economic development
because
A. It assumes a corresponding rise in population with the rise in national income.
B. It fails to recognise technical progress or technological advance that results in
growth in productivity for capital and labour.
C. It fails to recognise the phenomenon of foreign capital inflow.
D. All the options above are correct.
E. Only options A and B are correct.
F. Only options A and C are correct.
G. Only options B and C are correct.
SAQ 5.8
The reasons why classical growth theory seems to be relevant to less developed countries are:
A. Their economy experiences price instability and unstable economic growth.
B. Investment ratio is low and growth rate in capital stock is slow.
C. Consumption ratio and import propensity are high.
D. Population growth expands with growth in per capita while technical progress is
virtually non-existent resulting in diminishing productivity of labour and capital.
55
REFERENCES
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
Well, David M. (2008): Economic Growth 2nd ed. New York, London, Addison Wesley.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Development Report, Washington D. C. World Bank Publications.
56
Should you require more explanation
anation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
57
Study Session 6: Neo
Neo-classical Growth Models
Introduction
The neo-classical growth theory being discussed in this study session is an evolution from the
classical theory. It improves on the major inadequacies of the classical theory that resulted in
its utter failure to predict the historical record of sustained productivity growth, economic
growth and development in terms of considerable increase in the living standards of many
nations that have attained
ttained substantial industrial development.
development
The factors and assumptions of economic processes that have been introduced into the
neoclassical theory to make the difference from the classical theory will be presented.
Although there are several versions of the neo-classical
classical theory, the student will be introduced
to the mainstream theory with brief remarks to some
ome other versions that are relevant to
contemporary issues in development patterns among countries.
58
6.1 The Basic Neo-classical Growth Model
The basic neo-classical growth model is representedby the model of Robert M. Solow
(1957). The modelbrought in technical progress as an exogenous factor and assumes
constant returns to scale with respect to labour and capital, constituting the major
modifications to the classical growth model. Land as a factor of production is entirely absent
in all the versions of the neo-classical model. This can be defended by including landed
properties as part of the capital stock apart from the fact that technology has been able to
relax the constraint that land can impose on the productivity of capital and labour. Like the
classical model, the neoclassical theory also assumes that labour force depends on population
growth, but unlike the classical theory, the neoclassical theory assumes that investment or
growth in capital stock is financed out of national income. This leads to a situation where the
growth of capital approaches the growth of national income and, therefore, national income is
independent of capital or investment, which is itself dependent on income. So we are left
with only labour force growth and technical progress as the only factors determining
economic growth and development. Since labour has constant productivity, the growth of per
capita income then depends only on technical progress. The Solow neo-classical growth
model can be simplified and presented algebraically as follows:
where g(Y) is the growth of national income, g(K) is the growth of capital and g(L) is the
growth of labour. For instance, if α is 0.4 and β is 0.6 so that α+β=1, and assuming λ=0 (no
technical progress), then national income growth rate, g(Y), will be a weighted average of
capital stock growth rate, g(K), and labour force growth rate, g(L). If capital stock growth
rate g(K) is 5% and labour force growth rate g(L) is 2%, then national income growth rate is
a weighted average, obtained as follows:
g(Y) = 0.4(5%) + 0.6(2%) = 2% + 1.2% = 3.2%
If on the other hand, we assume a positive technical progress to the tune of λ=3%, other
things being equal, then national income growth rate will become higher, that is:
The Solow neo-classical growth model goes further to explain the determinants of capital
stock K and labour force L, by assuming that change in capital stock is finance from national
income Y, and that labour force L depends on population growth rate, say n. If change in
capital stockdK/dt is financed from national income Y, we can show that the growth in capital
59
stock can neither exceed nor lag behind the growth of national income. Therefore the growth
of capital stock will approach the growth of national income in the long run. That is:
With the assumption of labour force being determined by the growth rate, n, of population,
we can also write:
g(Lt) = n.
In sum, the Solow neo-classical growth model may be abridged and presented as follows:1
g(L) = n (6.3)
With capital growth depending on income, g(K) = g(Y) in the long run. The growth of labour
g(L) = n, the growth rate of population. The solution to the growth model above becomes:
g(Y) = α g(Y) + βn + λ
Thus, the growth g(Y) of national income is determined by population growth rate n
and technical progress. You will observe that capital formation K does not feature in the long-
term determination of growth rate of the economy. This is because capital formation itself
depends on national income and so it is not an independent factor. The only independent
factors are population growth rate n and technical progress λ adjusted by capital (or labour)
coefficient.
However, growth in national income does not automatically translate to growth in per
capita income, which is closer to development in terms of its impact on living standards of
1
The model is developed as follows: Y = f(K, L, t); fK = α(K/Y); fL = β(L/Y); ft= λY, where α and β are
respectively capital and labour elasticities of output and λ is technical progress or total productivity growth
(neutral technical progress); dK/dt = sY implying that g(K) = g(Y) as t→∞ ; and Lt = L0ent , i.e. g(L) = n.
60
the average citizen. Growth in per capita income will occur if the growth in national income
exceeds the growth in population. Noting that per capita income is defined as y=Y/N, where
N is population, growth rate of per capita income,
g(y) = g(Y) – n,
according to the arithmetic of growth treated in study session 3. The growth of Economic
development is better measured by the growth of per capita income rather than by the growth
of national income. So we have
g(y) = g(Y) – n = λ/(1- α). (6.5)
This means that economic development depends ultimately and exclusively on the exogenous
technical progress or the “Solow residual” λ. The neoclassical position of exogenous
technical progress may be justified in the sense that there are many factors that determine
technical progress, a lot of which are non-economic factors. In the traditional economic
theory, such factors are declared exogenous.
Let us consider some hypothetical figures as we have done before. Suppose the capital
coefficient or capital elasticity of output α is 0.4 and that of labour β is 0.6 and population
growth rate is 2%, then the growth of national income will be given as:
g(Y) = n + λ/(1- α) = 2% + 3%/0.6 = 7%
The growth of per capita income, reflecting improvements in living standards, an indicator of
development is given as:
g(y) = λ/(1- α) = 3%/0.6 = 5%
If on the other hand, a country experiences zero technical progress, its development will be
nil as the growth of per capita income will be zero.
61
decreasing rate, leading eventually to zero net investment.This is because replacement
investment and net investment are financed from savings. When all the savingsfrom national
income is exhausted by the need for replacement investment to maintain the production
capacity, net
et investment becomes zero and output ceases to grow
grow.. At that point
po in time,
national income per capita will stop growing. We then have a steady state where national
income per capita remains constant while net investment per capita also remains constant.
These variables become character
characterised by zero growth rates. Fig.6.1 illustrates such a steady
state where savings function is caught up by depreciation function to produce zero net
investment per capita. This version of neo
neo-classical growth model is presented
ed in per capita
terms and is presented below in two equations:
y = f(k); fk> 0; fkk< 0; y = Y/L; k = K/L; (6.6)
dk/dt = sy – δk (6.7)
where Y denotes national output, L labour force, and K capital stock, so that y is output per
labour input and k is capital stock per labour input. The conditions fk>0 and fkk<0 imply that
marginal productivity of capital stock per labour input (fk=dy/dk) eventually exhibits
diminishing returns. Steady state occurs when equation 6.7 becomes zero. That is: dk/dt =
sy – δk; and sy = δk, illustrated in Fig. 6.1 below. At the steady state
This implies that capital stock and output per labour input is constant. It also indicates that
per capita income remains
mains constant. At that steady state, population growth is zero.
zero
δk
sy δk
γ2 s’y
γ
0 γ γ2 k
6.1:: Steady state where sy = δk and steady state k* = γ
62
function sy will shift upward to determine a higher level of steady state, such as γ2 and
correspondingly higher per capita output and capital stock per labour input. However, we
can show in accordance with this model that rising population and labour force imply a lower
level of economic development as the steady state will occur at a lower level of γ and output
per capita. A simple approach to demonstrate this is to note that productivity of capital per
labour will approach zero steady state faster when labour input is larger. That is: If k1 = K1/L1
and k2 = K2/L2, where L1 is greater than L2 , then k1 is less than k2 and will therefore approach
zero steady state faster.
63
Summary
ummary of the Study Se
Session 6
1. The major modifications of the neo
neo-classical
classical growth model to that of the classical are
the introduction of exogenous technical progress and constant returns to scale as
opposed to the diminishing marginal productivity in one version of the neo-classical
neo
model, and general introduction of the savings as a proportion of national income and
determinant of investment.
2. In the neo-classical
classical model, national output depends on capital stock, labour input, and
exogenous technical progress. Land as a factor of production is absent in all the
versions of the neo-classical
classical model. This can be defended by including landed
properties as part of the capital stock.
3. In the Solow version of the neo
neo-classical
classical model that assumes exogenous technical
progress, the long run determinant of economic growth is population growth rate and
technical progress.
4. Capital formation does not feature among the factors that determine long run growth
and development because capital formation itself depends on national income growth.
In other
her words, capital formation is also an endogenous variable and not an
independent variable.
5. The neo-classical
classical growth models are generally closed economy models and are to that
extent unable to explain contemporary development of countries that have benef
benefited
from immense foreign capital inflow as per of the determinant of investment for
national development.
6. The major modifications that can be made to the neo-classical model to make it more
relevant is introduction of foreign capital inflow as part of the determinant of
investment and also identify some critical variables that significantly influence
technical progress, rather than assume it to be entirely exogenous.
64
Self Assessment Questions of Study Session 6
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 6.1
Production function in the neo-classical growth model defines
A. Output or national income as dependent on capital stock, labour input and
exogenous technical progress.
