Question

how does neoclassical theory describe development in Pakistan and Bangladesh?

Answer 1

Development in Pakistan and Bangladesh - An outline of the problem :-

Let us first take the Example of Bangladesh .The First Five Year Plan in Bangladesh was launched in 1973 .

However within one year of launching the plan , there were successive droughts , followed by floods .These drastically impacted the smooth working of the five year plan.

In addition to that following economic factors lead to major economic mismanagement in the country :-

1) Internal official corruption

2) World Commodity boom

3) International Monetary Disorder

4) World recession.

Impact of economic disorders on economic development of the countries using Neoclassical theory of Sollow's model :-

This theory uses the extended form of Neoclassical theory of Sollow which includes human capital and public sector . The following function includes output, capital,labour and technological development as variables.

Y(t)= F [(K(t) , H(t), G(t) , A(t), L(t)]=K(t)H(t)G(t)(A(t)L(t))^1---

^{Where ,}

^{Y is the aggregate level of income}

^{K is the level of physical capital}

^{L denotes the Labour employed}

^{A represents multi factor productivity}

^{G represents public sector}

^{H denotes human capital}

^{() <1 implies that production functions shows decreasing returns to each input .}

^{Now the economic disorder is incorporated into the above function to show its impact on real GDP per capita .}

^{Here y(t) = Y(t) / A(t) L(t)}

While the per capita GDP is represented by :-

Y(t) / L(t)

Total factor productivity here directly shows that economic disorders reduces the efficiency of technological development by imposing negative externality on it which means higher economic disorders lower technological development that is represented as :-

A(t) ⁽⁾ =A(t)^e-

Change in the above variable will change its impact on the growth by changing overall productivity of the economy.

A positive value of represents economic disorder is diminishing and negative value represents that disorder is increasing .

When this is put into the per capita GDP formula , higher level of economic disorder will reduce per capita GDP and vice versa .

Thus we conclude that the above economic disorder created a negative externality on per capita GDP of Pakistan and Bangladesh according to the derivations of Neo Classical Sollow's Growth model.