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ECN 412: DEVELOPMENT ECONOMICS

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.

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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

Learning Outcomes for Study Session 1


When you have studied this session, you should be able to:
1.1 Define and use correctly all the key words printed in bold (SAQ 1.1 to 1.4)
1.2 Understand the difference between GDP at current prices and GDP at constant
prices and its importance (SAQ 1.5 & 1.7).
1.3 Know how the growth rate of GDP is calculated for a given year and period (SAQ
1.8 & 1.9).
1.4 Appreciate
ppreciate the reasons for having alternative measures of economic growth in
i a less-
developed country (SAQ 1.5 & 1.6)
1.6).

1.1 Definition of Economic Growth


The generally accepted definition of economic growth is the sustained increase in the
total or average outputs of all goods and services produced in a country. The increase in the
output or general production of goods and services
services in a country should be sustained for
several years before we can conclude that growth has taken place. This is because transient
increase in the production of goods and services may be due to seasonal patternsas a result of
seasons of weather or festivals
tivals and may not be sustained; similarly, a decrease in the
production of goods and services may also be due to seasonal patterns and may not be
persistent so that it does not constitute a sustained decline in the output of goods and services.
These factors cause quarterly or seasonal fluctuations within a year,, as depicted in Fig.1.1.It
Fig.
may also cause annual fluctuations
fluctuations, referred to as business cycles. Thus economic growth
considers the trend as shownby the linear graph in Fig.1.1 or the annual series of
o
Fig.1.2,rather than the seasonal fluctuations. Since we cannot add all goods and services
together because of their different dimensions, the summation of all goods and services
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produced in a country has to be based either on market prices in the same currency
currency dimension
or on indexing system that utilis
ises
es percentage changes in the physical output of all products
relativee to a given base year. In the first case, the total output of all goods and services in a
country can be expressed
essed in terms of gross domestic product (GDP)) or its various versions
(like gross national product, GN
NP, or gross national income, GNI).orcan
can be expressed in
terms of index of output such as the index of industrial output, the index of agricultu
agricultural
output, or a combination of both.

1.2 Calculating Economic Growth


In order to find out whether economic growth has taken place, we calculate the
growth rate of GDP, which is the percentage of GDP over the previous year. That is, if we
wish to calculate the growth rate in year 2012, for instance,
instance, we take the difference between
GDP 2012 and GDP 2011 and divide by the GDP 2011, multiplying the answer by 100, to
obtain the percentage change.

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.

The growth rate of GDP for 2012 is given by:


G(Y2012) = (888.9 – 834.0)/834 = 0.066 (to three decimal places)
= 6.6% (multiplying by 100).

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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

Linear (Quarterly GDP at


140,000.00
Constant 1990 Prices (Nmillion))

120,000.00

100,000.00
2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013

1.1: Quarterly GDP at Constant 1990 Prices (Nmillion)

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

1.2:Annual Series off GDP at Constant 1990 Prices (M


(Million Naira)

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
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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.

1.3 Alternative Measures of Economic Growth


Since the GDP deflator is based on estimates of inflation rates, it will be subject to
wide margins of statistical estimation errorsand so render the real GDP unreliable as
estimates of the trend of total outputs of all goods and services in the country, apart from the
Herculean task of covering or enumerating the economic activities of the whole population.
Thus the index of industrial output complemented by the index of agricultural output that
selects the major industries and agricultural produce for growth analysis may be more reliable
in assessing economic growth especially in less-developed countries where prices are
changing rapidly yearly. This is because the index of industrial or agricultural output is based
on physical output or physical measure of goods and services (such as tons of cement, liters
of soft drinks, and barrels of crude oil), the index is not subject to price fluctuations. It has its
own disadvantages such as changes in quality. There are other more reliable measures of
economic growth that you will encounter later.

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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.

3. The use of GDP time series introduces


introduce the problemof
of changes in prices, making the
current market values over the years incomparable. By calculating the rate of general
price changes from a given base year and using to deflateGDP at current prices, the
GDP at constant prices (referred to as real GDP) are generated.. The growth rate of
the economy is calculated
alculated by taking
taki the percentage change in the realGDP
GDP, GNP or
GNI.
4. The alternative measures of economic growth include index of agricultural output and
index of industrial output, which are not subject to price fluctuations.

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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.

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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%

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REFERENCES

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Goulet, Denis (1971): The Cruel Choice: A New Concept in the Theory of Development;
New York, Atheneum.

Dwight, H. P., S. Randelet, D. K. Sandgrass, M. Gillis, and M. Roema (2003): Economics of


Development 5th ed. New York, N. N. Norton.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

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.

UNDP (1992, 2002, 2012): Human Developme


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 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.

Learning Outcomes for Study Session 2


When you have studied this session, you should be able to:
2.1 Define
efine and use correctly all the key words printed in bold (SAQ 2.1 and 2.2).
2.2
2.2 Explain the
he concept of development
deve as it relates to development economics (SAQ 2.1,
2.4, 2.5 & 2.6).
he relationship between economic growth and development (SAQ 2.3).
2.3 Describe the 2.3)
2.4 State the reasons
easons why economic growth may fail to lead to development (SAQ 2.4).
2.4)
2.5 List the major indicators of development (SAQ 2.7 & 2.8).

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
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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:

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(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.

This last objective of environmental protection is not expressly stated in those


development plans and policies,, but it is part of the recent industrial development policies
inNigeriaand globally.. The seven objectives listed above are clearly more precise and more
development as they
comprehensive than the three development objectives or core values of development,
can more easily be subjected to measurement and evaluation through appropriate
development indicators.
The sixth objective of “balanc
“balanced
ed socioeconomic development” addresses the diverse
economic and social needs in a harmonious way such as taking care of all economic and
social concerns,, including balanced functional education, security of life and property, health
care, water supply, transportation
ansportation and communication system, energy supply,
supply housing,
agriculture and rural development. Talking about balanced development, there is need for
inter-sector as well as intra-sector
sector balance. Thus agricultural sector should not be neglected
while we focus on the oil sector. On the other hand, food subsector of agriculture should not
sub
be neglected while we focus on cash crops, nor should we neglect railway sub-sector of
transportation while we invest heavily on airports and aviation industry. Otherwise,
Otherwise there will
result inconsistent development where, for example, a senior civil servant or business
executive drives his luxurious car for some distance to fetch water from a commercial bore-
bore
hole water operator on account of non-availability
non of public waterr supply, where the water
closet toilets in the offices or at home lack water to flush!
In summary, development is a long
long-term
term process that transforms the entire social
system in such a way as to continually enhance the quality of existence of the people
individually and collectively by improving upon their capabilities to lead the lives they value,
enjoy greater freedom of choice, and fulfill their enlightened aspirations in a socially just and
sustainable manner.

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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?

2.2.1 Economic Growth As a Necessary Condition for Development


The greatest challenge in the development process is to first achieve economic growth
or industrial development.. Thereafter it requires favourable socialand political environment
to translate economic growth to social or human development,, through appropriate policies.
policies
But the task of achieving sustained and appreciable economic growth
th has posed the greatest
challenge to developing countries, especially the Sub
Sub-Saharan
Saharan Africa. However, the inability
of these poor nations to achieve rapid economic growth is also traced to fundamental
problems in their economic, social and political str
structures.
uctures. Once a nation achieves sustained
and rapid economic growth,, it is evidence of the efficiency of the economy as it is not
possible to achieve sustained rapid economic growth unless the country is able to produce
and export some industrial goods at internationally competitive prices and quality. This is
because the world has become a global market where it is near impossible for any country to
insulate herself from goods produced in other countries or from international trade. It is also
not possiblee to achieve the fit of sustained economic growth unless the country has laid sound
infrastructural foundation such as efficient energy sector, transport and communication,

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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.

2.2.2 Why Economic Growth is not a Sufficient Condition for Development


The second question we ask is why economic growth is not a sufficient condition for
development. In other words, what factors can be responsible for the phenomenon of growth
without development? The factors that may be responsible for the phenomenon of growth
without development may be grouped into five as follows:

(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.

2.3Major Indicators of Development


Development indicators are consistent and measurable aspects of sustainable socio-
economic development. The major developmentindicators include measures of average
realincome or purchasing power of income, health conditions, level of education, income
distribution, self-reliance, and security, among others. The UNDP has proposed the human
development index, which is a composite index comprising real per capita income, life
expectancy at birth, adult literacy and mean years of schooling. The index is calibrated from
0 to 1, according to ascending order of development. The index cannot easily reflect short-
term progress in development efforts and does not directly cover the development objectives
of self-reliance, income distribution, and preservation of the physical environment. Of course,
not every development objectives can be satisfactorily measured. However, it is still

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 A Set B Set C


• Growth of per capita • Growth of industrial • Growth of per capita
GNI output per head GNI
• Child mortality rate • Child mortality rate • Growth of industrial
• Life expectancy • Adult literacy rate output per head
• Adult literacy rate • Percentage living below • Life expectancy
• Crime rate poverty line • Adult literacy rate
• Crime rate • Percentage living below
poverty line

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.

Summary of Study Session 2


1. The concept of development goes beyond economic growth.This
This is because
development comprehends not only sustained economic growth but also beneficial
social and institutional changes
hanges that bring about sustained improvements in the quality
of life of every citizen without jeopardising
jeopard ing future development and the prospects of
coming generations.
2. In terms of the relationship between economic growth and development,
development economic
growth is a necessary condition for development since economic growth will bring
about the resources for the pursuit of development objectives and social concerns
continually; however economic growt
growth is not a sufficient condition for development
as it cannot guarantee development.
3. The reasons why economic growthoften
growth fails tolead to development may be to
excessive population growth
owth,, widening income inequality, imbalance in multi-sector
economic development, environmental degradation, and worsening social, moral,
intellectual and conditions of the people.
people
4. The major development indicators can be grouped into basic and composite
indicators. Human Development Index (HDI) is a UNDP
NDP composite indicator that
integrates per capita income, life expectancy, and the level of actual and prospective
education. Basic development indicators include per capita income, life expectancy,
child mortality rate, literacy rate, percentage of household
hold with access to safe water,
crime rate, share of thee poorest 40% in GNP
GNP,, foreign debt ratio of national income,
income
and per capita tons of carbon dioxide emission as a measure of environmental
pollution.