B. Output or national income as dependent on capital stock, land, and labour input
C. Capital stock as the dependent on national income
D. Labour force as dependent on population growth
SAQ 6.2
Exogenous technical progress means
A. Technological advance determines by advanced countries abroad
B. Steady technological advance brought about by investment growth
C. The non-controlled rate by which national income grows independently of the
contributions of labour input and capital stock.
D. The endogenous rate of productivity growth of labour input and capital stock.
SAQ 6.3
What are the major modifications of the Solow Neo-classical growth model to the classical
growth model?
A. Investment depends on savings from national income
B. Assumption of constant returns to scale for capital and labour inputs
C. Existence of exogenous technical progress
D. All the above
SAQ 6.4
In the version of Neo-classical growth model that assumes no technical progress, but assumes
diminishing marginal productivity of capital per labour input (i.e. k=K/L where K is capital
stock and L is labour force what then is the difference between it and the classical growth
model?
A. Investment depends on savings from national income
B. Assumption of constant returns to scale for capital and labour inputs
C. Existence of exogenous technical progress
D. All the above
65
SAQ 6.5
The long run determinant(s) of economic growth in the Solow neo-classical model, is (are):
A. Technical progress
B. Population growth rate
C. Savings rate
D. Options A and B
E. Options B and C
SAQ 6.6
In the version of Neo-classical growth model that assumes no technical progress, but assumes
diminishing marginal productivity of capital per labour input (i.e. k=K/L where K is capital
stock and L is labour force, the long run determinant(s) of economic growth is (are):
A. Technical progress
B. Population growth rate
C. Savings rate
D. Options A and B
E. Options B and C
SAQ 6.7
If we measure development by the growth of national income per capita, the long run
determinant(s) of development in the Solow model is (are)
A. Technical progress
B. Population growth rate
C. Savings rate
D. Options A and B
E. Options B and C
SAQ 6.8
Though strange, why is capital formation absent among the determinants of long-term
economic growth in the Solow neo-classical growth model?
A. Capital formation is endogenous in the model, being dependent on income
B. Capital formation is irrelevant where there is technical progress
C. Without skilled manpower, capital formation is useless
D. Capital formation is affected by depreciation in the long run
SAQ 6.9
Why is neo-classical growth model inadequate in explaining contemporary economic
development among less developed countries?
A. Because it assumes exogenous technical progress
B. Because it assumes full employment of labour force
C. Because it is a closed model not taking foreign capital inflow into account
D. Options A and B are correct
E. Options A and C are correct
F. Options B and C are correct
66
SAQ 6.10
What major modifications will make neo-classical growth model more realistic?
A. Dropping the assumption of full employment of labour
B. Considering technical progress as dependent on some critical variables amenable
to domestic policy manipulation rather than exogenous
C. Extending the model to an open economy model with possibility of foreign capital
inflow
D. By options A and B above
E. By options A and C above
F. By options B and C above
67
REFERENCES
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
Well, David M. (2008): Economic Growth 2nd ed. New York, London, Addison Wesley.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Developmen
68
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by e-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
69
Study Session 7: Structural Change Models of Development
Introduction
The structural change model employs microeconomic behaviour and dynamics in a
modernising world to explain or predict the process of economic development. Structural
changes refer to changes in the relative output shares of various sectors of the economy and
functional income distribution. A major structural change theory is that of Arthur Lewis
(1954) entitled “Economic development with
with unlimited supplies of labour”. His theory was
later modified and expanded by John Fei and Gustav Ranis (1964) in their publication
entitled “Development of the labour
labour-surplus economy: theory and policy”.
Another approach to structural change models is ba
based
sed on empirical studies of
structural changes in economic development among many countries and over a long period.
The pioneering study was carried out by Simon Kuznets (1966, 1971). More comprehensive
empirical studies were later carried out by Chenery and Taylor (1968), Syrquin, Taylor, and
Westphal (1984), and Branson, et al (1988).
73
develop its own technology rather than depend on imported techno
technology
logy and goods and
services. Where there is much corruption, the nation will be less competitive in international
trade and will be more dependent on imported goods and services with the consequences that
it may be trapped in chronic balance of payments de
deficits
ficits and growing foreign debt that will
hamper its economic development.
Summary
ummary of Study Session 7
1. Arthur Lewis surplus labour theory assumes that there is so much surplus labour in
rural agriculture that the marginal productivity of labour is zero ssoo that if any worker
migrates to the urban industrial areas for better earnings, agricultural output will not
suffer any decline while the industrial sector will gain through increase in output and
surplus brought about by migrating workers who earn much lless
ess than the marginal
productivity in the industry.
2. Fei and Ranis theory modified the Lewis’ theory by introducing three phases of
economic development in the interaction between the rural agricultural and urban
industrial sector. The first phase is when m
marginal
arginal productivity of labour is zero and
surplus labour transferring to the urban industrial sector does not result in any fall in
the output of agriculture but leads to growth in the urban industrial sector. In the
second phase, the marginal productivit
productivityy of labour becomes positive but is less than
urban industrial wage and migration continues leading to some fall in agriculture but a
rise in industry leading to economic growth. This phase continues until the third phase
is reached, where there is equal
equalisation
ation of marginal productivities in the rural
agricultural sector and urban industrial sector, with the consequence that rural to
urban migration ceases, and self
self-sustaining growth commences.
3. Both the Lewis and Fei-Ranis
Ranis theories have been critic
criticised on grounds
ounds that migration
from rural agriculture is selective and involves the most productive able
able-
bodiedworkers such that agricultur
agricultural output would fall with such migration. Second is
that continual migration to urban industrial sector on account of different
differential wage may
not lead to increase in industrial output as unemployment grows with such migration
and as modern industrial production is characterised
character by labour saving technology.
4. The empirical structural change models postulate that sectoral shares of output change
with economic development on the basis of income elasticities of demand with
respect to essential commodities and non-essential
non or luxury goods.
74
Self Assessment Questions (SAQs)
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the SAQs at the end of this module.
SAQ 7.1
In Lewis’ theory, the transfer of surplus labour from rural agriculture to the urban industrial
complex is assumed to lead to growth because
A. The marginal productivity of labour in the urban industrial sector is more than that
of the rural agriculture so that what is lost in agriculture if more than offset by the
gain in industrial sector.
B. The marginal productivity of labour in agricultural sector is zero while that of the
industrial sector is positive.
C. The surplus gained in the agricultural sector is invested in infrastructural sector.
D. Of foreign capital inflow into rural agriculture in order to produce inputs into
manufacturing industries.
SAQ 7.2
Major criticisms of Lewis’ theory is that
A. Migration is selective and it involves unproductive members of the rural
household agricultural output does not fall with migration
B. Migration is selective and it involves the most productive members of the
household so that agricultural output falls with migration.
C. Migration to urban industrial sector leads to growing unemployment and attendant
problems that tend to hinder economic growth
D. Options A and C are valid.
E. Options B and C
SAQ 7.3
The first, second and third phases of economic development in the Fei-Ranis theory of labour
surplus economy, which modified Arthus Lewis’ theory are:
A. Marginal productivity of labour is zero in the first phase; marginal productivity of
labour is non-zero but less than urban wage in the second phase; and third phase is
equalisation of rural and urban wage.
B. Marginal productivity of labour is non-zero but less than urban wage in the first
phase; marginal productivity of labour is zero in the second phase; and third phase
is equalisation of rural and urban wage.
C. Marginal productivity of labour is non-zero but less than urban wage in the first
phase; there is equalisation of rural and urban wage in the second phase; and rural
wage is less than urban wage in the third phase.
75
D. In the first phase, there is equalisation of rural and urban wage; marginal
productivity of labour is zero in the second phase; and third phase is characterised
by a lower rural wage than the urban.
SAQ 7.4
Comparing Fei-Ranis theory with that of Arthur Lewis, there is agreement between the two
theory in respect of Fei-Ranis
A. First phase B. Second phase C. Third phase D. No phase
SAQ 7.5
The structural characteristics of less developed countries are:
A. More than 40% share of agricultural output in GDP and more than 60% share of
manufacturing sector output in total exports
B. More than 40% share of agricultural output in GDP and less than 30% share of
primary sector output in total exports
C. Less than 20% share of agricultural output in GDP and more than 30% share of
primary sector output in total exports
D. Less than 20% share of agricultural output in GDP and more than 70% share of
manufacturing sector output in total exports
SAQ 7.6
The structural characteristics of developed countries are:
A. More than 40% share of agricultural output in GDP and more than 70% share of
primary sector output in total exports
B. More than 40% share of agricultural output in GDP and less than 30% share of
primary sector output in total exports
C. Less than 20% share of agricultural output in GDP and more than 30% share of
primary sector output in total exports
D. Less than 20% share of agricultural output in GDP and less than 30% share of
primary sector output in total exports
SAQ 7.7
The structural changes in economic development are due to:
A. Infrastructural development
B. Education and manpower development
C. Savings and capital formation
D. Variable income elasticities of demand between basic needs and primary goods
one hand and non-essential and manufactured goods on the other.
SAQ 7.8
Poor economies commence with “early industries” because they are industries:
A. that depend on rural areas and agricultural sector
B. that break even early
C. that can be carried out with simple technology and produce basic needs
D. that are not capital intensive
76
REFERENCES
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Developmen
77
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
78
Study Session 8:: S
Stages Theory of Development
Introduction
A group of economists and economic historians view the process of economic
growth and development as consisting of consecutive stages, governed by factors
characterising such stages and the movement from one stage to the next,, which are a kind of
sequential structural changes akin to structural change models
models.. Various approaches were
undertaken process
en in describing the dynamic sequences or stages of the development process.
