Let’s travel together.
CFDs are complex financial products and are not suitable for all investors. CFDs are leveraged products that expire when an existing open position is closed. By investing in CFDs, a person assumes a high level of risk and may result in the loss of all invested capital.

Keynesian models of economic growth

0 440

According to the Keynesian tradition, the vicious circle of economic underdevelopment of countries is associated with low income, which is explained by low consumption and low savings. Low consumption translates into inefficient demand, contributing to a narrow domestic market and slow investment growth. The theory of the transition to “self-sustaining growth” had a great influence on the formation of modern concepts of modernization in developing countries.

According to the Keynesian tradition, the vicious circle of economic underdevelopment of countries is associated with low income, which is explained by low consumption and low savings. Low consumption translates into inefficient demand, contributing to a narrow domestic market and slow investment growth. These, in turn, lead to low production efficiency, low profitability, and low incentives to increase production, ultimately explaining low revenues.

1. Rostow Model

Содержание статьи:

The theory of the transition to “self-sustaining growth”, proposed by the scientist Walt Whitman Rostow, had a great influence on the formation of modern concepts of modernization in developing countries.

Rostow proposed five stages of growth:

  1. traditional society (the traditional society);
  2. the period of creation of the preconditions for takeoff (the preconditions for takeoff);
  3. takeoff (the takeoff);
  4. movement toward maturity (the drive toward maturity);
  5. the era of high mass consumption.

The criteria for distinguishing the stages were mainly technical and economic characteristics: the level of technology development, the sectoral structure of the economy, the share of production accumulation in national income, the structure of consumption, etc.

It is typical for the first stage of a traditional society that more than 75% of the population without disabilities is engaged in food production. The national income is mainly used unproductively. This society is hierarchically structured, with political power in the hands of landowners or the central government.

The second stage is transition to takeoff. During this period, important changes are taking place in three non-industrial sectors of the economy: agriculture, transport and foreign trade.

The third stage – “take-off” – covers a relatively short period of time: 20-30 years. At this time, the rate of investment is growing, production per capita is increasing remarkably, and the rapid introduction of new technologies in industry and agriculture begins. The development initially covers a small group of industries (“leading link”) and only later spreads to the entire economy as a whole. For growth to become automatic, self-sustaining, several conditions must be met:

  • a sharp increase in the share of productive investment in national income (from 5% to at least 10%);
  • rapid development of one or more industry sectors;
  • a political victory of the supporters of economic modernization over the defenders of traditional society.

The emergence of exchanges of a new institutional structure should ensure, according to Rostow, the distribution of the initial impulse of growth throughout the entire economic system (mobilizing capital from internal sources, reinvesting profits, etc.).

The fourth stage, the period of “movement to maturity”, is characterized by W. Rostow as a long stage of technical progress. During this period, the urbanization process develops, the share of skilled labor increases, and the leadership of the industry is concentrated in the hands of skilled managers – managers.

During the fifth stage, the “time of high mass consumption”, there is a change from supply to demand, from production to consumption. This period, for example, corresponded to the state of American society in the 1960s.

In his later work, Politics and the Stages of Growth (1971), Rostow adds a sixth stage, the “quality-seeking stage” of life, in which man’s spiritual development comes to the fore. Thus, he tried to outline the perspective of the development of modern societies.

Development in this approach is understood, first of all, as synonymous with high growth rates. Deep social and institutional changes seem to be in the shadows, and the proportion of investments and growth rates of the gross national product come to the fore.

The growth stages theory represents a significant advance over the theories of the first half of the 20th century. At the same time, this concept, which claims to explain the historical process of human development, is not exempt from important deficiencies.

  • It characterizes economic relations in a non-systemic way, analyzing only their individual elements. The social and legal aspects are clearly underestimated.
  • Only one period of development is absolutized: the period of modernization, the stage of preparation and deployment of the industrial revolution. Other qualitative stages in the development of society are not reflected, in particular the replacement of an industrial society by a post-industrial one (scientific and technological revolution).
  • The industrial revolution itself is interpreted somewhat one-sidedly. It is mainly the socio-psychological characteristics that come to the fore, leaving in the shadows the whole range of socio-economic consequences associated with the transition from an agrarian to an industrial society.
  • The rather abstract nature of the proposed quantitative criteria for stage assignment. In the “self-sustained growth” theory, the thesis of doubling the share of productive investment in national income has a great deal of logic. Meanwhile, it clearly contradicts the historical experience of the developed capitalist countries.