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Dwight, H. P., S. Randelet, D. K. Sandgrass, M. Gillis, and M. Roema (2003): Economics of


Development 5th ed. New York, N. N. Norton.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard


Growth;Harvard University Press.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

Seers, Dudley (1969): “The Meaning of Development” Paper presented at the Eleventh
World Conference of the Society for International Development, New Delhi.

Sen, Amartya (1985): Commodities and Capabilities; Amsterdam, North Holland.

Sen, Amartya (1999): Development as Freedom; New York, Alfred Knopf.

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.

Learning Outcomes for Study Session 3


When you have studied this session,
ession, you should be able to:
3.1 Define
efine and use correctly all the key words printed in bold (SAQ 3.1 and 3.2).
3.2 Calculate the growth rates for national income (which
which may be represented by Gross
Domestic Product, GDP, Gross National Product, GNP, or Gross national
ional Income,
GNI), for population, and other
oth socio-economic
economic variables (SAQ 3.3 & 3.4).
3.3 Derive the per capita national income, industrial output per head, agricultural output,
given the population growth rate,
rate for a given year (SAQ 3.5 & 3.11).
3.4 Calculate the average growth rate for a period of years, given the initial value and
terminal value of the variables (SAQ 3.10).
3.5 Interpret
nterpret the rate of change of socioeconomic variables, where the rate of change can
be a growth rate or a rate of declin
decline,
e, and whether positive or negative rate of change
indicate progress or not (SAQ 3.7 & 3.8).
3.8)
3.6 Project
roject future development in respect of national income and per capita national
income and other socioeconomic varia
variables
bles and development indicators, and hence be
able to predict the prospects of development (SAQ 3.9).
3.7 Derive
erive or calculate key development indicators for the purpose of evaluating the
development progress, if any, of a country (SAQ 3.6).
3.8 Evaluate the
he extent to which Nigeria has developed since independence
independence in 1960,
applying the various growth indices, structural changes, and development indicators
(SAQ 3.10, 3.11 & 3.12)..

3.1 The Arithmetic of Growth


Economic growth is defined in quantitative term
terms as the percentage change in real
national income or industrial production, sustained on the average for several years or
decades. It thus refers to a trend and not a short
short-term affair.. We mentioned real national

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:

g(Y) = (Yt – Yt-1)/Yt-1 = ΔY/Y (3.1)


ΔY denotes the change in the variable Y and ΔY/Y is thus the relative change; Yt refers to the
variable Y in year t or time period t, while Yt-1 refers to the value of the variable in the
previous year or time period. For instance the growth of Y in 2012 is the difference between
Y in 2012 and Y in 2011, divided by Y in 2011. That is:

g(Y2012) = (Y2012 – Y2011)/Y2011

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:

g(Y) = [Y(t)/Y(0)]1/t - 1; (3.2)

g(Y)% = {[Y(t)/Y(0)]1/t - 1}100% (3.2)’

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:

Yt = Yt-k[1 + g(Y)]k (3.3)

If we take the base year as year 0, i.e. t years back, then the formula becomes:

Yt = Y0[1 + g(Y)]t (3.3’)


Where k = t, and t-t = 0.

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:

g(Y) = (Yt – Yt-1)/Yt-1


Yt in the definition can be made the subject of the formula as follows:
Yt – Yt-1 = Yt-1 g(Y) or Yt = Yt-1 + Yt-1 g(Y).
i.e. Yt = Yt-1[1 + g(Y)] (3.4)

Similarly, assuming uniform growth(averaging the growth), in the definition of growth of Y


for the previous year, i.e. t-1, and making Yt-1the subject of the formula we have:
Yt-1 = Yt-2 [1 + g(Y)] (3.5)
By extension, Yt-2 will be given as:
Yt-2 = Yt-3 [1 + g(Y)] (3.6)
If we now substitute equation 3.5 into equation 3.4, we have
Yt = Yt-2 [1 + g(Y)][1 + g(Y)] = Yt-2[1 + g(Y)]2 (3.7)

If we further substitute equation 3.6 into equation 3.7, we have


Yt = Yt-3 [1 + g(Y)][1 + g(Y)]2 = Yt-3[1 + g(Y)]3 (3.8)

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:

(") (") $(")


=
" " "

(")/ " (")/ " $(")/ "


That is:
(")
(")
$(")

(")/ " (")/ " $(")/ "


Since , , '() arerespectively by definition the growth ratesor
(") (") $(")

relative changes of variables y, Y, and N, we have equation 3.9 given as


g(y) = g(Y) – g(N).

Alternatively, the proof can utilise the basic equation 3.4 that defines growth, i.e.
Yt = Yt-1[1 + g(Y)].

With this definition we can write:

yt = yt-1[1 + g(y)], Yt = Yt-1[1 + g(Y)], Nt = Nt-1[1 + g(N)].

But since y = Y/N, we have:

27
"+, -1 + /( )0
*" *"+, -1 + /(*)0 *"+, -1 + /(*)0
1"+, -1 + /(1)0

-,2 ( )0
i.e. -1 + /(*)0 -,2($)0
;

Cross multiplying and simplifying, we have:

/(*) /( ) /(1) /(*)/(1)

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:

Yt = Y0[1 + g(Y)]t or Yt = Yt-k[1 + g(Y)]k


In the equation above, we have four variables or unknowns, namely, Yt, Y0, g(Y), and t (or
k). Given any three of the variables, we can solve the equation for the fourth variable. For
example, we can calculate the average growth rate for a given period of years, if we are given
the value of Yt (current GNP) and Y0 or Yt-k (initial GNP). The third variable is time t (or k),
the time period between current year and initial year. Let us illustrate with some hypothetical
figures: Y2000 = 250, Y1990 = 200, t = 2000-1990 = 10 years. Plug these values into the
formula to have:
250 = 200[(1 + g(Y)]10 .

To solve for g(Y) we manipulate the equation sequentially to isolate g(Y). This gives us:

g(Y) = (250/200)1/10 – 1 = 0.023 = 2.3% (to the nearest 3 decimal places).

Generally, g(Y) is given by:

g(Y) = (Yt/Y0)1/t – 1 or (Yt/Yt-k)1/k – 1 .

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:

g(Y)= [125.35/70.40] 1/20 - 1 = 0.029 = 2.9%.


where Y(t)= 125.35,Y(0) = Y(t-k) = 70.40, and t = k = 20.

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

g(y) = g(Y) – G(N) = 2.9% – 2.5% = 0.4%.

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%

By the result above, what can we con


conclude
clude about the combined school enrolment
rate?
Since the growth rate of enrolment (2.8%) is higher than the growth rate (2.5%)
of population of the school
school-age
age children, we conclude that the combined
enrolment rate is rising,
rising, indicative of progress though not quite significant.
significant
Bythe second method,, the population (Nsc,t)of the school-age children
en in 2012 is
projected as:
Nsc,2012 = Nsc,2000[(1+g(Nsc)]12 = 25(1.025)12 = 32 million (note that 2.5% = 0.025).
0.025
The enrolment ratio in 2000 is equal to 10/25 = 0.4 or 40%; the enrolment rate in 2012 is
14/32 = 0.44 or 44%. Enrolment rate has thus risen from 40% in 2000 to 44% in 2012
2012, which
is indicative of educational progress
progress.
For some variables such as per capita GNP, positive growth rate is indicative of
progress in socio-economic
economic development. For some variables such enrolment rate,
employment rate, positive growth
rowth rate, or rate of increaseis
increase indicative of progress only if it
exceeds population growth rate; and the higher the growth rate the better.
better. But for some
som
variables such as unemployment, child mortality, and disease prevalence, negative growth
rate, or rate of decline, is indicative of progress in socio-economic development The greater
economic development.
the decline in such variables, the better it is for socio-economic
socio development.
elopment. For example,
most developing countries in Sub-Saharan
Sub Africa have child mortality rates that vary from 50
to over 200 per thousand, whereas the developed countries of Europe and America have child
mortality rates that vary from 4 to 8 per thousand. The more rapid such an indicator declines
the better it is for development.

(a) Suppose combined enrolment rate is growing at the rate of 2% while


population is growing at 2.5%, what will happen to adult literacy rate eventually?

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.

Summary of Study Session 3


1. The purpose of the arithmetic of growth is to be able to calculate precisely the rate of
economic growth and development. In any scientific analysis, including the social
sciences, we cannot be objective and draw valid conclusions until we are able to
subject our analysis to precise measurement that iis consistent and demonstrably
objective.
2. The objective measure of progress is through the basic definition of Growth Rate,
defined as the percentage change of a variable. From the basic definition, we have
derived the formula for projecting a variable Yt, for calculating the rate of growthg(Y),
growth
and for determining the time period k or t that it may take a nation to reach a
particular target Yt. The formula is given as:
Yt = Yt-k[1 + g(Y)] k
If we take the base year as year 0, i.e. t years back, then the formula becomes:
Yt = Y0[1 + g(Y)]t

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:

A. g(Y) = [Yt /Y0] 1/t – 1


B. g(Y) = [Yt /Y0 – 1]1/t
C. g(Y) = [(Yt – Y0 )/Y0]1/t
D. g(Y) = [Yt /Y0] 1/t – 1

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.

A. 5.0% B. 0.5% C. 12.0% D. 1.2%

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?

A. 1.5%, 2.9% B. 2.5%, 3.7% C. 2.7%, 3.3% D. 2.5%, 2.7%

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.

A. 0.3% B. 0.6% C. 1.2% D. 2.6%

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.}

A. $2,438 B. $2,124 C. $2,166 D. $1,820

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.

A. 4.8% B. 3.2% C. 2.8% D. 2.0%

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:

A. -2.2% B. -3.4% C. 2.2% D. -2.74%

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

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.