Some look at the stages in terms of modes of exchange, from barter economy
economy, to the
monetised economy and finally the credit economy; some view the development stagesin
terms of the evolution,, interaction, and diversification of sectors of economic activities, while
others perceive the stages in terms of spatialor geo-political specialisation,, interaction and
integration. At the end of the study session, the student will be expected to grasp the
following issues:
79
8.1Brief General Discussion of Various Approaches to Development Stages Theories
In terms of occupation and production, a nation moves from hunting, to farming and
agriculture, trade, services, cottage industries and finally large scale manufacturing and
services. As regards the mode of exchange, underdeveloped economies at the early stages are
characterised largely by trade by barter, where goods are exchanged with goods. As the
economy become progressively monetised, growth and development is accelerated, and the
more monetised the economy, the more developed it becomes, as trade and industry are more
easily facilitated across the economy. At the final stage of development, the economy is
characterised by credit system, where the use of currency notes and coins undergosubstantial
decline. In the modern economy, the use of credit cards and electronic banking is rendering
the use of currency notes and coins redundant. In many developing countries, the rural areas
are yet to be monetised and banking facilities are not available, while in the urban industrial
sector, the people withdraw and deposit heavy sums of cash and keep huge amount of cash in
their homes and market places. A lot of cash still circulate outside the banking system in
those countries and their central banks cannot easily capture these currencies in their
monetary policy. In Nigeria, for example, the people often withdraw millions of Naira or the
equivalent of hundreds of thousands of US dollars, while billions of Naira are in circulation
among market men and women and other traders, hardly passing through the banking system.
In contrast, developed countries use little or no cash in most transactions, across the length
and breadth of their countries.
Another approach is in terms of spatio-sectoral stages of development, from the
household economy to the village economy to the town economy to the national economy
and finally to the international economy and market. Thus at the primitive stage of
development, households are on their own subsistence level, with occupational specialisation
among the husband, wife/wives, and children. With further progress, the village comes
together with households specialising and trading their surpluses within the village. The
village is on its own subsistence level and independent of other regions. Further development
would bring villages together with the town as the centre and we have the town economy. As
the development process advances, we have towns or small regions coming together forming
a national economy and specialisation is nationwide. In Nigeria, for instance, the Western
region specialises in the production of kola nuts and cassava; the East specialises in palm oil
and yams, while the North specialises in beans, cattle and vegetables. Development advances
further as the country is able to produce goods that are internationally tradable and are able to
import all kinds of goods from the rest of the world. The stages are not finely demarcated but
80
have to do with the dominant features. In countries like the USA, Japan and Western
Germany, all products in the whole world can be obtained while all their own products are
capable of being exported to all parts of the world. Nigeria, for instance, can only export its
crude oil and some agricultural produce like cocoa; she cannot significantly export most of
other things she produces, such as wearing apparel, shoes, vehicles, food products, drugs,
drinks, leather produces and furniture.
8.2 Rostow’s Stages Theory of Development
The most comprehensive and most popular stages theory of growth is that of Walt W.
Rostow, which describes the stages of development as comprising five. The first is the
primitive stage, the second consists of preconditions for take-off into self-sustaining
growth, the third is the take-off stage, the fourth stage is the drive towards maturity and the
final fifth stage is the age of high massconsumption. There is no doubt that countries do
indeed pass through these stages in a consecutive manner, but the theory did not explain why
some countries stagnate at one stage. The primitive stage is characterised by the rural
traditional subsistent economy with little communications and interactions among products
and people across different regions. The preconditions put in place are the infrastructure for
energy, communications and interactions and the breaking down of cultural obstacles to
modern production and mobility of products and people. It definitely involves education for
literacy, civilisation, and socialisation of the people according to national moral standards and
civic responsibilities, as well as the development of modern skills. The take-off stage,
according to Rostow, consists of mobilising substantial investment resources required for
modern industrial development; such investment resources must be at least 10% of national
income. Thereafter the economy will experience the next of drive to maturity and finally
reach the stage of high mass consumption. Naturally, when a country is able to invest
significant proportion of its national income (through domestic savings and, or foreign capital
inflow), and the investment is well managed, the economy may experience steady cumulative
growth. Within a short period, the national income will reach a high level through the law of
exponential growth. At that stage, the nation will experience surplus savings and capital,
which will be diverted to credit for consumption purposes, as investment outlets fall short
severely of funds supply.
Nigeria has been able to achieve more than 10% investment ratio. Why then has
the country not achieved the take-off
take stage towards sustained development
devel and
drive to maturity?
Summary
ummary of the Study Session 8
1. Stages theories of development examine the universal stages through
which countries need to pass in the process of economic development. In terms of
modes of exchange, countries pass through stages dominated at each stage by trade by
82
barter, then monetisation of the economy, and finally the use of credit. In terms of
spatial-sectoral interaction and specialisation, they pass through the household
economy, village economy, town economy, national economy and finally the
international. In terms of occupation and production, a nation moves from hunting, to
farming and agriculture, trade, services, cottage industries and finally large scale
manufacturing and services.
2. A more comprehensive analysis is that of Rostow’s stages theory of development
whereby from the primitive stage, countries lay foundation for development through
the pre-conditions, then the take-off stage and finally arrive at the steady drive
towards maturity and mass consumption. It is noteworthy that in Rostow’s theory, the
factors that characterise each stage are discussed. In particular, the preconditions for
take-off into development relate to favourable investment climate. For the take-off
stage, the nation requires to set aside a significant amount of national income for
investment, which was considered to be a minimum of 10%.
3. The stages theories could not explain why some countries remain perpetually under-
developed or revert to a lower level of development, or the time it takes each stage to
unfold itself and graduate to another stage.
83
Self Assessment Questions for Study Session 8
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 8.1
Which of the following sets is odd?
A. Barter → Money → Credit
B. Household- → Village- → Town- → Nation- → International- economy
C. Primitive → Pre-conditions for take-off → Take-off → Drive to maturity
D. Household → Barter → Money → Nation → International
SAQ 8.2
Which of the following does not belong to the preconditions for take-off stage?
A. Lingua franca and appreciable level of literacy
B. Appreciable and appropriate transportation and communication network
C. Appreciable and appropriate level of energy infrastructure
D. Existence of large scale manufacturing industries
E. Security to life and property and political stability
SAQ 8.3
For the take-off stage into development, the minimum effort is in respect of
SAQ 8.4
The sequence of Rostow’s stages theory of development is:
SAQ 8.5
The stages theories of development fails in respect of inability to:
84
A. Identify the relative time required for each stage of development.
B. Establish the possibility that some countries may remain perpetually under-
developed.
C. Establish whether having achieved a stage of development, a nation may not go
backwards to an earlier stage.
D. All of the above
SAQ 8.6
The required minimum investment effort for take-off is:
A. 10% of savings
B. 10% of national income
C. 15% of savings
D. 15% of foreign exchange earnings
85
REFERENCES
Caincross A. K. (1961): “The Stages of Economic Growth” The Economic History Review
13(3) pp. 450-458
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Developmen
86
Should you require
equire more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
87
Study Session 9:Harrod-Domar
DomarNeo-Keynesian Growth Theory
Introduction
There is a body of growth theories inspired by K
Keynesian
eynesian macroeconomic
revolution of the circular flow of national income determination and market imperfection.
Unlike the classical models, the Neo
Neo-Keynesian
Keynesian models do not assume full employment or
the operation of free market-clearing
clearing price mechanism or perfect competition. We shall
consider two variants of thee Neo
Neo-Keynesian
Keynesian growth models, one simple and one complex,
among the ones most relevant to developing countries. The first to be considered is the
variant of Harrod-Domar
Domar model, based on the similar theories presented independently by the
two economists, R. F. Harrod (1959)
(19 and E. Domar (1947). The second variant is the “new
model of growth”” of Kaldor and Mirrlees (1962), which is discussed in the study session 10.
The Harrod-Domar
Domar is one of the simplest neo
neo-Keynesian growth models which relate
investment to
o change in output or capital stock to the level of national income. Labour is not
brought into the analysis on account of labour market imperfection that resulting in excess
labour supply. Actual wage rate is always above the competitive wage rate and definitely
def
above the classical subsistence wage. So with surplus labour supply, the labour force is not a
constraint to economic growth so that capital stock or net investment expenditure remains the
only binding constraint that determines the output level an
andd its growth.The student is
expected to grasp the following issues in the Harrod
Harrod-Domar growth model:
88
9.1The Harrod-Domar Growth Model
The growth model is interested in deriving the rate at which the economy can generate
smooth equilibrium growthoperating at full capacity and the factors involved. The model is
based on very simple assumption about aggregate production capacity of the economy and
aggregate supply of investment resources. Increase in national output capacityor potential
national income (Y) in the current period (t) is dependent linearly (by a constant parameter
b) on the aggregate national investment (I) with one period lag (t-1), while the current
national investment is financed out of current national savings which form a given proportion
(s) of national income (Y). Output capacity or capacity output or potential national
income in the Harod-Domar model is the maximum sustainable output that the economy can
generate putting all capital resources into production.
Implicitly, the model assumes that capital stock is the only constraint to output
capacity creation and growth in national income, apart from the equilibrium condition that
aggregate demand be equal to aggregate supply capacity. The constancy of parameter b
signifies constant returns to scale for capital, implying implicitly an assumption that
diminishing returns are offset by technological progress. As a non-classical model, full
employment of labour is not assumed and so labour (skilled or unskilled) does not constitute
a constraint, indicating that there is surplus labour or chronic unemployment. Implicitly also,
the Harrod-Domar model may be taken as assuming that labour adjusts proportionally to the
growth of capital stock. If such an assumption is dropped, and labour grows faster than
capital stock, then there will be growing unemployment; capital is thus the limiting factor of
production. We may assume that skilled labour and manpower development can be
incorporated into investment expenditure as part of human capital stock component of total
capital stock.