As S. Kuznets correctly pointed out, the share of domestic accumulation in national income before the take-off stage in many countries was noticeably higher than 5% (in the US in the 40-50s of the XIX century it was 15 -20%, in Canada at .- 15, in 1890 – 15.5 and in 1900 – 13.5%) and their doubling during takeoff never happened. W. Rostow’s scheme rather “could correspond to the “communist ups””, since in the process of “socialist industrialization” a doubling of the rate of accumulation of production occurred (albeit at a higher level).

2. The big push theory

Despite the obvious shortcomings for many economists, the concept of transition to “self-sustaining growth” had a great influence on the leaders of developing countries and was used in the process of creating new theories of modernization – the concepts of ” big boost.” .

The concept of “big push” became a kind of synthesis of two theoretical concepts of postwar literature: “vicious cycle of poverty” and “self-sustaining growth.”

The ancestor of this theory is P. Rosenstein-Rodan, who formulated it back in 1943 for the underdeveloped countries of the European periphery. Subsequently, Western scientists (R. Nurkse, X. Leibenstein, A. Hirschman, G. Singer, and others) used the “big push” concept to substantiate the conditions for the modernization of newly liberated countries. At the center of his research were the problems of primary industrialization, which were interpreted in the spirit of neo-Keynesianism. Therefore, the main attention was paid to the role of autonomous investments due to the economic policy of the state aimed at increasing national income.

Keynesianism was not prepared to deal with these problems. Keynes’s model considered only a depressed economy in the short run. It was necessary to complement it and extend it to a long-term period. R. Harrod made an attempt to solve this problem in 1939 and E. Domar in the late 1940s. The strategic variable that sought to promote economic growth was investment.

According to E. Domar’s model, to maintain equilibrium, investments and national income must grow at the same rate and constant over time. It is obvious that such a dynamic equilibrium is rarely stable, since the growth rate of planned private sector investments can deviate from the level given by the model, both in one direction and in the other, that is, it can be above or below the calculated level. In fairness, it should be noted that E. Domar’s model did not initially claim to be the growth theory. It was a bold attempt to extend the short-run Keynesian equilibrium conditions to a longer period.

Entrepreneurs, as a rule, plan the volume of their own production based on the situation that has developed in the previous period, ie. mainly in the balance of supply and demand. The Harrod and Domar models complemented each other, combined into a single model, which became the “theoretical weapon” of Keynesianism in development economics. It was this model that formed the basis of the “big push” theory.

Although the model was quite imperfect, it showed an undoubted relationship between investment growth rates and GNP growth rates, which was repeatedly confirmed by numerous econometric tests.

Scientists proceeded from the fact that the modernization of countries requires a large injection of capital, as a result of which self-sustaining growth begins. It seemed unrealistic to mobilize these resources on a voluntary basis, so the emphasis was placed on forced savings resulting from the State’s monetary and fiscal policies. The inefficiency of the fiscal system could be compensated with capital imports. The injection quantity must be sufficient to initiate an irreversible movement; otherwise, there is a danger that it will be used entirely to meet current needs, which have greatly increased due to population growth and/or the demonstration effect.

Big push theorists, like neo-Keynesianism in general, are highly critical of the regulatory power of the market. Therefore, these theories were mainly characterized by the macro approach. It comes from an analysis of the economy as a whole; the main thing is to determine the optimal growth rates of the national economy. To this end, investments are distributed by industry to achieve the main result: to accelerate the growth rate of the national economy.

Most proponents of the “big push” theory see the market as a static rather than a dynamic system, which on its own is unable to modernize itself and lift the economies of developing countries out of the “vicious cycle of poverty”. . The idea of ​​a “big push” arose under the influence of the “Marshall Plan”, which played a huge role in the revival of post-war Europe.

The “big push” theory appealed both to the leaders of developing countries (as it identified lack of capital as the main reason for their economic and social backwardness) and to the broader population of these regions (creating the illusion of the possibility of a decisive change). modernization and rapid achievement of the heights of the “welfare society”). Since the implementation of the modernization program was entrusted to state officials, over time a social stratum interested in its implementation developed in these countries, the state-bureaucratic bourgeoisie. Finally, the goals of large corporations in developed countries, seeking the most profitable areas for capital investment, should not be ignored.All this predetermined not only a high theoretical interest in the new concept, but also attempts to implement it in practice in Asia,

The concepts of modernization considered focused on the use of such a limited factor in developing countries as capital, and clearly did not take into account the possibility of using such a relatively abundant factor as labor. This determined the just criticism of the neo-Keynesian leadership by the neoclassicists.

Development is understood in this approach, first of all, as profound structural changes that encompass the main branches of the national economy. As before, as in self-sustaining growth theories, technical and economic problems are at the forefront. The absence of modern sectors of the national economy is perceived as the main obstacle to development, so primary attention is paid to the creation of a set of modern industries.

Leave A Reply

Your email address will not be published.