Learning Outcomes for Study Session 4


When you have studied this session, you should be able to:
4.1 Define
efine and use correctly all the key words printed in bold (SAQ 4.1 and 4.2).
4.2 Discuss Kuznets’ pioneering six characteristics of structural changes in economic
development (SAQ 4.3).
4.3 State other major characteristics of structural changes in economic development (SAQ
4.3 & 4.4).
4.4 Analyse the major
ajor groups of characteristics that occur during the transformation and
structural changes of an under-developed
under economy (SAQ 4.4).
4.5 Identify the common charact
haracteristics of under-developed countries as distinct from
characteristics of under-development
development (SAQ 4.5).
4.6 Discuss the structure of Nigerian economy and major characteristics of her under-
development as a case study.

4.1Basic Characteristics of Structural


tructural Changes in Economic Development
The pioneering works of Kuznets (1966, 1971) and Syrquin, Taylor, and Westphal (eds.)
(1984), put forward specific structural changes during the process of economic development.
Kuznets (1971) in particular empirically identified six characteristics of structural changes in
economic development. The six characteristics are:
(i) High rates of growth of per capita output and population;
(ii) High rates of increase in total factor productivity;

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.

4.2: The Structure and Common Characteristics of Less-Developed Countries


It is instructive in understanding economic development process to explore the major
common characteristics of the structure of Less-Developed Countries (LDCs). When we
apply the major classifications economic structure of a country in relation to economic
development as outlined by Branson, Guerrero and Gunter (1998:3-6), we have the following
characteristics of the structure of LDCs:
(1) Sectoral composition of output characterised by predominant share of the
agricultural sector for LDCs, such as 60% or more in the 60s for Nigeria that has
fallen to 40% in 2012;
(2) Investment ratio of GDP that is extremely low for LDCs such as 7% to 15% for
Nigeria and most sub-Saharan African countries;
(3) Consumption and savings ratio of GDP, where the former is relatively very high
(around 90%) or the latter is very low (around 10%) for LDCs;
(4) Government budget pattern characterised by very heavy budget deficit LDCs
(such as 20% to as high as 50% or more);
(5) Inflation rate usually in the double digit and relatively very rapid money supply
growth for LDCs;
(6) Import and balance of payment structure characterised by chronic balance of
payment deficit for LDCs;
(7) Concentration of export products in primary commodities for LDCs to the tune of
70% or more, compared with 30% or less for industrially advanced countries;
(8) Financial market development with the Stock Exchange in its infancy for LDCs
where most enterprises being medium or small scale are not listed on the stock
market.
For less-developed countries of sub-Saharan Africa that concern us in particular, there
are other critical aspects of the economic structure that are relevant to their development.
These include:
(1) The monopoly and oligopoly market structure predominates in the industrial
economy;

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.

4.3 Characteristics of LDCs that are not characteristics of underdevelopment


There are however some characteristics of LDCs that are not necessarily
characteristics of under-development. We cannot exhaust such characteristics here, but some
examples can be mentioned, which include:
1. Tropical location: Most LDCs are located in the tropical regions of the world. The
reasons for this have to do with colonial history and the fact that the tropical regions
abound in agricultural and easily exploitable mineral resources. It has also been
alleged that the hot and humid weather discourage work and encourage growth of
bacteria and other diseases which are not favourable to economic development. One
may not agree with this since the tropical climate also has its advantages in making
available a lot of agricultural resources that can be exploited industrially. So, this
characteristic does not necessarily have to be associated under-development.
2. Relatively high primary commodity export content: Although extremely high primary
commodity export content is indicative of industrial under-development, LDCs are
expected to have higher agricultural commodity export content because they are much
more endowed with agricultural resources.Tropical countries may produce timber and
other agricultural produce in a renewable manner that is consistent with development
and export the surplus (after domestic industrial utilisation) to temperate regions that
lack tropical climate to grow such crops economically.
3. Female labour participation rate: LDCs are characterised by much lower female
labour participation rate on account of their traditional and religious culture,
especially Islamic countries. With high unemployment rate generally in the world,
low female labour participation rate may not harm labour supply.

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.

Chenery, H. B. (1980): “Patterns of Industrial Growth” The American Economic Review,


50(4) pp. 624-54.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

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.

Learning Outcomes for Study Session 5


When you have
ve studied this session, you should be able to:
5.1 Define and use correctly all the key words printed in bold (SAQ 5.1
5.1&& 5.2).
5.2 Explain the
he major factors explaining
explain economic growth in the classical theory
(SAQ 5.3).
5.3 Discuss the
he phenomenon whereby economic grow
growth
th is arrested eventually but
leads only to bigger economy but no development (SAQ 5.4 & 5.5).
5.4 Explain the reasons for the failure of the prediction off the classical economists
concerning the non-sustainability
sustainability of economic growth in respect of the industrially
developed countries (SAQ 5.7)
5.5 Explain the
he reason why the prediction of the classical economists about non
non-
sustainability of economic growth has materialised
material for some LDCs (SAQ 5.8).
5.8)
5.6 Identify the major criticisms of the classical growth model (SAQ 5.7)
SAQ 5.7).

5.1Classical Growth Model


The classical
sical and the neo
neo-classical growth theories are grouped together on account of
their general orientation of the assumption of full employment and perfect competition,
even though their conclusions about factors that determine growth differ significantly. Full
employment refers to a situation where all the adult population that desire wage or
financially gainful employment and who constitute the labour force are ultima
ultimately
tely employed.
In other words, full employment refers to the equilibrium between labour supply and labour
demand at a labour-market
market determined wage. Perfect competition refers to a situation where
equilibrium between demand and supply is always restored in all product and factor markets
on account of the innumerable independent buyers and sellers or suppliers and purchasers of
goods, services and factor services. The classical theory ascribed largely to the prominent
49
classical economist, David Ricardo, emphasised three factors of production, two of which are
variable while one is fixed, thus leading to diminishing returns to the variable factor. The
variable factors are capital and labour, while the fixed factor is land. Capital is dependent on
returns on investment or profitability.Labour, on the other hand, depends on population
growth while populationgrowth depends on per capita income or wage rate.
Thus growth in output or economic development advances as the quantity of capital,
labour, and land increases. In symbols, we can express this postulate as follows:

Yt = f(Kt , Lt, Dt), (5.1)


Yt denotes national output or national income, Kt capital stock, Lt labour force, and Dt the
amount of land utilised in the production, all in the current period, t.Since the quantity of land
is fixed for a given country, expansion of economic activities is expected to employ the best
or most suitable land, in terms of fertility, accessibility to market centres and suitability of the
terrain for production purposes, security, and other favourable factors. As demand grows for
the most suitable land, rent on such land is expected to rise continuously, thus encroaching on
the profitability of the investment. Profit (say Π) is defined as the residual from the valued
added (V) or net market value of the output after deducting wages or the cost of labour (W),
the opportunity cost of capital (i.e. interest rate, i), and rent (R). That is:

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.

5.2 The Phenomenon of Growth without Development in the Classical Model


The reason for the phenomenon of growth without development or without impact of
per capita income in the long run in the classical theory, is that rising wages that follow
economic growth will lead to rising population. The rising population will cause wage rate to
fall to subsistence level or such a level that cannot support rising population. One the other
hand, the rising wage rate due to economic development, leads to population and labour force
growth, which in turn leads to falling wage rate as labour supply expands. The classical
50
theory assumes that all labour supply is employed, implying that when labour force rises, the
wage rate has to fall to accommodate all workers. The population and labour force will stop
growing when the wage rate falls to subsistence level. Subsistence level of wage rate will
arrestfurther growth in population and labour supply. That is another aspect of the steady
state where labour force and population remain constant or having zero growth.In a nutshell,
economic expansion only leads to higher population, higher national income, without any
long term impact on per capita income and living standards. So the economy ends up on zero
growth for investment, population and labour, with subsistence wage and marginal existence,
due mainly to diminishing returns to capital and labour productivity as a consequence of
fixed land and as a consequence of rising population as wage rate rises above subsistence
level.
The position above is upheld by most classical economists, especially Ricardo and
Malthus. But the pioneer classical economist, Adam Smith, had a different approach in his
Wealth of Nations. Adam Smith did not give prominence to diminishing returns to
productivity of capital and labour, but emphasizes the role of capital as subsistence fund as
well as the means of technology change due to the experience that goes with the increasing
manufacturing of capital goods. Other factors identified in economic development is the
liberaleconomic system of Britain and the specialisation and growing division of labourthat
results from the organisation of production to satisfy expanding external markets.
The classical growth model has obviously failed to predict economic growth and
development for the following reasons among others.
(i) Wage rate has consistently risen over time above subsistence level without
bringing about corresponding growthin population and labour supply that is
expected to bring down the equilibrium wage rate as families have adopted family
planning methods to check population growth to sustain higher standards of
living;wage rate has also been rising and resulting in rising living standards of
workers due also to labour market imperfection that has kept wage rate above the
equilibrium and has permitted chronic unemployment. Thus economic growth has
resulted not only in bigger economy but also to rising living standards.
(ii) Diminishing returns to labour and capital have not taken place in the long run as
expected based on fixed land, because land as factor of production could not
constitute a significant constraint to growth on account of technological progress
that made land increasingly more productive and on account of expansion of lands
in various colonies and new territories. Thus with technology, a plot of land that

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

George Mavrotas and Anthony Shorrocks, eds. (2007): Advancing Development: Core
Themes in Global Development, Palgrave, Macmillan.

Hunt D. (1988): Economic Theories of Development: An Analysis of Competing Paradigms,


London, Harvester Wheatsheaf.

James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

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.