In its simplified form, the Harrod-Domar model may then be presented as follows:
ΔYt = b It-1 ;0<b<1 (9.1)
It = sYt ; 0 < s < 1 (9.2)
Yt is current capacity output and ΔYt= Yt–Yt-1 is the change in the capacity output; It is
current investment expenditure. Parameterb signifies the amount of output that results from
one unit of investment; for instance, if b=1/3, one billion Naira of investment expenditure
will result in N1/3 billion (i.e. N333.3 million) output annually and continually, indicating
that the one billion Naira investment expenditure will generate a total of one billion Naira
output in three years, meaning that it will take three years to recover the value of the
investment; in other words, parameter b is a macroeconomic payback period.Parameter s is
89
thesavings ratio of income, actually a variable parameter that is subject to government
monetary and fiscal policy.
Substituting equation (9.2) in (9.1)we derive the growth rate g(Y) as:
This implies that full capacity equilibrium economic growth rate is determined by the product
of s,the savings ratio, and b, the ratio of change in output to investmentexpenditureor a ratio
that reflects investment productivity. If, for example, b=1/3, s=0.1 (or 10%), then growth is
given as:
Please note that s = 0.1 is the same as s = 10% because 10% = 10/100 = 0.1. It is also to be
noted higher growth rate can be achieved through a higher savings ratio. If for instance, the
ratio is increased through appropriate monetary and fiscal policy to s=0.15, the growth rate
will rise to g(Y) = 0.15/3 = 0.05 or 5.0%.
There is need for some remarks regarding depreciation of capital stock. In another
version of Harrod-Domar model, we treat investment expenditure as gross investment
whereas it is net investment expenditure that results in a change in capital stock that can bring
about an increase in output capacity. Change in capacity output ∆Y depends therefore on
change in capital stock ∆K. In this regard, we introduce depreciation rate δ as a proportion of
capital stock Kso that net investment expenditure or change in capital stock (∆K) is given as:
∆K = It – δK
Thus, the Harrod-Domar model incorporating depreciation of capital stock is given as:
∆Yt = b∆Kt-1 (9.1’)
∆Kt = It – δKt-1 (9.2’)
It = sYt (9.3’)
Substituting equations (9.3’) into (9.2’) and the result into equation (9.1’), we have
∆Yt = b(sYt-1 – δKt-2), noting that (9.2’) also implies ∆Kt-1 = It-1 – δKt-2
Dividing both sides of the equation above by Yt-1 , we obtain
90
Note that ∆Yt = b∆Kt-1of (9.2’) implies Yt = bKt-1 or b = Yt /Kt-1 = Yt-1/Kt-2on the assumption
of constant parameter b. a ratio of output to capital stock with one period lag. Thus, with the
introduction of depreciation, making the model more realistic, growth rate is the Harrod-
Domar model is given by equation (9.3’’). That implies that a remarkable savings ratio for a
developing country of the magnitude of 15% cannot bring about economic development if we
consider a depreciation rate of say 5% of capital stock. For instance, given a realistic
parameter b=1/3, s=15%(0.15), and δ=5%(0.05), growth rate is given as:
g(Y) =bs – δ = (1/3)(15%) – 5% = 0.0%
This model implies that a developing country whose savings ratio is not more than 15%
cannot achieve any growth rate. Typically, less developed countries cannot save more than
15% of their national income, and that means that economic development is not possible with
such characteristic level of savings ratio. One option that less developed countries cannot
adopt is to pursue a centrally planned economy that forces the economy to save much more
than 15%, say 30% of national income. This relatively high savings ratio will bring about
growth rate to the tune of
G(Y) = (1/3)(30%) – 5% = 5%.
Another option is to source for foreign capital inflow to augment domestic savings rate, such
as taking foreign load to the tune of additional 15% to augment domestic savings to reach a
level of 30% of savings or investment ratio of national income. This brings us to a formal
analysis of the open economy version of Harrod-Domar model.
91
Ftis a policy instrument that signifies the foreign capital inflow. Substituting equations 9.7
and 9.6 in 9.5, and substituting the result in equation 9.4, and dividing by Yt-1 as we have
done before, we have:
ΔYt/Yt-1 = b(s + f) - δ
i.e. g(Y) =b(s + f) - δ (9.8)
where f = Ft-1/Yt-1 is foreign capital inflow of national income. We note the difference
between the closed model solution of equation (9.3’’) from that of (9.8) as just being a
augmentation of domestic savings ratio with foreign capital inflow ratio (f) of income (Y).
Equation 9.8 signifies that growth rate g(Y) in the economy, at least in the medium term,
would depend positively on domestic savings rate and positively on foreign capital inflow
ratio of national income. Suppose parameter b=1/3, savings ratios=0.12 (or 12%), and
foreign capital inflow ratio f=0.09 (or 9%), then the growth rate
Without the foreign capital inflow, the growth rate will be negative. That is:
The larger the foreign capital inflow, the higher the growth rate, provided the foreign capital
inflow is judiciously utilised and other things being equal.
In precise terms, there are however reservations to this conclusion about the impact of
foreign capital inflow or the assumption that external borrowing can accelerate economic
growth. These reservations include the following:First, foreign capital inflow comes with a
cost, either the interest on loans or subsequent dividends, proprietors income and salaries of
expatriates in respect of foreign direct investment, that will have to be repatriated abroad.
When the cost of the foreign capital inflow exceeds its benefits (growth impact on the
economy), and this is possible given the effective tariff protection on the investments or
domestic subsidies, then the foreign capital inflow will retard economic growth. Second,
debt service payments or payments for factor services to abroad have to be in foreign
exchange. But when the foreign investment fails to generate foreign exchange through
exporting part of its domestic output, the nation will lack the foreign exchange to service the
foreign debt and this may lead to foreign exchange market instability, foreign exchange
92
constraints to economic growth, accumulation of foreign debt and eventual debt trap that will
strangle the economy. The third reservation is that domestic savings may be displaced and
become partly redundant when the
the magnitude of foreign capital inflow goes beyond the
complementary or optimal level for domestic savings. The fourth reservation is that foreign
capital inflow is usually tied to the capital goods, intermediate inputs, and allied services
emanating from the source of the foreign capital, and so may promote factor-biased
factor
technology, non-competitive
competitive pricing or undue inflation of the costs of the capital goods and
services. Therefore the decision to allow any foreign capital inflow to augment domestic
investment
tment resources has to be done with caution, weighing properly the benefits and costs to
the economy.
94
Self Assessment Questions for Study Session 9
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 9.1
Define output capacity or potential national output
A. Projected national output for the following year
B. Change in national output from one year to the other
C. Maximum achievable growth of national income
D. Maximum sustainable output that an economy can generate with full employment
of capital resources
SAQ 9.2
Specify the Harrod-Domar growth model:
A. ∆Yt = b∆Kt-1; ∆Kt = It – δKt-1 ; It = sYt.
B. ∆Yt = bIt-1; It = St ; St = sYt.
C. ∆Yt = (1/v)∆Kt-1; ∆Kt = It – δKt-1 ; It = sYt.
D. ∆Yt = (1/v)It-1; It = St; St = sYt.
E. Any of the above
F. None of the above
SAQ 9.3
The solution to the Harrod-Domar growth model may be given as:
A. g(Y) = s/b
B. g(Y) = s/v
C. g(Y) = sb – δ
D. Options A and B
E. Options B and C
F. Options A and C
where s is savings ratio; b=1/v is output-capital ratio; v=1/b is capital-output ratio, and
δ is depreciation rate.
SAQ 9.4
Suppose savings ratio is 15%, depreciation rate 5%, and output-capital ratio 0.3. Calculate the
growth rate of the economy under Harrod-Domar model.
A. 4.5%
B. 3.0%
C. –0.5%
D. –1.5%
SAQ 9.5
95
In the question above, if the country desires to bring in foreign capital inflow to the tune of
10% of GDP to augment domestic savings, what is the expected growth rate?
A. 5%
B. 2.5%
C. 6.0%
D. 1.5%
SAQ 9.6
If the country desires a growth rate of 7.0% and its savings ratio is estimated as 15%,
depreciation rate 5%, and capital-output ratio 1/3, how much capital inflow as a ratio of
national income will be required?
A. 21.0%
B. 15.0%
C. 7.5%
D. 5.0%
SAQ 9.7
Which of the following is not an implicit assumption of Harrod-Domar model?
A. Constant returns to scale for capital stock
B. Full employment of labour
C. Capital stock is the only constraint to output capacity
D. No foreign capital inflow or external borrowing
SAQ 9.8
Which of the following constitutes a reservation to open economy extension of Harrod-
Domar model?
A. Foreign capital comes with a cost – interest rate
B. Foreign capital inflow may promote technological dependence
C. Foreign capital inflow may depress domestic savings
D. All the above
E. None of the above
96
REFERENCES
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
Harrod, R. F. (1959): “Domar and Dynamic Economics”; The Economic Journal,vol.69; pp.
451-64.
