DEVELOPMENT ECONOMICS

B.A. IIIYR (SEM – V)

DISCIPLINE SPECIFIC COURSE – PAPER-V
MODULE IV: THEORIES OF UNDER DEVELOPMENT

Lewis Model - An Overview

The Lewis model is ‘structural change’ model that explains how labor transfers in a dual economy. According to
Lewis, growth of the industrial sector drives economic growth.
The Lewis Model argues economic growth requires structural change in the economy whereby surplus labor in
traditional agricultural sector with low or zero marginal product, migrate to the modern industrial sector where high
rising marginal product.
Transferring surplus labor from rural to urban areas has no effect on agricultural productivity as MP of rural
workers = 0.
Firm’s profits are reinvested. Growth means jobs for surplus rural labor. Additional workers in urban areas
increase output hence incomes and profits. Extra incomes increase demand for domestic products while increased
profits fund increased investment. Hence rural urban migration offers self-generating growth.
The ability of the modern sector to absorb surplus works depends on the speed of investment and accumulation
of capital. Where firms invest in new labor saving capital equipment, surplus workers are not taken on by the formal
sector. Recently arrived rural migrants join the informal economy and live in shantytowns
Thus, urban growth drives economic growth but it can lead to the neglect of agriculture by government. Neglect
of Agriculture happens, yet most people live in rural areas where incomes are relatively low.
However, for many LDC's, rural urban migration levels have been far greater than the formal industrial sector’s
ability to provide jobs. Urban poverty has replaced rural poverty.

'BIG-PUSH' THEORY (ROSENSTEIN-RODAN)

Basically under developed economies are running under the trap of vicious circles of poverty. Which means that
the economy is suffering low employment or mass unemployment. Therefore people will earn lower income. So saving
and consumption will be lower. This will lead to small market size and slower rate of capital formation. When the capital
formation is lower, there will no more investment, production, employment, income etc. This kind of trap exists in under
developed economies.
The biggest task of an under developed economies is to break the trap of vicious circles of poverty. Then only
the economy can grow. The big push theory states that, under developed economies are in urgent of heavy investments
in its different sectors. This may push the economy in to a higher developed stage from under developed conditions. The
theory also states that, low rate of investment in a single industry will not create any impacts in the economy. So it will
be wastage. Because low rate of investment in a single industry cannot influence the economy as a whole and cannot
able to break the trap of vicious circles of poverty, unemployment, low productivity, low income etc.
The idea behind this theory is this that a big push or a big and comprehensive investment package can be
helpful to bring economic development. In other words, a certain minimum amount of resources must be devoted for
developmental programs, if the success of programs is required. This theory is of the view that through 'Bit by Bit'
allocation no economy can move on the path of economic development, rather a specific amount of investment is
considered something necessary for economic development. Therefore, if so many mutually supporting industries
which depend upon each other are started the economies of scale will be reaped. Such external economies which are
attained through specific amount of investment will become helpful for economic development.
This theory is an ‘investment theory’ which stresses the conditions of take-off. The argumentation is that there is
a need for a ‘big push’ via investments. The investments should be of a relatively high minimum in order to reap the
benefits of external economies. Only investments in big complexes will result in social benefits exceeding social costs.
High priority is given to infrastructural development and industry, and this emphasis will lead to governmental
development planning and influence.
The theory of big push is a modern version of an old idea of ‘external economies’. The theory is based on the
assumption that an industrial economy enjoys large many external economies. To enjoy these economies, a massive
investment is necessary in the development of several industries at the same time.
[External economies can be illustrated with the help of an example: Suppose, there are two industries A and B. If industry
A expands in order to overcome the technical divisibility’s, it shall derive certain internal economies. This results in
lowering the price for the product of industry A. If A’s output is used as input for industry B, the profit of A’s internal
economies shall be passed on to B in the form of pecuniary external economies. Thus, “the profits of industry B created
by the lower prices of factor A, will encourage investment and expansion in industry B, one result of which will be an
increase in industry B’s demand for industry A’s product. This, in turn, will give rise to profits and call for further
investment and expansion of industry A”. Therefore, external economies and indivisibilities flowing are significant
determinants of economic development in an economy.]
Main Features:
The principal features of the theory of Big Push are:
1. Massive Investment: The theory of big push envisages massive investment at the very outset of the process of
growth. In its absence, the process of growth may not be self-sustaining.
2. Investment in Different Sectors: The theory envisages the need for investment across different channels of growth
so that each channel sustains the growth of other by providing the necessary demand-base. Thus, it leads towards
the Balanced Growth of the system.
3. Planned Industrialisation: The theory stresses the need for planned industrialisation of under developed countries
where agriculture is the dominant sector which is backward and riddled with poverty. A big-push to industrialisation
is expected to place the system on sound footing, and avoiding the uncertainties of agricultural production.