Learning Outcomes of Study Session 6


When you have studied this session, you should be able to:
6.1 Define and use correctly all the key words printed in bold (SAQ 6.1 & 6.2).
6.2 Define and use correctly all the key words printed in bold (SAQ 6.1 & 6.2).
6.3 Explain the major modifications of the neo-classical
neo growth theory to the classical
(SAQ 6.3 & 6.4).
6.4 Describe the long run Production Functionin
F terms of the manner of influence of
explanatory variables on long-term changes in national output (SAQ 6.5& 6.6
& 6.6).
6.5 Identify the
he factors that determine economic growth
growth as distinct from the factors that
determine development in the neo
neo-classical
classical growth model, and specifically definethe
relationship between population and economic growth (SAQ 6.7).
6.6 Explain why
hy capital formation does not feature among the factors that determine
det long-
run growth and development
developmentunder the assumption of exogenous technical progress
(SAQ 6.8).
6.7 State the reasons for the
he limited extent to which the neo-classical
classical growth model is
able to explain the differences in economic development among countries (SAQ 6.9).
6.8 Know thecritical modifications to the neo
neo-classical growth model
del to make it more
realistic and relevant to the situation of less developed economies (SAQ 6.10).
6.10)

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:

g(Y) = α g(K) + β g(L) + λ; α + β = 1 (constant returns to scale)

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:

g(Y) = 0.4(5%) + 0.6(2%) + 3% = 2% + 1.2% + 3% = 6.2%

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:

dKt/dt = sYt implies that g(Kt) = g(Yt) as t → ∞.

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(Y) = α g(K) + β g(L) + λ; α + β = 1 (6.1)

g(K) = g(Y) (6.2)

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

Collecting like terms, we have.

g(Y) = (βn + λ)/(1- α) = n + λ/(1- α), since α+β = 1 or β = 1- α. (6.4)

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.

6.2 Version of Neo-classical Model without Exogenous Technical Progress


Another notable version of neo-classical model is one that drops the assumption of
exogenous technical progress and assumes diminishing returns to the productivity of capital
stock per labour input but introduces the pro-Keynesian assumption that gross investment is
financed out of savings from national income. The modification here to the classical growth
theory is that gross investment (i.e. net investment or change in capital stock, plus
replacement investment or depreciation) in the long run is not dependent on internal rate of
return or interest rate as in the classical theory but is determined by savings from national
income. With diminishing returns to productivity, national income will increase at a
decreasing rate and so will the savings from national income. However, replacement
investment is more or less a constant proportion of capital stock while national income and
savings exhibit diminishing returns to capital stock. This implies that replacement investment
growing at a constant rate with capital stock will catch up with savings that grow at a

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

y* = f(k*), and dk*/dt = sy – δk = 0, and sy = δk.

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

The major factor that determines economic development in this neo-


neo
classical model is the proportion of national output saved. For if the parameter s is raised, the

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.

6.3 Criticisms of the Neo-classical Growth Model


The assumption of exogenous technical progress may be challenged. This is because
we have seen that countries develop at diverse rates, which depend not only on general
factors but more importantly on development policies and economic behaviour that
distinguish countries, such as the investment environment, extent of security to life and
property, political stability, educational system and attainments, culture, and the style of
governance, among others. This means that nations can influence the technical progress and
hence the pace of development.
Another factor of the model that may be challenged is the assumption that changes in
capital stock is determined by the national income such that the growth of capital stock
approaches the growth of national income. This assumption is not valid as nations can obtain
foreign capital inflow or foreign aid for economic development, making the change in capital
not exclusively dependent on national income. In that case development will not depend only
on technological change but also on foreign capital inflow. If we assume that foreign capital
inflow were not feasible, then a poor nation can hardly mobilise any investment. However, in
the modern world, foreign capital inflow has become a significant factor and can make a
difference to domestic investment, and so capital or investment becomes a relevant factor in
economic development of nations. Nigeria’s oil wealth is not due to Nigeria’s savings but
huge foreign investment brought into the oil sector. Left to Nigeria, the investment will
hardly take place in accordance with the vicious cycle of under-development.

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

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

James, Charles I. (2002): Introduction to Economic Growth 2nd ed. New York; W.W. Norton.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

Solow, R. M. (1957): “Technical Change and Aggregate Production Function.”Review of


Economics and Statistics 39: 312-320.

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).

Learning Outcomes of Study Session 7


When you have studied this session, you should be able to:
7.1 Define and use correctly all the key words printed in bold (SAQ 7.1).
7.2 Give an outline of major highlights of Arthur Lewis’Surplus
’Surplus Labour Theory (SAQ 7.1
& 7.4).
7.3 Explain the major criticisms or flaws regarding the Arthur Lewis’ theory. (SAQ 7.2)
7.4 Explain the improvements made by Fei and Ranis to Arthur Lewis’ Model and the
extent to which it is able to address the flaws therein (SAQ 7.3 & 7.4).
7.5 Present the empirical approach to the dynamics of structural changes especially
e as
presented by Chenery, Taylor, Synquin, and Srinivasan and Robinson (SAQ 7.5, 7.6,
7.7, &7.8).

7.1The Lewis’’ Surplus Labour Theory


The Lewis’ theory assumes that there are two distinguished sectors in the economy:
the traditional rural agricultural sector and the urban industrial sector. Labour is surplus in the
rural traditional agricultural sector such that iiff some are transferred to the urban industrial
sector, there will not be any loss in the rural agricultural output while there will be growth in
output in the urban industrial sector, leading to increased profits and capital accumulation for
70
output expansion. This process leads to economic growth and development. It is assumed that
basically, the jobs in the rural agriculture are shared among all household members in such a
way that if one of them were to leave the farm, the output will not decline as there are more
than enough hands. We then say that the marginal productivity of labour in the rural
agriculture is zero. So when the surplus labour moves from agricultural sector, no output is
lost while the movement of the labour to the urban industrial sector leads to a rise in output
and increase in profit as well as national income. Continual movement of labour to urban
industriesleads to growing industrial outputwhile the rural agriculture suffers no decline, with
overall increase in national income.
The major criticismsor flaws regarding the Arthur Lewis’ surplus labour theory
(whose marginal productivity is zero in the rural agricultural sector) are that
(i) the transfer of labour from rural agricultural sector may lead to a fall in
rural output as the migration may be selective such that output drops in
rural agriculture or that the marginal productivity may not be zero on
account of the caliber of the migrating labour;
(ii) the urban industrial sector may not re-invest most of its surplus in output
expansion that can bring about growing employment, but rather the surplus
may be transferred abroad as “capital flight”;
(iii) even if surplus is re-invested in the economy, the new technology may be
more capital intensive, leading to little or no growth in labour absorption or
employment growth but creating growing unemployment in the urban
industrial sector, resulting in growth without development, and
(iv) the labour transfer from rural agricultural sector to urban industrial sector
has led to excessive urbanisation that results in urban squalor, congestion,
widening income inequality, criminality and political instability, that
threatens sustainable development.

7.2Modification of Lewis’ Theory by Fei and Ranis


The modifications to the Lewis’ theory by Fei and Ranis have not totally removed the
criticisms, but have improved upon the theory by recognising phases of such development. In
the initial (first) phase, the traditional rural agricultural sector behaves as predicted by Lewis,
where there exists zero marginal productivity for labour and transfer from the rural sector
does not result in output decline. In the second phase, marginal productivity is greater than
zero but is less than institutional wage (or average urban wage) and transfers of labour from
rural to urban sector still continue. These two phases constitute the take-off stage for
71
economic development. In the third phase, there is equalisation wage between the rural
traditional sector and modern industrial sector, marking the end of surplus labour and the
take-off period, and marking the beginning of self-sustained economic growth.
However, Fei and Ranis theory cannot remove all the criticisms of Lewis’ theory as
most developing countries cannot be said to have over-populated rural areas, even if 80% or
more of the population reside there. The phenomenon of capital-intensive technology leading
to growing unemployment in the urban industrial sector, severe congestion in urban areas due
to excessive rural-urban migration, the wrong implicit assumptions of competitive labour
market and full-employment in urban areas, and the syndrome of capital flight are still
unresolved. Development cannot be guaranteed just by the process of transfer of labour from
so-called labour-surplus stagnant rural traditional sector to the growing urban industrial
sector.

7.3Empirical Studies of Structural Changes characterising economic development


Another approach to structural change models is based on empirical studies of
structural changes in economic development among many countries and over a long period.
The pioneer work was done by Simon Kuznets. Later comprehensive studies were carried by
out by Hollis B. Chenery, and others like Lance Taylor, Moshe Synquin, T. N. Srinivasan and
Sherman Robinson. The major findings are that economies undergo structural changes from
shifts from an economy dominated by agriculture to one dominated by manufacturing
activities, from one oriented to primary exports to one dominated by manufactured goods
exports. Factors like population size, population growth, resource endowment, investment
ratio, composition of consumer demands and their income elasticities determinegenerally the
structural changes in the types of industries that will gain prominence in growth performance
and in contributing to economic growth. Domestic policies and types of governance make the
difference in determining the peculiarities and divergence of every country from the general
pattern.
It is thus expected that at the low levels of development, demand will be very strong
for basic-need goods and services so that industries that supply such goods and services will
contribute most to economic growth at that level of development. Such industries are
described as “early industries” and are carried out with very simple technology. It is easy for
such industries to thrive at the early stages of development because they satisfy simple needs
and can be handled with simple technology for a nation that is not advanced technologically.
As the economy grows, the people become richer and demand for basic needs such as food
tends to reach saturation point and exhibits slow growth. Growth in demand then shifts to less
72
essential and more luxurious goods such that the income elasticity of demand becomes
relatively very high. The industries that supply such goods and services will grow much
faster than those that supply essential and basic-need goods and services. With progress in
education and manpower development, the country is able to handle industries with more
complex technology. So, after the early industries we have the intermediate industries
emerging until finally with further growth, the nation embarks on more technologically
complicated and more advanced industries, described as “late industries”. As economic
growth proceeds, the share ofthe primary sectors (especially the agricultural sector) decline
while those of manufacturing and entertainment industries increase.Commercial and social
services sectors tend to maintain constant share. Primary sectors include agricultural and
mining sectors, with agriculture dominating the primary sectors. This is because of two
factors: First is that demand for agricultural produce approaches saturation point and becomes
income inelastic so that further increases in income do not result in additional demand for
agricultural produce. Second, as income increases there no other uses for such income except
for luxury goods and entertainments including travels and tourism. That is why artists,
designers, actors and actresses, and sportsmen and sportswomen belong to the highest earning
professionals.
Two major structural characteristicsof economic development are:
(i) Agricultural sector’s share of national income declines to below 10% while the
manufacturing sector increases its share to above 60% of national income for
developed countries, while for less-developed countries, the agricultural sector’s
share of national income is more than 40% while that of manufacturing sector is
below 20%. (In Nigeria for instance, the share of agricultural sector is currently
40%; it used to be over 70% in the 60s before the discovery of substantial crude
oil. The manufacturing sector on the other hand accounts for a terribly low 5% of
national income.)
(ii) The share of manufactured goods export in total exports of goods and services
accounts for more than 70% while that of primary goods export account for less
than 30%. (For Nigeria, the share of manufactured goods export in total exports of
goods and services is below 3% while that of primary goods export is more than
97%, with the crude oil sector accounting for about 96%).
Nations will differ in the pace of structural transformation depending upon the
efficiency of macroeconomic management and social development policies. For instance,
where there is appropriate education and manpower development, the nation will be able to

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

Solow, R. M. (1957): “Technical Change and Aggregate Production Function.”Review of


Economics and Statistics 39: 312-320.