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
Well, David M. (2008): Economic Growth 2nd ed. New York, London, Addison Wesley.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Developmen
97
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
98
Study Session 10: Kaldor& Mirrless’ “New Model of Growth”
Introduction
A much more realistic neo-Keynesian
neo growth model is that of Kaldor and Mirrlees
(1962),, entitled “a new model of growth”, new in the sense that it constituted a distinct
departure from a much criticised
ised earlier model of Kaldor. The “new model” is realistic in the
sense that it assumes a precise veritable type of market imperfection and attempts to model
practical and rational business and social behaviour in the analysis of economic growth. Its
approach is not too theoretical and abstract like many other growth
growth models, yet it is quite
rigorous.
According to this model, economic growth is determined by (i) the traditional payback
period “h”, the smaller the worse as many viable projects may not qualify when the required
payback period is very short, (ii) growth rate of wage whether or not it is in excess of
productivity growth; if it is in excess, it will discourage investment and retard economic
growth, if it falls short of productivity rate, it will not promote the optimal investment rate as
businessmen may over-invest due to the rate of return exceeding the productivity growth; (iii)
the optimal rate of new investment per operative, which depends on endogenous factors in
the economy, an area in which endogenous growth theories have their concern.
100
10.2 Abridged Mathematical Presentation of the Model
For thee purpose of intelligibility and the level of the students, the mathematical model
of Kaldor and Mirrlees’ model will be presented in an abridged or simplified form.
The Technical progress function is specified as:
4
3 4
; 3 6 7 0; 3 66 A 0. (10.1)
di/i
γ f(di/i)
di/i
0 γ
In Fig.10.1, from origin (0) to γ, productivity growth is higher than the growth of investment
per operative, and so it is considered rational behaviour that businessmen will find it
profitable to keep expanding investment per operative. Beyond γ, it is not rational to increase
investment per operative.Optimal productivity growth rate is thus given as γ.Whether
γ.Whether the
t
economy will operate at this optimal level depends on other components or equations of the
model, namely, the investment behaviour and labour market behaviour.
The capital market behaviour
behaviour,, characterising the investment behaviour of
businessmen, is defined by the following two equations:
"2;
8" 9 :" ( *< =< ))> (10.2)
"2
8" 9 :" (*< =< )? +(@2
2B)<
)> (10.3)
101
where h is payback period, wtis wage rate, r is discount rate (or appropriate interest rate as
cost of capital), and ρ is normal profit rate or a premium for risk.
Equation (10.2) indicates that no investment will be embarked upon unless it can be
recovered on or before period h as the payback period. It is thus the amount that can be at
least recovered within the period h that will actually be invested. The difference between yt
and wt signifies the profit component, where yt is the value-added per operative. Equation
10.3 is the project evaluation based on discounted cash flow of expected returns from the
investment, with provision for normal profit. The amount to be invested must therefore be
able to pay for the cost of capital and normal profit. As earlier pointed out, the length of the
payback period, h, will determine how much investment can be considered for evaluation.
With a very short payback period as in less developed countries, a lot of medium and long-
term projects will be excluded, whereas it is the long-term projects that best promote
economic development.
Labour market behaviour is defined by the following equations:
wt>wmin(t) (10.4)
="2< =" (1 + C )< (10.5)
Equation (10.4) indicates that current wage is governed by the minimum wage rate influenced
by government and trade unions. Equation (10.5) indicates that future wage rate is projected
at the rate ε for the purpose of investment analysis. The projection rate is based on the recent
growth in wage rate.
102
period. Wage rate may rise faster than productivity or be perceived to be so on account of
minimum wage rate fixed from time to time. So if minimum wage rate is fixed too high
periodically, it will adversely affect investment and national income growth. And if wage rate
increases at a slower rate than productivit
productivity growth, it will lead to over-investment
investment as profit
rate grows faster than productivity; and the over
over-investment
investment will lead to a less than optimal
productivity rate and adversely affect economic growth. It should be noted that national
income includes both profit and wage, so that if wage is not increasing appropriately, it will
affect the total national income.
103
4. The imperfect labour market is characterised by a pre-determined dynamic minimum
wage rate owing to the influence of government and trade unions. Businessmen
project the wage rate in their investment analysis on the basis of recent growth in
wage rate.
5. The determinants of economic growth in the model are the conventional payback
period of investment and the long-term investment prospects that are all determined
by the investment environment, includingespecially the wage growth rate. The
economy will operate below the optimal productivity rate if the consequent
investment rate is too low or too high. If payback period is too short, investment rate
will be too low;if wage rate rises faster than productivity, investment rate will be too
low; and if wage rate rises at a slower rate than productivity, investment rate will be
too high.
6. Development policy implications are that the government should promote
anefficientand equitable labour market that will ensurethat wage rate growth
corresponds tolabour productivity growth, establish efficient and adequate
infrastructure, especially in respect of energy and transportation and communication,
in order to enhance productivity fundamentally, and furthermore promote security to
life and property and the rule of law, balanced sectoral development and social
justice, and political stability in order to create favourable investment environment
and foster business confidence.
104
Self Assessment Questions:
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 10.1
State the three major components of the Kaldor and Mirrlees’ “new model of growth”.
A. Technical progress function, savings function, and capital market behaviour
B. Technical progress function, capital market behaviour, equilibrium condition
C. Technical progress function, capital market behaviour, labour market behaviour
D. Technical progress function, savings function, labour market behaviour
SAQ 10.2
Which of the following statements is (are) not valid?
A. Capital market behaviour defines the investment behaviour of businessmen.
B. Labour market behaviour determines the wage rate and employment.
C. Payback period is the time it takes to recover the amount invested in a project.
D. All the options above.
E. None of the options above.
SAQ 10.3
What determines productivity growth in the technical progress function?
A. An autonomous component and growth of investment per operative
B. An autonomous component and amount of skilled manpower
C. Domestic investment rate and foreign capital inflow
D. Skilled manpower and efficiency of infrastructure
SAQ 10.4
How does productivity growth depend on investment per operative?
A. Non-linearly in such a way that intercept is positive, first derivative positive and
second derivative negative.
B. In such a way that productivity is positive when investment rate per operative is
constant, and productivity increases at a decreasing rate when investment per
operative increases.
C. Linearly in such a way that the intercept and gradient are positive.
D. Options A and B are both correct
E. Options B and C are both correct
SAQ 10.5
List the determinants of economic growth in the Kaldor and Mirrlees’ model?
A. Savings, payback period, and interest rate
B. Payback period, investment rate per operative, and wage rate
105
C. Investment per operative, payback period, and skilled manpower
D. Investment per operative, payback period, and foreign capital inflow
SAQ 10.6
What defines the optimal technical progress in Kaldor and Mirrless’ model?
A. When productivity rate reaches the maximum level
B. When investment rate per operative reaches the maximum level
C. When there is equality between the productivity growth and growth of investment
per operative
D. When there is equality between wage growth rate and productivity growth
SAQ 10.7
Which of the following statements is true with regard to Kaldor and Mirrlees’ model?
A. The shorter the conventional payback period, the slower is economic growth.
B. Optimal technical progress is not attainable when wage rate increases faster than
productivity.
C. Investment rate will tend to grow faster than productivity when wage growth rate
lags behind productivity growth.
D. All the above are correct.
E. None of the above is correct
F. Options A and B are correct
G. Options A and C are correct
H. Options B and C are correct
SAQ 10.8
The most appropriate implication for development policy package in respect of Kaldor and
Mirrlees’ model is that government should
A. Promote domestic investment and minimise external borrowing to promote self-
reliant economic development.
B. Promote workers welfare through minimum wage and manpower development in
order to encourage workers and promote labour productivity.
C. Ensure favourable tax regime for the business sector and promote security to life
and property for the purpose of favourable investment environment.
D. Promote balanced development, social justice and equity, and security to life and
property in order to promote productivity and business confidence
E. Promote rule of law, and security to life and property to foster business confidence
and ensure that wage rate growth corresponds to labour productivity growth
106
REFERENCES
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
Well, David M. (2008): Economic Growth 2nd ed. New York, London, Addison Wesley.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Developmen
107
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
108
Study Session 11: International Dependence Models – The Neo-classical
classical
Introduction
International dependence models have made their impact on the evolution of
economic thought and have a lot of appeal to development economists in developing
countries on account of substantial empirical evidence in support the phenomenon in which
the fate of less-developed
developed economies are determined by the economic policies of industrially
advanced countries on whom they depend economically, financially, technologically,
politically, intellectually, and even culturally. The models concern themselves with the
problems of perpetual under-development,
development, rather than explain factors that determine growth.
The benefit of such models is in informing policy makers of cautions to be taken and food for
thought in their efforts to achieve economic growth and development. S
Substantial
ubstantial part of the
theories are however not generally applicable because not all developing countries are subject
to all its assumptions and characterisation
character ation of economic structure and external relationships,
relationships
and hence its predictions. It is thus possible
possib though very difficult for any country to position
itself in such a way as to be free from some of its characterisation
ation and predictions.
There are three major approaches or var
variants of the international dependence model,
namely the Neo-classical model, the False Paradigm model, and the Dualistic (or Centre-
Centre
Periphery) model.
odel. These approaches are actually complementary and represent various angles
to the perception of the constraint of international dependence to economic emancipation and
development. The study session 11 presents the Neo-classical dependence model
odel while the
study session 12 presents the remaining two versions, namely, the False
False Paradigm and the
Dualistic models.
These entire factors combine to perpetuate underdeveloped in the poor countries and
at least sustain the large gap in economic development and per capita income between the
less-developed countries and the industrially advanced countries.
111
characterisee all developing countries. For example, OPEC countries are not short of resources
for investment and do not have to engage in substantial external borrowing.
borrowing. Brain drain has
not significantly affected less developed countries that have appropriate incomes policy. To a
reasonable extent, monopoly effect, international demonstration effect, and factor bias
technology have adversely affected most, if not all, less developed countries and enhance
their dependence. The countries that are not subject to these factors are the centrally planned
or socialist countries.
