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International Political Economy #20
Is Under-development a Problem of Economics or
Politics?
William Kindred Wineco
Indiana University Bloomington
November 12, 2013
W. K. Wineco | IPE #20: Economics or Politics? 1/9
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The Question
How do we generate sustained economic growth?
This is important because all of the other things we want
long and healthy lives, education, a variety of life experience
require high incomes.
Related: why do some countries grow while others do not?
Ultimately this remains a mystery, but economists have spent a lot of
time thinking about it.
W. K. Wineco | IPE #20: Economics or Politics? 2/9
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The c. 1940s Harrod-Domar Growth Model
Countries grow by increasing savings and boosting the capital stock.
Increase S, increase I.
In particular, we want to add more technology.
Technological development boosts productivity.
Productivity boosts growth.
Growth is determined exogenously via the savings rate.
W. K. Wineco | IPE #20: Economics or Politics? 3/9
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The Politics of Harrod-Domar
The basic logic appealed to leaders in many developing countries.
It allowed for planning: the government could force increased savings
and capital investments, especially where production is collectivized.
Many Five-Year Plans employed a Harrod-Domar logic.
The import substitution industrialization development model, about
which we will learn more later, was consistent with this logic because
H-D was developed for a closed economy.
Economic planning becomes a part of nation-building in the rst
post-WWII generations.
W. K. Wineco | IPE #20: Economics or Politics? 4/9
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Problems with Harrod-Domar
It has a knife-edge equilibrium:
Under reasonable conditions, growth would often generate
unemployment and/or lower real incomes.
There is no ability to substitute labor for capital or vice versa.
It is rigid: the only long-run way to increase growth is through
improving technology.
It was developed for a closed economy.
There are no politics in it. No corruption, no rent-seeking, no taxes, no
transfers, no constitutions, no legislatures, etc.
How do we know that the Benevolent Social Planner is the one who
wins the election?
W. K. Wineco | IPE #20: Economics or Politics? 5/9
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The c. 1950s Solow Growth Model
Same as the Harrod-Domar model, except the knife-edge condition
goes away by allowing factors of production to be substitutable.
Key result: a wide mix of policies could, in theory, facilitate growth in
ways that do not generate unemployment by improving the kind of
technology (not just the amount).
ISI is not necessarily the only development strategy that
makes sense.
Growth is determined exogenously via technological progress.
Limitations remain: closed economy, no politics, etc. But the more
exible model is extendable in many ways.
W. K. Wineco | IPE #20: Economics or Politics? 6/9
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The c. 1980s Romer Growth Model
Technology does not have to change. The savings rate does not have to
change. Instead, changes in human capital drives growth.
Focuses on endogenous growth, rather than simply boosting savings
and/or technology.
Constant returns to scale.
Positive spillovers.
Implications: better to be open, competitive, and innovative. Limit
regulation. Let markets work.
Krugman: too much of it involved making assumptions about how
unmeasurable things aected other unmeasurable things.
Politics: none.
W. K. Wineco | IPE #20: Economics or Politics? 7/9
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Economic Concepts
Resource Curse.
Dutch Disease.
Interdependence.
Dependency theories.
W. K. Wineco | IPE #20: Economics or Politics? 8/9
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Politicizing Growth
Are all politicians Benevolent Social Planners?
Of course not. Growth and growth strategies are contested.
Of course not. Growth strategies benet some and not others.
Of course not. Stance towards openness via closedness has
distributional implications.
W. K. Wineco | IPE #20: Economics or Politics? 9/9