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:

Learning Outcomes of Study Session 8


When you have studied this session, you should be able to:
8.1 Define and use correctly all the key words printed in bold (SAQ 8.1).
8.2 Identify the
he various aspects of the development stages, in terms of modes of
exchange, in terms
erms of the evolution, specialisation,
specialisation, and integration of sectors of the
economic activities, and in terms of spatial or geo-political sub
political (that is, local, sub-
regional, regional, national, sub-global,
sub and global) specialisation,
ation, interaction and
integration (SAQ 8.1 & 8.2)
8.2).
8.3 Describe all the development stages of Rostow’s
’s stages theory of development in their
dynamic order (SAQ 8.2 & 8.3).
8.3)
8.4 Identify the
he specific factors that define the pre
pre-conditions and factor required for the
take-off stage and the succeeding stage of sustained growth, drive to maturity and
mass consumption (SAQ 8.3, 8.4 & 8.6)
8.6).
8.5 Discuss the relevance,appli
,applicability, and limitations of Rostow’s stages development
theory for Nigeria and other sub
sub-Saharan African countries (8.5).

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.

8.3 Limitations of Stages Theories of Development


A general criticism of stages theories of development is that they 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. A
81
particular criticism of Rostow’s model is that it does not perceive that once an economy takes
off into drive to maturity,
urity, it has the possibility of crash landing or even crashing during its
drive to maturity. For example, if the nation is actually able to invest more than 10% of its
national income, but the projects for which the investment funds have been released may not
be well executed or the funds embezzled outright. Apart from corruption in the management
of the nation’s resources, the nature of industrial development may not be in tune with
comparative advantage or may not lay the foundation for self
self-reliant economy.Where
omy.Where an
economy is over-dependent
dependent on imported technology, a sudden fall in foreign exchange
earnings may spell doom for the economy. Another area of criticism is that after laying the
pre-conditions
conditions for development, is it not possible for such pre
pre-conditions
ditions to get lost through
lack of maintenance or sustainable development of the infrastructure facilities.

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?

It is one thing to carry out substantial investment; it is another thing to invest in


viable projects. The theory did not take into account political instability and crisis
that can lead to failure of projects and abort economic development. Nigeria has had the
problem of inadequate energy infrastructure and security to life and property that can sustain
the drive to maturity. It is possible to lay the precondition for development and subsequently
lose it while achieving the take--off
off stage. For example, in the past Nigeria had much better
railways and electricity supply which are part of pre
pre-condition
condition for development. Later on,
things got worse for electricity supply, security to life and property, railway transportation,
and economic stability (rapid inflation), all of which led to the inability of the nation to
achieve the take-off pre
off stage towards sustained development and drive to maturity. Laying pre-
conditions for development requires their sustainability; otherwise the nation reverts back to
the previous stages of under-development.
development.

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

A. Transport and communication infrastructure


B. Investment ratio of national income
C. Agricultural foundation
D. Energy infrastructure

SAQ 8.4
The sequence of Rostow’s stages theory of development is:

A. Primitive stage → preconditions → take-off → drive to maturity → mass


consumption
B. Preconditions → primitive stage → take-off → drive to maturity → mass
consumption
C. Primitive stage → preconditions → take off → mass consumption → drive to
maturity
D. Primitive stage → take-off → preconditions → drive to maturity → mass
consumption

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

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Hunt, D. (1989): Economic Theories of Development: An Analysis of Competing Paradigms;


London, Harvester Wheatsheaf.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

Rostwo, W. W. (1960): The Stages of Economic Growth – A Non-Communist Manifesto;


Cambridge, Cambridge 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:

Learning Outcomes of Study Session 9


When you have studied this session, you should be able to:
9.1 Define and use correctly all the key words printed in bold (SAQ 9.1).
9.2 Specifythe Harrod-Domar
Domar model involving the three variables namely: National
output capacity or change in national output capacity, capital stock or net investment
expenditure, and national savings or savings propensity (SAQ 9.2).
9.3 Obtain thee solution to the model with and without the assumption of depreciation rate
(SAQ 9.3& 9.4).
9.4 Obtain the
he solution to the open economy extension of the model (SAQ 9.5&
9. 9.6).
9.5 State the implicit assumptions of the Harrod
Harrod-Domar model (SAQ 9.7).
9.6 State the major reservations of the Harrod-Domar
Harrod model (SAQ 9.8).

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:

g(Y) = ΔYt/Yt-1 = sb (10.3)

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:

g(Y) = 0.1(1/3)= 0.033 or 3.3%

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

∆Yt /Yt-1= b(sYt-1 – δKt-2)/Yt-1 = bs – bδKt-2/Yt-1 = bs - bδ/b = bs – δ


That is:
∆Yt /Yt-1= bs – δ (9.3’’)

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.

9.2 Open-Economy Version of Harrod-Domar Model


Harrod-Domar growth model is a closed-economy model. An open-economy version
of the Harrod-Domar model would be modified to allow for foreign capital inflow (F) in the
financing of domestic investment (I), so that the model is then given as:
∆Yt = b∆Kt-1 (9.1’)
∆Kt = It – δKt-1 (9.2’)
It = sYt (9.3’)

∆Yt = b∆Kt-1 ; 0 < b < 1 (9.4)


∆Kt = It – δKt-1 (9.5)
It = St + Ft ; (9.6)
St = sYt ; 0<s<1 (9.7)

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

g(Y) = (1/3)(0.12 + 0.09) – 0.05 = 0.07 or 7.0%.

Alternatively working in percentages

g(Y) = (1/3)(12% + 9%) – 5% = 7.0%

Without the foreign capital inflow, the growth rate will be negative. That is:

g(Y) = (1/3)(0.12) – 0.05 = - 0.01 or - 1.0%

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.

Summary of the Study Session 9


1. The Harrod-Domar
Domar growth model is given by:
∆Yt = b∆Kt-1; ∆Kt = It – δKt-1 ; It = sYt.
∆Y denotes change in output capacity, ∆K the change in capital stock, and I the gross
investment expenditure.
2. Implicitly, the Harrod-Domar
Domar 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. As a non
non-
classical model, full employment of
of labour is not assumed and so labour (skilled or
unskilled) does not constitute a constraint, indicating that there is surplus labour.
labour The
constancy of incremental capital
capital-output ratio (or output-capital
capital ratio) implies an
assumption of constant returns to capital or investment expenditure.
3. The determinants of equilibrium growth rate (or solution) for the Harrod-Domar
Harrod
model are (the product of) the savings ratio sand capital-output ratio 1/b(or
1/b output-
capital ratio b),, taking into account the depreciation rrate δ. Mathematically the
solution to the model is given by:
g(Y) = bs - δ
4. Given the typical values for the parameters s (such as between 10% tand 15%) and
δ(such as 5% to 10%)for
for less developed countries, the model predicts that economic
development willl be unattainable as the growth g(Y) will not be positive. If however
there is foreign capital inflow to raise investment ratio of national income, the growth
can become significantly positive, other things being equal.
93
5. Thus a realistic extension of the model is to examine the open economy version,
where investment expenditure is financed not only by domestic savings resources but
also by foreign capital inflow, Ft. The model then becomes:
∆Yt = b∆Kt-1; ∆Kt = It – δKt-1 ; It = sYt + Ft = (s+f)Yt ; where ft = Ft/Yt
This gives the solution: g(Y) = b(s + f).
6. There are however reservations to the open economy extension of the model. First is
that foreign capital comes with interest rate and unless the returns on foreign capital
inflow exceed the interest rate, the foreign capital inflow will have no positive impact.
Second is that if foreign capital inflow competes with or exert negative effect on
domestic savings, its effect will be damped. Third is that foreign capital inflow may
promote technological dependence and under-development if care is not taken.
Fourth, foreign capital inflow may be invested in projects that do not promote foreign
exchange earnings while it will draw foreign exchange that is required for foreign
debt servicing and capital repayment; in that case it will lead to foreign debt trap and
chronic balance of payments deficit.

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Domar, Evsey D. (1947): “Expansion and Employment”; American Economic Review


vol.37; pp. 34-55;

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

Solow, R. M. (1957): “Technical Change and Aggregate Production Function.”Review of


Economics and Statistics 39: 312-320.

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.