Summary
ummary of the Study Session 11
1. The Neo-classical
classical dependence model assumes
assumescertain major characteristics of the less
developed economy that lead to its chronic exploitative dependence on industrially
advanced countries, namely:
namely monopoly effect; international demonstration effect,
effect
GDP;
balance of payment difficulties and growing foreign debt ratios of GDP;factor-bias
effect and brain-drain
drain effect
effect.
2. Those assumptions are quite relevant to most of the less
less-developed
developed economies. The
multinationals originate from industrially advanced countries and have financial,
technological, marketand even diplomatic advantages to dominate the industrial
economyof the LDCs, invariably former colonies of the industrially advanced
countries.
3. Development policy implications are obvious such as the promotion of competitive
industrial structure and indigen
indigenisation
ation of selected industries within the technological
capability of a poor nation, appropriate incomes policy to check excessive brain drain,
112
the control of importation of luxury goods, and the promotion of technological self
reliance.
SAQ 11.2
Monopoly effect means
A. The monopolization of import business by big importers
B. The monopolisation of government contracts by foreign contractors
C. The domination of the industrial economy by multinationals originating from
industrially advanced countries
D. The monopolisation of global trade by the industrially advanced countries
SAQ 11.3
International demonstration effect means
A. The demonstration of products at trade fairs by industrially advanced countries
which have impact on international trade.
B. The emulation by LDCs of lifestyles of those of industrially advanced countries
which promote excessive importation.
C. The emulation by LDCs of educational systems of the industrially advanced
countries.
D. The emulation by LDCs of research and development methodology of industrially
advanced countries.
SAQ 11.4
Excessive external borrowing of LDCs promoting financial dependence is due to
A. Substantial opportunities for industrial development in developing countries
B. Easy availability of funds for industrial development
C. Low savings propensity of LDCs that cannot afford them enough investment
resources for modern development
D. The greed and corruption of political leaders of LDCs
113
SAQ 11.5
Factor-bias effect means the adoption of
A. Foreign technology that is not consistent with domestic factor endowments
B. Factors of production that are biased against capital and modern technology
C. Labour intensive technology
D. Capital intensive technology
SAQ 11.6
Brain drain effect is due to:
A. Poor diets of the people of LDCs that result in deficient brain development.
B. Migration of highly skilled scarce manpower due to unemployment at home.
C. Migration of highly skilled scarce manpower due to inability of LDCs to pay
international competitive emoluments.
D. Migration of intelligent and brilliant students from LDCs to obtain higher degrees
in developed countries.
SAQ 11.7
Which of the following assumptions of the Neo-classical dependence model is not relevant to
the typical sub-Saharan less-developed economy?
A. Monopoly effect
B. Factor bias effect
C. Brain drain effect
D. International demonstration effect
E. None of the above
SAQ 11.8
Development policy implications of neo-classical dependence model are:
A. Promotion of technological self-reliance
B. Control of excessive importation of luxury durable goods into LDCs
C. Promotion of indigenisation of the less complex industrial sectors
D. All the above options
E. Options A and B
F. Options B and C
G. Options A and C
114
REFERENCES
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Developmen
115
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
116
Study Session 12: False Paradigm and Dualistic Development Models
Introduction
We present two international dependence models that are in the realms of political economy
rather than economic theory but which are nevertheless quite relevant to development
economics.
conomics. The first one to be presented is th
the False Paradigm Model
odel that questions the basis
and validity of development theories and policies put forward for guiding less developed
countries. The second model is the Dualistic development model that views the problems of
less developed countries from the angle of socioeconomic polarisation nationally and
globally in development policy bias
bias. Dualistic Development models are also referred to as
Centre-Periphery
Periphery theory of development, indicating the polar
polarisation
ation between the “centre” and
“periphery” at national and global levels.
118
12.1.2 The Problem with Structural Adjustment Programmes (SAP)
The Structural Adjustment Programmes (SAP) introduced in mid-80s include
deregulation of foreign exchange market, privatisation and commercialisation of enterprises,
and balance budget policy for the purpose of diversification of the economy, minimal
inflationary growth, and reducing the nation’s excessive dependence on the oil sector. After
several years of the policy and up till the present, matters got worse for the nation. Rather
than diversify the economy and promote non-oil foreign exchange earnings, we became even
more dependent on oil revenue; rather than improve the share of manufacturing sector in
GDP, the manufacturing sector’s share of GDP fell from above 8% to below 5% currently;
rather than achieve minimal inflationary growth, the nation experienced the most rapid
inflation after the mid-80s up till the present; rather than increase foreign exchange earnings
of the non-oil sector, especially the manufacturing sector through the depreciation of the
Naira, the share of the non-oil and manufacturing sector in total export earnings declined
while demand for foreign exchange keep rising. Most of all, the percentage of the people
living below poverty line increased.
The reason for the failure of SAP is that it is based on economic fallacies rather than
principles of economics and the peculiar environment of the LDCs. For instance, making
US$ more expensive by devaluation of the Naira could not discourage importation because
the demand for imported products is price inelastic and there are no domestic alternatives to
more of the imported plant and machinery. No more how expensive generators become
through Naira depreciation, banks and hotels will still have to import them as there are no
alternative locally produced generators of similar quality and capacities. When Naira is
depreciated, those who want to siphon currencies abroad cannot lose or be discouraged, but
manufacturers that depend on imported inputs will have to pay much higher price and will be
discouraged because the end product will command higher prices and become less
competitive with imported finished products.
119
medium-term planning has been more favourable to the economy than the period of rolling
plans. The plan makes for increases in output capacity while the private sector benefits from
restricting output growth and driving up prices to make huge profit.
Summary
ummary of Study Session 12
1. The False Paradigm Model postulates that development policy prescriptions for less-
less
developed countries emanate from the industrially advanced countries and their
economic and financial institutions, and are hence inappropriate to the peculiar and
raw environment of the less-developed
less oped countries probably deliberately designed to
mislead the poor economies to facilitate their continual dependence and exploitation.
2. The Dualistic Development modelasserts that the less-developed
developed economy is
characterised by the coexistence of various dualistic groups, which perpetuate wide
inequality and development gap. The dualistic groups include: the vast rural and
agricultural sector versus the enclave of modern urban industrial sector; the formal
versus informal sector
tor in urban areas.
areas
3. Development policy implications include the promotion of self-reliant
self reliant technology, the
urban
control of excessive importation of luxury goods, checking the urban-biased
development policies, and development of agriculture and rural areas.
121
Self Assessment Questions of Study Session 12
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 12.1
False paradigm model refers to
A. False indicators and reports of development achievements for purpose of
government propaganda
B. Misleading or irrelevant development theories and policies meant to keep less
developed countries under-developed
C. Falsification of statistics concerning social and economic development
D. Falsification of information in the evaluation of development projects
SAQ 12.2
Which of the following is a good example of false paradigm model?
A. Import substitution policy
B. Policy of deregulation of foreign exchange market
C. Policy of removal of subsidy from agriculture
D. All the above
E. None of the above
SAQ 12.3
Dualistic development model asserts that
A. less-developed economy is characterised by the coexistence of various dualistic
groups, which perpetuate wide inequality and development gap,
B. development is pursuit in a biased manner with respect to the dualistic groups that
include the vast rural and agricultural sector versus the enclave of modern urban
industrial sector nationally and globally.
C. statistics of development have dual nature
D. that inflation affects the nation in a dualistic manner
SAQ 12.4
The following indicator is an evidence of validity of dualistic development model
A. Rapid population growth in less developed countries
B. Rapid economic growth in less developed countries
C. Enormous inequality in per capita GNP between developed countries and less
developed countries
D. High crime rate in urban areas of less developed countries
122
SAQ 12.4
Development policy implication of false paradigm model is
A. Subject development policy proposals to debate by local academia
B. Ensure balanced infrastructure development between the rural and urban areas
C. Facilitate the training of citizens in tertiary institutions abroad
D. Check excessive migration into the country from neightbouring countries
SAQ 12.5
Development policy implication of dualistic development model is
A. Subject development policy proposals to debate by local academia
B. Ensure balanced infrastructure development between the rural and urban areas
C. Facilitate the training of citizens in tertiary institutions abroad
D. Check excessive migration into the country from neightbouring countries
123
REFERENCES
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Development
124
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
125
Study Session 13: Technical Progress and Economic Development
Introduction
Finally, we have a growing body of growth theories attempting to explain econom
economic
development through factors that can be controlled within the country or factors that
distinguish one country from another in terms of the level of economic development. Starting
from the neoclassical growth theory that assumes exogenous technical progr
progress, various
endogenous growth theories explore the influence of some structural, social and
environmental factors on technological progress and economic development. There is a lot of
emphasis on technical progress or technological progress in endogenous growth theories that
sometimes we refer to them as endogenous technological theories. Before we consider the
factors brought into the analysis of endogenous growth theories, we may introduce the
concept and nature of technical progress in this study sessi
session
on and its role in economic
development. Thereafter we shall discuss endogenous growth theories in study session 14.
13.1Concept
Concept and Definition of Technical Progress
Technical progress may be defined as the occurrence of a faster growth of output than
the average growth of factor input
inputs,
s, in terms of physical output or market values. This
implies that technical progress shifts the productivity curves over time leading to continually
rising productivity of factor inputs. Thus technical progress exists when total factor
productivity grows and can thus be measured by the growth of total factor productivity. In
this regard, various possibilities exist: If all factor inputs are kept constant and output still
grows, we ascribe that growth to technical progress; if output is kept constant while the
quantity of some factor inputs are reduced keeping others constant, we ascribe the
126
achievement to technical progress, that is, we are able to cut resource inputs without any
reduction in output or production.