LEIBENSTEIN CRITICAL MINIMUM THEORY

Prof. Harvey Leibenstein is of the view that UDCs are characterized by vicious circle of poverty (VCP) which keeps them
around a low income per capita equilibrium state. The way out of this impasse is a certain  'Critical minimum
effort' which would raise the per capita to a level at which sustained development could be maintained. In other words,
a UDC will have to introduce 'Stimulus' in an amount which should be more than a critical level for the sake of change.
Shocks and Stimulants: Leibenstein says that every economy is subject to 'Shocks and Stimulants'. A shock has the
impact of reducing the per capita income initially; while a stimulant tends to increase it.
Certain countries are poor and backward because of the reason that the magnitude of stimulant is small while that of
shocks is large. On the other hand, if income raising forces are more than income depressing forces the economy will be
having critical minimum effort which will take the economy on the path of development.
Growth Agents: According to Leibenstein, if the income increasing forces expand at a higher rate than the income
depressing forces, then the favorable conditions for economic development will be existing. In the process of
development such conditions are created by the expansion of 'Growth Agents'.
These growth agents comprise of entrepreneurs, investors, savers and the innovators. The growth contributing activities
result in creation of entrepreneurship, the increase in stock of knowledge, the expansion of production skills of people
and increase in the rate of savings and investment.

Leibenstein introduces two types of incentives for UDCs:

i) Those incentives which do not increase national income, but they bring a change in the distribution of income. He
calls them "Zero-Sum incentives".
ii) Those incentives which result in expansion of national income. He calls them "Positive-Sum incentives".
The entrepreneurs in UDCs are engaged in zero sum activities. They wish to attain monopolies; political influence; and
social prestige. Thus as a result of zero sum activities the real national incomes of UDCs do not increase. They just cause
a change in the distribution of income. The positive sum activities which are essential for development have limited
scope in UDCs.
Therefore, according to Leibenstein, there is a need to direct the zero sum activities of the entrepreneurs of UDCs to the
positive sum activities. It is, therefore, necessary that 'minimum effort' should be sufficiently large to create an
environment whereby the positive sum activities could flourish.

The following factors are responsible for depressing per capita income in UDCs:
a) Zero sum entrepreneurial activities.
b) Conservative activities of organized and unorganized labor.
c) The resistance to new knowledge and ideas and attachment to old ideas.
 d) Increase in consumption, and unproductive use of those resources which could be used for capital accumulation.
e) Increase in population.
f) The high capital-output ratio.
To overcome these influences which keep an economy in backwardness a sufficiently large critical minimum effort is
required to sustain a rapid rate of economic growth. In this way, on the one side the zero sum activities could be
overcome, and positive sum activities could flourish. As a result of critical minimum effort, the per capita income would
rise leading to increase the level of savings and investment.
They will in a turn would lead to:
(i) An expansion of growth agents. (ii) The capital-output ratio will come down. (iii) The income depressing forces will get
weaken. (iv) Such a social environment will be created which will promote social and economic mobility. (v) The
secondary and tertiary sectors will expand and specialization will be encouraged. (vi)  An atmosphere will be created
where there will be social and economic change leading to decrease the population.