Learning Outcomes of Study Session 10


When you have studied this session, you should be able to:
10.1Define
Define and use correctly all the key words printed in bold (SAQ 10.1
10.1& 10.2
& 10.2).
10.2Describe the highlights of Kaldor & Mirrlees’ model and its functioning (SAQ 10.3
& 10.4).
10.3Identify specifically the
he aspects of market imperfections postulated in the model and
their relevance for less developed countries (SAQ 10.7).
10.4Indicate the
he major components of the model and their significance
ificance and role in
economic growth (SAQ 10.2 &10.6).
&
10.5Itemise the
he major determinants of economic development and the processes by which
they operate (SAQ 10.5)
10.5).
10.6Draw the major development
evelopment policy implications of the model (SAQ 10.8).
10.8)

10.1 The basic props of the Kaldor and Mirrlees’ model


The three basic props of the Kaldor and Mirrlees’ model are:
(i) Technical
echnical progress functionwhich
function describes production and productivity as
being determined by the magnitude of new investment per operative (worker
attached too the new plant and machinery)
machinery) in such a way that there is an optimal
level of investment per work
worker at which productivity growth,, increasing at a
decreasing rate,becomes equal to growth in investment per worker. At constant
new investment per operative, that is, zero growth rate of investment per
operative,, productivity growth rate is positive and hence higher than the growth of
investment per operative; when new investments per operative increase,
99
productivity increases, maintaining its lead over the growth of investment per
operative; but with further growth in new investment per operative, growth in
productivity slows downuntil the growth of new investment per operativebecomes
equal to the growth of productivity. That point of equality between the growth of
productivity and the growth of investment per operative represents the optimal
productivity rate, in the sense that further growth in investment per operative will
result in a lower growth of productivity. It is similar to saying that productivity
growth represents the “marginal productivity” of investment per operative while
the growth in investment per operative represents the “marginal cost” of
investment per operative. Expansion of investment per operative will continue by
rational business behaviour when the “marginal revenue” is greater than the
“marginal cost”, until the point at which the two are equal. Beyond that optimal
point, it is not rational to increase investment per operative as it will bring about a
lower growth in productivity.
(ii) Capital market behaviourwhich is determined by two criteria, one being the
investment payback period (say “h”) and the other criterion being the internal
rate of return of investment proposal. The payback period is the first criterion to
be considered in any investment proposal. Thereafter the rate of return criterion is
used to select the investment projects that meet with a pre-determined level of
profitability, taking into account interest rate or cost of capital and premium for
uncertainty.
(iii) Labour market behaviour which determines the average current wage rate,
based upon a dynamic minimum specified politically (through government and
trade unions). Businessmen take the trend growth rate of wage into account in
appraising investment projects.

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)

where y denotes productivity, idenotes


denotes investment per operative. The function (10.1) is such
that the first derivative is positive while the second derivative is negative, implying that the
productivity growth increases at a decreasing rate. This is illustrated below in Fig.10.1.
Fig.10.1

di/i

γ f(di/i)

di/i
0 γ

10.1: Technical Progress Function

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.

10.3 Determinants of Growth in the Kaldor and Mirrlees’ Model


From the analysis of the model, we may conclude on the factors that determine
economic growth and the manner in which they do.
First the technical progress function which depend on the rate of investment per
operative. If the rate is too small or too big, it reduces the optimal productivity of the
economy and affects its growth rate adversely.
Secondly, payback period is a critical factor in economic growth. If the payback
period is too short, it will adversely affect economic growth. The longer the payback period
the better it is for economic growth and investment expenditure.
Another significant factor in investment behaviour is the wage rate. If wage rate rises
faster than productivity, it will make investment less profitable and elongate the period of
recovery of investment expenditure, thus excluding more projects on the basis of payback

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.

10.4 Development Policy Implications


Development policy implications are as follows:
(i) Government needs to promote an efficient and equitable labour market that will
growth
ensure that wage rate growth corresponds to labour productivity growth;
(ii) Government at all tiers should ensure security to life and property and promote the
rule of law, social justice, and political stability in order to foster business
confidence,
nfidence, which in turn will promote a long conventional payback period;
period
(iii) Efficient
fficient and adequate infrastructure, especially in respect of energy and
transportation and communication, should be established in order to enhance
productivity fundamentally;
(iv) Sectorally balanced development should be pursued such that we do not have too
much investment in some sectors and too little in the other sectors as this will
affect the technical progress function fundamentally in terms of its intercept and
gradient.

ummary of the Study Session 10


Summary
1. The Kaldor and Mirrlees’ “new model of growth” consists of three major
components: the technical progress function, the investment behaviour of
businessmen, and the imperfect labour market.
2. The technical progress function de
describes
scribes technical progress or productivity growth as
non-linearly dependent upon investment per operative
operative.
3. The capital market behaviour characterising investment behaviour of businessmen
business is
subject to two conditions, one of which is a conventional payback period while the
other is net discounted cash flow analysis of returns to investment.

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

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.

Kaldor, N. & J. A. Mirrless (1962): “A New Model of Economic Growth”; Review of


Economic Studies vol. 29: pp. 174-92

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

Solow, R. M. (1957): “Technical Change and Aggregate Production Function.”Review of


Economics and Statistics 39: 312-320.

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.

Learning Outcomes of Study Session 11


When you have studied this session, you
yo should be able to:
11.1Define
Define and use correctly all the key words printed in bold (SAQ 11.1 & 11.2).
11.2List the major assumptions of neo-classical
neo classical dependence model and discuss their
relevance to contemporary less-developed countries (SAQ 11.3, 11.4 & 11.5).
11.5)
11.3State the
he economic principles governing the predictions of neo
neo-classical
classical dependence
model (SAQ 11.4, 11.5 & 11.6).
11.6)
11.4Discuss the
he major factors in the neo-classical
classical model that hampers economic
emancipation and development of less developed countries (SAQ 11.7).
109
11.5Draw the policy implications of the model (SAQ 11.8).

11.1The Neo-classical Dependence Model


The neoclassical dependence model employs orthodox economic analysis to explain
the dependence of less-developed economies to the industrially advanced countries,
originating from the colonial days. The major mechanisms which serve to perpetuate the
dependence and underdevelopment through the wide and growing inequality gap in
development may be broken into five as follows:
(i) Monopoly effect: This refers to the economic domination of the modern industrial
sector of the less-developed economies by the monopoly (or oligopoly)
multinational companies having their headquarters in industrially advanced
countries. Their activities suppress economic development in the less-developed
economy on account of capital flight (through repatriation of super profits and
other emoluments), output and employment restrictions characteristic of
monopoly firms, trade and foreign exchange malpractices that hamper economic
growth, and the immense financial, technological, market and diplomatic
advantage of the multinationals deployed in dominating the industrial economy
and in barring entry into the industry by prospective indigenous firms.
(ii) International Demonstration Effect: This refers to the phenomenon whereby the
people of less-developed countries copy the lifestyles of those of the industrially
advanced countries as they consider them more modern, more civilised and
superior. This results in excessive import propensity for imported consumer and
intermediate goods and chronic tendency to balance of payments deficit and
accumulation of foreign debt. The servicing of foreign debt becomes problematic
and the financial institutions of advanced countries have to dictate austere
economic policies to the less-developed countries, which adversely affect the
welfare of the masses. The economy is unable to grow as it specialises only in the
supply of primary commodities (minerals and agricultural produce) and is unable
to develop industrial capacity to partake beneficially in international trade.
(iii) Substantial external borrowing for development and Debt Trap: On account of
low savings, less developed countries cannot finance economic development
under the free enterprise economy and have to resort to external borrowing to
general adequate investment resources for modern development. Most less
developed countries cannot efficiently manage foreign capital inflow owing to
110
corruption and ineptitude of political office holders as well as unscrupulous and
exploitative behaviour of the private sectors of both the industrially advanced
countries and less developed countries. Consequently, the less developed
countries receive foreign investment that fail to bring adequate returns to cover the
cost or generate adequate foreign exchange needed for servicing the debt. This
impedes development rather than promote it as the less developed countries end
up in huge foreign debt service payments that starve other development
programmes of resources and enhance their financial dependence.
(iv) Factor-biased technology: Another factor related to the above is the introduction
of the technology of the industrially advanced countries into the less-developed
economies which is inappropriate for them. It is inappropriate because the
advanced technology is too capital intensive, too foreign exchange intensive, and
too skilled-manpower intensive, while the less-developed countries have scarcity
in these areas and possess abundant labour. The excessive dependence on foreign
capital inflow also compounds the problem by bringing into the country obsolete
technology from industrially advanced countries, which cannot be serviced
locally, thus preventing the development of self-reliant technology. The
consequence is inability to grow as they employ dependent and unsustainable
technology.
(v) Brain-drain effect: This factor refers to the situation where the little highly
skilled manpower produced in less-developed countries are attracted abroad to the
industrially advanced countries that can pay much better remuneration for their
services than the poor economy. In terms of research and development, the less-
developed economies become disadvantaged in terms of highly skilled and trained
manpower and experts. Less developed countries may then have to pay heavily for
the use of such experts and consultants that will have to be “imported” from
abroad.

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.

11.2 The Extent of Relevance of Neo-classical Dependence Model


A pertinent question we need to pose is whether all these factors characterise all less-
developed countries. We will say it thus to some extent. However, not all the factors

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.

11.3 Development Policy Implications of Neo-classical


Neo Dependence Model
Development policy implicat
implications are obvious which we cannot exhaust in this
discussion. Students should also reflect on the problems and appropriate policies by reading
wide in this area. First is the promotion of competitive market structure and sensible
indigenisation of ownership of industrial enterprises, especially the less complicated ones.
Second is the promotion of self--reliant
reliant technology and international competitiveness through
appropriate infrastructural policies and export promotion in the areas of comparative
advantage. Third is the control of importation of luxury goods through tax and other rational
foreign exchange policies. Whatever policies are adopted, they will succeed only if policy
makers possess the integrity and competence to implement them. India has succeeded
immensely in these regards.

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.

Self Assessment Questions of Study Session 11


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 11.1
State some of the major characteristics of the economy put forward in the neo-classical
dependence model
A. Monopoly effect, international demonstration effect, and factor-bias effect
B. Monopoly effect, brain drain effect, dominant agricultural sector
C. Monopoly effect, factor-bias effect, primary export orientation
D. International demonstration effect, monopoly effect, dominant agricultural sector

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

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.