The concept of technical progress can occur in various ways and by various processes.
It can occur through technological advance or though improvements in technology, such as
the designing of fuel systems of a vehicle to make it consume less fuel for the same amount
of kilometer covered. In other words, the amount of kilometer covered per liter of fuel
increases with technological progress. Technical progress can occur through improvement of
skills of workers or through accumulation of experience on the job or continual practice of
the same activity such as repetitive construction of the same model or version of a product.
Technical progress can also occur through re-organisation of a firm, through a more efficient
accounting system, through a more efficient supervision, through improvements in workers
incentives. Any method or action that leads to increase in output with fixed amount of inputs,
or an increase in output in a greater proportion than the increase in the amount of inputs, or
an increase in profit rate, brings about technical progress.
In a nutshell, technical progress occurs through economisation of factor and non-
factor inputs for a given level of output or customer satisfaction, and through research and
discoveries of new resources and new uses for existing resources.The factor inputs often
economised are labour and land. Technology can be labour saving through increasing
automation or land saving through the building of storey buildings or skyscrapers. Non-factor
inputs that are economised include energy and materials. Vehicles and apparatuses have been
designed to use less energy and cost less to operate, while many products have been designed
with much less materials to achieve the same or better function, such as the enormous brands
of laptops, handsets, palmtops and iPods that are capable of much greater communicational,
computational, photographic, navigational, and data storage functions than the much bigger
and huge hardware predecessors.
Moreover, technical progress can occur through external factors such as improvement
of the transport and communication infrastructure and management by reducing the time
spent in commuting and in cargo haulage as well as the safety in transportation. Similarly
improvements in energy infrastructure and security to life and property also lead to
substantial technical progress. Thus technical progress can be due to many factors internal or
external to the firm.
128
expansion path for production uses constant proportion of capital and labour, or assumes
constant output elasticities of capital and labour, where the total elasticities equal 1.
Another angle to view the methodology of measurement of technical progress
advanced by Solow is to define technical prog
progress
ress as the rate at which output grows when
capital and labour inputs are held constant. If capital and labour are not constant, the amount
by which growth in output differs from the weighted average growth of the factor inputs
(capital and labour) is technical
nical progress. If growth in output exceeds the weighted average
growth of capital and labour,, the residual is technical progress. The weights used in
elasticities α and β
computing the mean growth in capital and labour are the output elasticities,
respectively, of capital Kand labourL. Thus technical progress λcan be measured as follows:
and labour
gY = αgK + βgL + λ; α+β = 1 (13.1)
where gK = ∆K/K and gL = ∆L/L are growth rates of capital and labour.
For illustration, suppose output grows at the rate of 6.5%, capital stock grows at the rate of
5.0%
% while labour input grows at the rate of 2.5%;
2 suppose further that α equals 0.4 and β
equals 0.6;then
hen from equation 13.1, technical progress is given by the residual:
λ = gY – αgK – βgL
That is:
λ = 6.5% – (0.4)(5.0%)
%) – (0.6)(2.5%) = 6.5% – 2.0% – 1.5% = 3.0%
If there was no technical progress (i.e. λ=0) and under the assumption of constant returns to
scale, the growth in output would be given by:
gY = αgK + βgL
If capital stock grows at the rate 5% and labour 2.5%, output growth will be given by:
gY = αgK + βgL = (0.4)(5.0%) + (0.6)(2.5%) = 3.5%
Equation 13.1 has been used a lot in econometric investigation of technical progress, which is
also referred to as total factor productivity or the residual.
Suppose
pose growth rate of GDP is 5.6%, while the weighted average growth rate of
capital stock and growth of labour force 2.0%,
Summary
ummary of Study Session 13
1. Technical progress is the occurrence of a faster growth of output than the
129
average growth of factor inputs, in terms of physical output or market values. This implies
that technical progress shifts the productivity curves over time leading to continually rising
productivity of factor inputs.
2. Prices of factor and non-factor inputs play a great role in the nature of technological
change, whether it is going to be labour-saving, materials saving or land saving. If
wage rate, the price of labour, rises rapidly relative to prices of other factors of
production, labour saving or capital intensive technology will be stimulated leading to
declining demand for labour employment.
3. The role of technical progress in economic development is that it offsets the short run
impact of diminishing returns to productivity and allows the economy to grow
continually.
4. Technical progress can be measured empirically through equation 13.1 given as:
gY = αgK + βgL + λ; α+β = 1
where gY is the growth in output or national income, gK is the growth in capital stock,
and gL is the growth in labour input. It is to be noted α+β=1, where α is the output
elasticity of capital input and β is the output elasticity of labour input.
130
Self Assessment Questions
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 13.1
Technical progress may be defined as:
A. The growth of national income relative to population
B. Capital formation for rapid economic development
C. Occurrence of faster growth of output than the relative increase in factor and non-
factor inputs
D. Occurrence of faster growth in factor and non-factor inputs relative to the growth
of output
SAQ 13.2
Technical progress can occur through:
A. Research and development that reduces cost of production
B. Improvement in energy and transport infrastructure
C. Discoveries of cheaper alternative resources
D. Functional education and manpower development
E. All the above
F. Options A, B and C only
G. Options A, C and D only
H. Options B, C and D only
SAQ 13.3
The role of technical progress in economic development is due to:
A. Its ability to offset short run diminishing returns to productivity
B. The promotion of capital formation
C. The promotion of population growth
D. Its promotion of competition in production
SAQ 13.4
Technical progress can be promoted by government through
A. Effective tax system and prevention of tax evasion or avoidance
B. Railway transportation development across the country
C. Airports development in all states of the federation
D. Commercialisation of electricity supply
SAQ 13.5
Technical progress may lead to
131
A. Capital intensive technology if average wage rises faster than average price of
plant and machinery
B. Labour intensive technology if average wage rises faster than average price of
plant and machinery
C. Growing unemployment if average wage rises faster than average price of plant
and machinery
D. Options A and B
E. Options B and C
F. Options A and C
SAQ 13.6
We may promote employment and labour intensive technology by:
A. Ensuring that wage rate does not rise faster than labour productivity
B. Increasing the minimum wage of workers
C. Allowing wage rate to rise faster than labour productivity
D. Ensuring that profits do not rise faster than labour productivity
SAQ 13.7
Calculate the technical progress if national income grows at 6%, capital stock grows at 5%
and labour input grows at 2.5% and output elasticities of capital and labour are respectively
0.3 and 0.7.
A. 3.5% B. 3.0% C. 2.75% D. 2.25%
SAQ 13.8
If the nation is able through research and development and through efficient development of
energy and transport and communication infrastructure, technical progress can reach 5% rate,
how rapid the economy can grow assuming capital stock grows at 5% and labour input grows
at 3% with output elasticities given as 0.3 and 0.7 respectively.
A. 13.0% B. 8.6% C. 5.35% D. 3.25%
132
REFERENCES
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
UNDP (1992, 2002, 2012): Human Development Report; New York, Oxford University
Press.
Well, David M. (2008): Economic Growth 2nd ed. New York, London, Addison Wesley.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Developmen
133
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
134
Study Session 14: Endogenous Growth Theories
Introduction
Endogenous growth theories seek to explain economic growth and development
through factors that can be controlled internally or domestically in the country. It also
neo
attempts to put forward an endogenous theory of technical progress as opposed to the neo-
classical theory of exogenous technical progress. There is no doubt that many factors both
internal and external determine
ermine a nation’s economic growth and development. But
endogenous growth theories attempt to explore those factors that can be controlled internally
towards achieving economic growth and development and check any adverse external factor
or promote favourable
le external factors. There is no doubt also that technical progress is
determined by several variables both internal and external, both economic and non
non-economic.
Endogenous growth theories also seek to put forward factors that can be manipulated towards
promoting
romoting technical progress and through it the economic development.
137
and transparency as critical for sustainable economic development and
productivity growth.
Many of the factors identified in the endogenous growth theory are such that they are
beyond quantitative control and involve reformative and fundamental policies. Even when
such factors have been identified, the policy implication is very difficult to implement. For
example, many nations desire to put in place adequate security to life and property but they
have been unsuccessful. Similarly, many nations desire price stability in terms of controlling
inflation and avoiding rapid inflation.
138
Summary
ummary of Study Session 14
1. Endogenous growth theories seek to explain economic growth and
development through factors that can be controlled internally in the country. In
particular it puts forward an endogenous theory of technical progress as opposed to
the neo-classical
classical exogenous technical progress.
2. The significance of endogenous growth theory is that it may be able to guide
development policies.
3. The major factors often identified as influencing economic develop
development in
endogenous growth theory include appropriate and adequate rate of capital formation,
appropriate education and manpower development, energy and transport and
communication infrastructure, agricultural foundation of the economy, the structure of
the economic system, security to life and property, political stability, economic
stability, and social order in terms of governance, accountability and transparency.
139
Self Assessment Questions
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 14.1
Provide a brief definition of endogenous growth theories.
A. Models that seek to explain the nature of technical progress.
B. Models that seek to explain factors that perpetuate under-development.
C. Models that explore internal factors that determine the prospects of growth and
development.
D. Models that explore ways and means of promoting technological self
determination.
SAQ 14.2
What is the major objective of endogenous growth theories?
A. To explore the major domestic factors that determine economic growth and
development.
B. To explore ways of reducing external economic, financial, and technological
dependence of less developed countries.