Learning Outcomes of Study Session 12


When you have studied this session, you should be able to:
12.1Define
Define and use correctly all the key words printed in bold (SAQ 112.1 1
.1 & 12.2).
12.2Present a brief description
escription of False Paradigm model (SAQ 12.3).
12.3Discuss the relevance
elevance and give specific examples of applications of False
Paradigm model as regards LDCs and Nigeria in particular (SAQ 12.2 & 12.3).
12.4Present a brief description
escription of Dualistic Development model (SAQ 12.4)
12.5Discuss the relevance,
elevance, major indicators, and statistical evidence of Dualistic
Development model as regards LDCs and Nigeria in particular (SAQ 12.5).
12.6Draw development
evelopment policy implications of False Paradigm models (SAQ 12.5)
12.7Draw development
evelopment policy implications of Dualistic Development models (SAQ
12.6)

12.1False Paradigm Model


The False Paradigm Model less
odel postulates that development policy prescriptions for less-
developed countries emanate from the industrially advanced countries and their economic
and financial institutions, and are hence not relevant or appropriate to the peculiar and
primitive environment
nt of the less-developed
less developed countries, either because they were transplanted
from dissimilar environment of the advanced countries or were deliberately designed to
117
mislead the poor economies to facilitate their continual dependence and exploitation. These
policy prescriptions and development theories are often elegant and do not adequately take
into account the socioeconomic and political structure of the poor economy into account. As
these countries pursue such policies, they end up nowhere but in a confused state.
The policy makers and intellectuals in the less developed countries who are to
domesticate the development theories and policies have been trained in the industrially
advanced countries and are unable to think “out of the box” or have been indoctrinated and
alienated from the realities of their countries. They become pre-occupied with the analytical
elegance of the theories and policies and are oblivious of the peculiar structures of the less
developed economy that will render the theories irrelevant and the policies ineffective.
Examples of such false paradigms, theories and policies which have totally failed to
achieve their objectives or result in socioeconomic development are:
(i) Import substitution policy;
(ii) The Structural Adjustment Policies;
(iii) Substitution of Medium-term Development Planning with Rolling Plans.

12.1.1 The Misconception of Import Substitution Policy


An example of a false paradigm is the import substitution policy of the late 70s which
was proposed for Nigeria and many LDCs without any beneficial impact on the foreign
exchange conservation or manufacturing industry. Rather than reduce demand for foreign
exchange for the importation of all kinds of manufactured goods and promote the
manufacturing sector, matters got worse as demand for foreign exchange worsened while the
output of the manufacturing sector declined. The reason was that import substitution policy
was against the economic principle of specialisation. Nations should not engage in the
production of all kinds of products merely to substitute for importation of such products, but
should specialise in their areas of comparative advantage. Industries set up for import
substitution such as vehicle assembly plants, paper mills, and iron and steel complexes
(including Ajaokuta, Delta Steel, and Katsina Rolling Mills) have all failed woefully and
keep involving in continual losses. The nation at the end of the day incurred huge foreign
debt in the process of external borrowing for the establishment of those industries referred to
as core industrial projects. Central Bank of Nigeria has reported in various annual
publications of its Annual Reports and Statements of Accounts how those industries failed
woefully. The nation ought to have specialised at that time in liquefied gas plants, expanded
petroleum refineries, and other petrochemical industries.

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.

12.1.3 The problems with the Rolling Plans


The rolling plans methodology constitutes another false paradigm. Prior to the
introduction of rolling plans in the 90s, Nigeria and many LDCs have been operating
medium-term development plans. For a developing country, medium-term planning (4 to 7
year) and perspective planning (10 to 20 years) are more relevant to the development of the
economy through investment for capacity creation which has long gestation. The period of

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.

12.2The Dualistic Development Model


The Dualistic Development modelasserts that the less-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 in
urban areas; the extremely wealthy class versus the extremely wretched masses, with little or
no middle-income class, and so on. These dualistic groups are not converging but tend to be
chronic. The powerful group consisting of the urban industrial complex and the wealthy
business and political class located in the best part of the cities control the economy in such a
way that they perpetrate the exploitation of the masses and siphon domestic resources abroad.
Along with the domestic dualism, there exists international dualism between the rich
and poor nations, along economic, financial, intellectual, technological and social lines. The
gap is perpetuated by the international economic relations, which are facilitated by the
interaction among the ruling classes of the advanced countries and less-developed countries.
The industrially advanced countries represent the centre of the world, while the poor
nations represent the periphery of the world. The rich class in the less-developed country
represents the centre in the periphery, by means of which the periphery is exploited by the
centre of the world. The inequality between the centre in the periphery and the periphery is
very wide; the inequality between the centre of the world and the periphery is also wide; but
the inequality between the centre of the centre of the world and the periphery of the centre of
the world is narrow, thus allowing for cooperation and absence of dualism in the centre of the
world. The wide inequality between the centre in the periphery and the periphery serves as an
incentive and continual benefit for the ruling and wealthy class in poor countries to continue
the exploitation of the poor countries on behalf of the centre of the world. An attempt to
promote the development of the periphery will result in the elimination of the inequality and
the dualisms.
A major indicator of the existence of the dualistic development theory is that
development gap between developed countries and less developed countries is increasing. For
instance per capita GNP in several developed countries in Western Europe, USA, and Japan
is over 40,000 US$ while those of the majority of sub-Saharan Africa nations (excluding
South Africa) are below $1,000. The gap was much narrower in the 60s. Another example is
120
child mortality per thousand. While it has shrunk to below 5 in most of the developed
countries, it still remains above 100 in most Sub
Sub-Saharan
Saharan Africa nations. Another indicator is
that income inequality is getting wider in less developed countries while it is getting narrower
in developed countries. The poorest 40% of the population in developed countries are having
increasing share of national income, while they are having decreasing share of national
income in less developed countries.
Another indicator is that rural areas in less developed countries are getting more
impoverished with the consequence that urban
urbanisation
ation is growing more rapidly than for the
developed countries. While rural to urban
urban migration continues unabated in less developed
countries, it has stopped in developed countries and we instead are having reverse migration
from urban to sub-urban
urban and rural areas.

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

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.

Learning Outcomes of Study Session 13


When you have studied this session, you should be able to:
13.1Define
Define and use correctly all the key words printed in bold (SAQ 13.1 & 13.2).
13.2Define the
he concept of technical progress (SAQ 13.1, 13.2, & 13.4)
13.3Describe the
he nature and processes of technical progress (SAQ 13.4& 13.5
& 13.5)
13.4Define the
he role of technical progress in economic development (SAQ 13.3 &13.6)
&
13.5Determine
Determine or calculate technical progress in real life examples (SAQ 13.7 & 13.8).

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.

13.2The Process of Technical Progress


The process of technical progress is assumed in the Schumpeterian theory to
commence with the innovator at the stage of pure research to the design and then to the
127
fabrication stage. Empirical observations and even logic support the view that technical
progress can commence at any stage or be initiated at all the stages of the production activity,
from design and pure research, to fabrication of prototype, to commercialisation and to
marketing and user stages. Users can stimulate technological change by giving challenges to
researchers and entrepreneurs.
Prices of factor and non-factor inputs also play a great role in the process of
technological change, whether it is going to be labour-saving, materials saving or land saving.
Technical progress will tend to use more of such factor inputs and materials whose prices are
relatively low or are not rising relative to others. 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. If rent on
land is very high in an environment, land saving technology will be promoted, such as very
high sky scrapers in megacities.

13.3The role of Technical Progress in Economic Development


The role of technical progress is critical in economic development because in the
short run, there are diminishing returns to productivity of factor inputs, such as capital and
labour of certain vintages. It is technical progress that in the long run offsets the short run
impact of diminishing returns and allows the economy to grow rather than stagnate at
predicted by the classical economists. Moreover, as resources dwindle or as population
pressure increases on the environment, it is through technical progress that the level of
development can be sustained and even increased. This is because its impact boils down to
the ability of the nation to conserve its natural resources, economise or minimise the
exploitation of the scarce environmental resources subject to a given growth in output.

13.4 Measurement of Technical Progress


An attempt has been made to measure the rate of technical progress. A theoretical
basis for the measurement is provided by R. M. Solow (1957). It is assumed that in the long
run, returns to scale are constant with respect to factor inputs. Capital stock and labour force
are the two factor inputs considered in the analysis. Returns to scale in excess of constant
returns will then be ascribed to technical progress or total factor productivity. In other words,
total factor productivity growth, if any, is ascribed to technical progress. Capital productivity
and labour productivity are not separated; rather it is a combined productivity or what is
referred to as neutral technical progress. At equilibrium, given constant factor input prices,

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

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

Solow, R. M. (1957): “Technical Change and Aggregate Production Function.”Review of


Economics and Statistics 39: 312-320.

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.

Learning Outcomes of Study Session 14


When you have studied this session, you should be able to:
14.1Define
Define and use correctly all the key words printed in bold (SAQ 14.1).
14.2Explain the objective
ective and significance of endogenous growth theories (SAQ 14.2 &
14.3).
14.3Describe the major
ajor factors determining growth in endogenous growth theories (SAQ
14.4)
14.4Discuss the limitations
imitations of endogenous growth theories (SAQ 14.5)
14.5Draw development
evelopment policy implica
implications of endogenous growth theories (SAQ 14.6)

14.1The Significance of Endogenous Growth Theories


As earlier pointed out, the most significant factor in economic growth and
development is technical progress. Classical growth theories left this factor out while
whil the neo-
classical considers technical progress as exogenous. If what matters most in economic
development is exogenous, of what use is such a theory for development policy? Kaldor and
Mirrless’ model postulated a semi-endogenous
semi technical progress, identifying
ifying investment
rate, investors’ behaviour, and labour market structure as the major determinants of technical
progress in addition to exogenous factors. Thus developing a growth model that explores the
135
major determinants of technical progress can be useful for development policy and efforts at
achieving sustainable economic development. Even from Kaldor and Mirrlees’ model, an
endogenous growth model can be developed with practical development policy implications.
We now explore the various factors that have been considered in endogenous growth
theories.

14.2Factors in Endogenous Growth Theories


Specifically the factors that are presumed to explain technical progress or economic
growth in endogenous growth theories include:
(i) Appropriate and adequate rate of capital formation, in terms of investment ratio of
GDP (INVR). We observe that many growth theories, including that of Rostow’s,
neo-classical, and Kaldor and Mirrlees, investment rate plays a significant role,
except that while some assume constant returns to scale, Kaldor and Mirrlees
assume variable technical progress or variable productivity growth rates,
depending on the rate of investment per operative, conventional payback period in
project analysis, and labour market structure. One of the factors in international
dependence models is technological dependence due to factor-bias effect of
foreign technology embodied in foreign capital inflow to augment the inadequate
domestic resources.
(ii) The level of education and manpower development and character of educational
institutions (EDU); Most models leave out education and manpower development,
but development economists in various studies and empirical growth models have
recognised the importance of education and manpower development in economic
development. In particular endogenous growth theories have given prominent
place to appropriate and functional educational system and manpower
development as a major factor in economic development.
(iii) Infrastructural foundation in terms of the energy (electricity in particular) supply
per capita and cost per kilowatt, transportation facilities and cost (INFRAS);
Growth models have not captured this factor, but endogenous growth models and
empirical development studies consider the essential foundations of the economy
for development to include efficient energy and transport infrastructure. Rostow’s
model recognises the preconditions for take-off stage for economic development,
which definitely include such foundations.
(iv) Agricultural foundation of the economy (AGRIC); Endogenous growth theories
emphasise agricultural foundation for economic development. United Nations
136
Research Institute for Social Development has observed that no nation has
succeeded in sustained economic development without first laying viable and
efficient agricultural foundation. Some stage theories put agricultural development
among the early stages of development prior to industrial development and
international trade.
(v) Political stability and security (POLSEC); this is another significant factor
paraded as essential for favourable investment environment. This factor is
generally taken for granted in growth theories, but it can be considered as part of
the pre-conditions for economic development.
(vi) Economic stability in terms of secular inflation rate (INF); Endogenous growth
theories and recent empirical studies on the threshold inflation have established
the negative correlation between economic growth and rapid inflation rate.
(vii) The structure and management of the economy, such as capital market
development and market structures in various industries and the efficiency of
macroeconomic management by the government (ECNS); This factor has featured
prominently in development studies and policy economic analysis of problems of
development. It is obvious that the structure and management of the economy
plays a critical role in international competitiveness of various countries,
especially in respect of manufactured products.
(viii) The economic system or structure of the economy (SYSTEM), especially in
respect of market structure. Some sectors of the economy perform better under
command system or regulation, while others perform better under free markets or
competitive market structure. Many less developed countries practice mixed
economic system in varying degrees. Even in the free market economy, the extent
of competitiveness of the market structure as opposed to monopoly or oligopoly
matters, depending on the nature of the industry. The development of stock market
and the extent to which firms are listed is an aspect of the structure of the
economy.
(ix) Other social factors especially the democratisation process or the level of the
existence of functional democratic institutions, and general attitude to work,
culture and social behaviour, including especially public and private sector
accountability and transparency (U); These set of factors feature prominently in
endogenous growth theories. The World Bank and other multilateral institutions
have also identified functional democratic institutions that promote accountability

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.

So we can summarise the factors in the endogenous growth theory as follows:

g(Y) = f(INVR, EDU, INFRAS, AGRIC, SYSTEM, POLSEC, INF, ECNS, U)

where the variables are as defined above in items (i) to (viii).


In empirical studies, the most critical set of the possible explanatory factors are selected
through a background analysis of the economy and statistical tests, and proxy variables are
used where direct indicators are not available to measure the various explanatory variables. In
Nigeria, all the factors above are relevant; but emphasis has been placed on the following
factors:
(i) Grossly inadequate and inappropriate infrastructure;
(ii) Accountability and transparency or the level and intensity of corrupt practices in
public and private sector and the related macroeconomic mismanagement by the
government;
(iii) Insecurity to life and property and to livelihood, and political instability as
reflected by frequent policy changes and uncertainties, frequent or random
changes in government or political office holders, riots, students unrests,strikes,
and militancy and terrorist attacks.
(iv) Economic instability as reflected by rapid inflation rates and exchange rate
instability; and
(v) Non-functional and inappropriate educational system.

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.

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

Elhanah, Helpman (2004): The Mystery of Economic Growth;Harvard University Press.

Fashola, M. A. (2001) Macroeconomic Theory – Highlights and Policy Extensions for


Less-Developed Economies 3rd edn;Lagos, Concept Publications.

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.

Perkins, D. H., S. Radelet, D. L. Lindauer, and S. A. Block, (2014), Economics of


Development, New York, W.W. Norton & Co.,

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.

Learning Outcomes of the Study Session 15


When you have studied this session, you should be able to:
1.1 Give a run-down
down of the major factors that determine economic growth and
development (SAQ 15.1 to 15.6).
15.6)
1.2 Identify the
he particular growth theory or theories that put forward each
determinant factor (SAQ 15.1 to 15.6).

15.1 Synthesis of Major Factors in Economic Growth and Development


The factors that are considered to be the major ones that determineeconomic growth
and development, based on comparative analysis and synthesis of various growth theories
include appropriate and adequate capital formation, appropriate and adequate education aand
manpower development, sound and adequate foundation for infrastructure, favourable
environment for research and development, sound and dynamic agricultural foundation for
the economy, economic stability, political stability, adequate security to life and
and property, law
and order, and favourable social order. There is need for an elaboration of each of these
factors in accordance with various theories of growth and development.

15.2 Appropriate and adequate capital formation:


formation
Capital formation is critical in two respects. One is the appropriateness of the capital
factor
formation in such a way that it is consistent with domestic factor endowment rather be factor-
bias and lead to technological dependence. Neo
Neo-classical
classical International dependence model
refers to factor-bias
bias effect of technology adopted in less-developed
less developed countries which

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.

15.3Appropriate and adequate education and manpower development


Appropriate and adequate manpower development through a productive and
functional educational system is mainly featured in endogenous growth
theories.Technological progress also requires appropriate and adequate human physical
development in consonance with dynamic and optimal pace and pattern of industrial
development in a highly competitive global economy.

15.4Sound and adequate foundation for infrastructure:


Endogenous growth theories emphasise the critical role of domestic infrastructure,
which depends on the structure and effectiveness of government spending and resource
mobilisation. The infrastructure includes especially adequate and cost effective electricity,
appropriate transportation network (especially railway system), and efficient widespread
telecommunications. Rostow’s stages theory referring to the preconditions for development
may also be taken to address this factor.

15.5Favourable environment for research and development:


Government has to create a high level of universal technology spillovers in research
through the promotion of collaboration of research activities carried out in the universities
and other national research institutes on one hand and those carried out by the private sector.

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.

15.6Sound and dynamic agricultural foundation for the economy:


Empirical studies, stages theories of development, and endogenous growth theories
have demonstrated the imperative of sound agricultural foundation for any economy to
experience sustainable industrial development. Agriculture needs to raise its productivity and
output expansion to provide indispensable basis for food supply to the emerging urban
industrial sector and raw materials to early industries that are largely agro-allied and run on
simple technology, as well as for infrastructural development like housing, building and
construction.

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,

Amdt, H. W. (1981): “Economic Development: A Semantic History” Economic Development


and Cultural Change29(3) pp. 457-66, Chicago, The Chicago University Press.

Bell, C (1987): “Development Economics” The New Palgrave: A Dictionary of Economics,


v.1 pp 818, 825.

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.

Dwight, H. P., S. Randelet, D. K. Sandgrass, M. Gillis, and M. Roema (2003): Economics of


Development 5th ed. New York, N. N. Norton.

Griffin, Keith B. and John L. Enos (1970): Planning Development;London, Addison-


Wesley.

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.

Sen, Amartya (1985): Commodities and Capabilities; Amsterdam, North Holland.

Sen, Amartya (1999): Development as Freedom; New York, Alfred Knopf.

Syrquin, Moshe, Lance Taylor, and Larry E. Westphal (eds) (1984): Economic Structure and
Performance: Essays in Honor of Hollis B. Chenery; Orlando, Academy Press.

Solow, R. M. (1957): “Technical Change and Aggregate Production Function.”Review of


Economics and Statistics 39: 312-320.

150
Tinbergen, Jan (1958): The Design of Development; Baltimore, Johns Hopkins.

Tinbergen, Jan (1960): Development Planning; WorldUniversity Library.

(2008): Economic Development;10th edition;


Todaro, Michael P. and Stephen C. Smith (200
Addison-Wesley,
Wesley, New York; Pearson Education, Delhi.

UNDP (1992): Human Development Report;


Report;New York, Oxford University Press.

UNDP (2002): Human Development Report: Deepening democracy in a fragmented


world;New
New York, Oxford University Press.
Press

World Bank (1991): World Development Report;


Report;OxfordUniversity
OxfordUniversity Press, New York

World Bank (2009): Development


nt Economics through the Decades: A critical look at 30
years of the World Development Report, Washington D. C. World Bank Publications.

Perkins, D. H., S. Radelet, D.L.


.L. Lindauer, and S. A. Block,(
Block,(2014), Economics of
Development, New York, W.W. Norton & Co.,
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

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

Answers to Self Assessment Questions for Study Session 2


Question No. 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8
Answer E B E C B D A B

Answers to self assessment questions for Study Session 3

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

Answers to Self Assessment Questions for Study Session 4


Question No. 4.1 4.2 4.3 4.4 4.5
Answer C C A D B

Answers to Self Assessment Questions for Study Session 5


Question No. 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8
Answer B A A C D B E C

Answers to Self Assessment Questions for study session 6

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

Answers to Self Assessment Questions for study session 7

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

Answers to Self Assessment Questions:

Question No. 8.1 8.2 8.3 8.4 8.5 8.6


Answer D D B A D B

Answers to Self Assessment Questions for study session 9

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

Answers to Self Assessment Questions to study session 11


Question No. 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8
Answer A C B C A C E D

Answers to Self Assessment Questions for study session 12:


Question No. 12.1 12.2 12.3 12.4 12.5 12.6
Answer B D B C A B

Answers to Self Assessment Questions:

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

Answers to Self Assessment Questions:


Question No. 14.1 14.2 14.3 14.4 14.5 14.6
Answer C A A B F D

Answers to Self Assessment Questions:


Question No. 15.1 15.2 15.3 15.4 15.5 15.6
Answer A C F G F E

153