C. To determine factors that determine environmental sustainability of patterns of
economic growth.
D. To explore ways of promoting economic growth with social justice and equity.
SAQ 14.3
What is the significance of endogenous growth theories?
A. A growth theory that can inform and guide practical development policies
B. To provide alternative model for conventional growth theories
C. To complement neo-classical growth theories
D. As an extension of neo-Keynesian growth theories in respect of the integration of
market imperfection into growth models
SAQ 14.4
Which of the following set of variables you consider best among the factors that explain
growth in endogenous growth theories?
A. Foreign capital inflow, exchange rate, inflation rate, interest rate, investment ratio
of GDP, kilometers of road per thousand citizens
B. Inflation rate, investment ratio of GDP, literacy rate, energy consumption per
capita, number of police men per thousand citizens
C. Inflation rate, investment ratio of GDP, interest rate, female labour participation
rate, number of teachers per thousand citizens
140
D. Foreign capital inflow, exchange rate, interest rate, investment ratio of GDP,
kilometers of road per thousand citizens
SAQ 14.5
Which of the following factors do not belong to the explanatory variables in endogenous
growth theories?
A. Stock market development
B. Inflation rate
C. Foreign capital inflow ratio of GDP
D. Investment ratio of GDP
E. Subsidies to agricultural sector
F. None of the above
SAQ 14.6
Which of the following policies most qualify as development policy implications of
endogenous growth theories
A. Accumulating foreign reserves
B. Floating exchange rate policy
C. Laying sound agricultural foundation
D. Providing excellent security to life and property and political stability
E. Laying sound energy infrastructure
F. Laying sound transport and communication foundation
141
REFERENCES
Aghion, Philippe & Peter Howitt (1998): Endogenous Growth Theory; The MIT Press,
London, Cambridge Massachusetts.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure; Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
Todaro, Michael P. and Stephen C. Smith (2008): Economic Development; 10th edition;
Addison-Wesley, New York; Pearson Education, Delhi.
World Bank (2009): Development Economics through the Decades: A critical look at 30
years of the World Developmen
142
Should you require more explanation on this study session, please do not hesitate to contact
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
143
Study Session 15:: Synthesis of Theories of Development
Introduction
From the survey of the selected growth and development theories that are relevant to the
structure and environment of less
less-developed countries generally, it will be desirable to
explorethe factors that feature prominently in most of the theories or are complementary or
o
similar, in an attempt to provide a synthesis of growth and development theories.
theor Such a
synthesis is intended to summarise
summar the major factors in the growth theories that determine
economic growth and development.
Thee student is expected to be able to link each explanatory factor with a particular
growth theory or some growth theories.
144
perpetuate their dependence. Some endogenous growth theories emphasise technological self-
reliance or sustainable technology in the process of capital formation or investment
expenditure and utilisation of foreign capital inflow. Secondly, many theories stress the
importance of capital formation while others consider that the ratio of investment in national
income has to reach a remarkable level for economic development to be significant. There is
no doubt that the rate of investment or its adequacy must be adequate to take advantage of
economy of scale of production. Among the theories that refer to investment rate or ratio of
national income as a major factor in economic development are Rostow’s stages theory of
development, neo-classical growth theory, neo-Keynesian growth theories, and endogenous
growth theories. Some other theories emphasise technical progress while discounting capital
formation. However, technical progress has to be embodied in human and physical capital
formation in accordance with several growth theories including that of Adam Smith. So,
appropriate capital formation is essential for sustainable technological progress, while the
adequacy of capital formation as measured by investment ratio of GDP is not contestable on
account of the existence of enormous economy of scale in modern industrial development.
145
For example, incentives should be created to stimulate the universities and research
institutions towards converting their theoretical research findings to practical applications
required by the business sector, such that the private sector, with marginal investment in
sponsoring collaborative research and development, benefits from knowledge spillovers from
the nation-wide research institutes. This factor is derivable from the concept, definition and
processes of technical progress and from endogenous growth theories.
15.7Economic stability:
Development cannot be sustainable unless price stability is ensured and the foreign
exchange market is not chaotic. Rapid inflation will ever prevent the economy from being
competitive in the world market and will promote capital flight and discourage domestic
investment through its influence on interest rates, the promotion of unproductive speculation
and weakening of the banking system and capital markets. It is only the endogenous growth
theories that address this factor.
15.8Political stability, security, law and order, and favourable social order:
All these factors are interrelated and may be taken together. Several endogenous
growth theories have put forward these factors in one form or the other and empirical studies,
including those sponsored by the World Bank and United Nations have demonstrated the
importance of these factors. It is obvious that investors both local and foreign can never be
attracted to a politically unstable nation, and cannot also thrive where there is severe
insecurity to life and property. Development is also not sustainable in an environment that
lacks accountability and transparency as the government will mismanage such an economy
and will not put in place law and order that will regulate healthy business practices. Crooks
will thrive in such an economy, corruption will be unbridled and the economy will be ruined.
Democratisation process or the promotion of functional democratic institutions will promote
146
accountability, transparency, law aand
nd order, social justice and equity, and political instability.
The government will thus be compelled to manage the economy in an efficient manner.
Summary
ummary of Study Session 15
The major factors in economic growth and development in accordance with vario
various
growth theories and empirical development studies by various multi
multi-lateral
lateral
institutions include the following:
1.1 Appropriate and adequate capital formation
formation;
1.2 Appropriate and adequate pace of education and manpower development
development;
1.3 Sound and adequate infrastructure
infrastruc foundation for energy, transport, and
communication;
1.4 Sound and adequate agricultural foundation for the economy;
1.5 Favourable environment for research and development;
1.6 Economic stability in terms domestic price and exchange rate stability;
stability and
1.7 Political stability, security, law and order, and favourable social order.
order
147
Self Assessment Question of Study Session 15
Now that you have completed this study session, you can assess how well you have
achieved its learning outcomes by answering the following questions. Write your answers in
your Study Diary and discuss them with your Tutor at the next Study Support Meeting. You
can check your answers with the Notes on the Self Assessment Questions at the end of this
module.
SAQ 15.1
Which of the theories below does not back capital formation as a major factor in long-term
development?
A. Solow neo-classical growth model
B. Rostow’s stages theory of development
C. Kaldor and Mirrless’ model of growth
D. Harrod-Domar Growth model
SAQ 15.2
Which of the theories below address the problem of technological dependence?
A. Harrod-Domar growth model
B. Kaldor and Mirrlees’ mode of growth
C. Neo-classical international dependence model
D. Solow neo-classical model of growth and exogenous technical progress
SAQ 15.3
Which of the theories below incorporate endogenous technical progress?
A. Kaldor and Mirrlees’ model of growth
B. Neo-classical growth model
C. Endogenous growth theories
D. None of the above
E. Options A and B
F. Options A and C
G. Options B and C
SAQ 15.4
Which of the growth theories below address the factor of sound infrastructure for energy,
transport and communication?
A. Kaldor and Mirrlees’ model of growth
B. Rostow’s stages theory of development
C. Endogenous growth theories
D. None of the above
E. Options A and B
F. Options A and C
G. Options B and C
148
SAQ 15.5
Which of the growth theories below address the factor of sound agricultural foundation for
the economy directly or indirectly?
A. Kaldor and Mirrlees’ model of growth
B. Dualistic Development model
C. Endogenous growth theories
D. None of the above
E. Options A and B
F. Options B and C
G. Options A and C
SAQ 15.6
Which of the growth theories below address the factor of social order and economic structure
in economic development, directly or indirectly?
A. Kaldor and Mirrlees’ model of growth
B. International dependence models
C. Neo-classical growth models
D. None of the above
E. Options A and B
F. Options B and C
G. Options A and C
149
REFERENCES
Aghion, Phillipe and Peter Howitt (1998): Endogenous Growth Theory; Cambridge, Mass.
M.I.T,
Branson, William H., Isabel Guerrero, and Bernhard G. Gunter (1998): Patterns of
Development 1970-1994; World Bank Institute Working Papers
Chenery, H. B. and L. Taylor (1968) “Development Patterns Among Countries And Over
Time” , The Review of Economics and Statistics 50(4) pp. 391-416
Goulet, Denis (1971): The Cruel Choice: A New Concept in the Theory of Development;
New York, Atheneum.
George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.
Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread;
New Haven, Yale University Press.
Kuznets, Simon (1971): Economic Growth of Nations: Total Output and Production
Structure;Cambridge MA, Belknap Press of Harvard University Press.
Meier, Gerald M., and James E. Rauch (2005): Leading Issues in Economic Development
8thed., Oxford, Oxford University Press.
Seers, Dudley (1969): “The Meaning of Development” Paper presented at the Eleventh
World Conference of the Society for International Development, New Delhi.
Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.
150
Tinbergen, Jan (1958): The Design of Development; Baltimore, Johns Hopkins.
your e-tutor
tutor via the LMS.
Are you in need of General Help as regards your studies? Do not hesitate to
contact the DLI IAG Center by ee-mail or phone on:
iag@dli.unilag.edu.ng
08033366677
151
ANSWERS TO SELF ASSESSMENT QUESTIONS
Answers to Self Assessment Questions for Study Session 1
Question No. 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9
Answer D A C D D A A C C
Question 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12
Answer C A A D D D B C A D A E
Question No. 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10
Answer A C D A D E A A E F
Question No. 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8
Answer B B A A B D D C
Question No. 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8
Answer D E E C B A B D
152
Answers to Self Assessment Questions for study session 10
Question No. 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8
Answer C E A D B C D E
Question No. 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8
Answer C E A B C A C B
153