BALANCED GROWTH THEORY OF RAGNAR NURSKE

According to Nurkse, Vicious circle of poverty is at work in underdeveloped countries which retard economic
development. If, however, they broken, economic will follow.
How to break vicious circle? Individual investment decision cannot solve the problem. According to Nurkse, the
vicious circle can be broken by enlarging the size of the market. However, it is not possible by individual investment
efforts. The individual investment have the risk whether their product will find a market not. It is possible only when
different persons invest in different industries leading to a wide range of industries.
Different industries will support each other, will provide an enlarged market for products. The rate at which one
industry can grow is inevitably conditioned by the rate at which the other industries grow. Through the application of
capital over a wide range of activities, the general level of economic efficiency is raised and the size of the market is
enlarged. This is the way to break the vicious circle.
The result of overall investment is the enlargement of market because people working in a number of
complimentary projects would become each other’s consumer. Thus the overall expansion of investment project,
enlargement of market and the development of complimentary industries are important ingredients of balanced
growth, which can break the vicious circle of poverty, and release the factor of growth and expansion. The market can
be enlarged through investment in various industries, better salesmanship and publicity, liberal trade policy, reduction
of price and expansion of infrastructure facilities.
In development economics, balanced growth refers to the simultaneous, coordinated expansion of several
sectors.
The balanced growth theory is an economic theory pioneered by the economist Ragnar Nurkse (1907–1959).
The basic tenet of the theory is same as the big push -- need to make simultaneous investments in a no. of industries as
this would enlarge the size of the market and provide the inducement to invest.
The balanced growth can be defined as the systematic and equal prioritization for all sectors and regions of the
economy. It focuses on balanced type of investment and capital mobilization to make the growth more balanced and
distributed. Thus, the main objectives of balanced growth are to make the growth of all sectors in a balanced way at the
same time. 
The theory hypothesises that the government of any underdeveloped country needs to make large investments
in a number of industries simultaneously. This will enlarge the market size, increase productivity, and provide an
incentive for the private sector to invest.
Nurkse was in favour of attaining balanced growth in both the industrial and agricultural sectors of the economy.
He recognised that the expansion and inter-sectoral balance between agriculture and manufacturing is necessary so that
each of these sectors provides a market for the products of the other and in turn, supplies the necessary raw materials
for the development and growth of the other.
Nurkse’s theory discusses how the poor size of the market in underdeveloped countries perpetuates its
underdeveloped state. He also clarified the various determinants of the market size and puts primary focus on
productivity. According to him, if the productivity levels rise in a less developed country, its market size will expand and
thus it can eventually become a developed economy.
Role of state in balanced growth: Nurkse believed that the subject of who should promote development does
not concern economists. It is an administrative problem. The crucial idea was that a large amount of well dispersed
investment should be made in the economy, so that the market size expands and leads to higher productivity levels,
increasing returns to scale and eventually the development of the country in question.

UNBALANCED GROWTH THEORY OF HIRSCHMAN

The theory of unbalanced growth is associated with Albert O. Hirschman. It is the opposite of the doctrine of
balanced growth. Unbalanced growth is a situation in which the various sectors of a given economy are not growing at a
rate similar to one another
According to this concept, investment should be made in selected sectors rather than simultaneously in all
sectors of the economy.
According to Hirschman, investments in strategically selected industries or sectors of the economy will lead to
new investment opportunities and so pave the way to further economic development. Development can only take place
by unbalancing the economy. This is possible by investing either in social overhead capital (SOC) services or in directly
productive activities (DPA). The former create external economies while the latter appropriate external economies.
Hirschman contends that deliberate unbalancing of the economy is the best method of development and if the
economy is to be kept moving ahead, the task of development policy is to maintain tension, disproportions and
disequilibrium. Unequal development of various sectors often generates conditions for rapid development. More-
developed industries provide undeveloped industries an incentive to grow. Hence, development of underdeveloped
countries should be based on this strategy.
 The unbalance of economy is made by the unequal investment patterns. This means the investment is
concentrated at the potential and selective sector only.
 The developing countries do not have the adequate capital to invest in all sectors of economy. So, if they invest
in the sectors advantage. They can get the economy with better growth.
 The unbalance condition of economy creates the balanced condition which further makes the economy
unbalance and finally economy is balanced. It is a non- ending process.
Unbalanced growth is a natural path of economic development. Situations that countries are in at any one point in time
reflect their previous investment decisions and development. Accordingly, at any point in time desirable investment
programs that are not balanced investment packages may still advance welfare. Unbalanced investment can
complement or correct existing imbalances. Once such an investment is made, a new imbalance is likely to appear,
requiring further compensating investments. Therefore, growth need not take place in a balanced way.
The path of unbalanced growth is described by three phases:
1. Complementary
2. Induced investment
3. External economies
For example, if there is growth in primary product sector, this creates a complementary investment in transport to
get the goods to the export market.
Secondly, if there is growth in one sector, there will be a multiplier effect, and this will cause induced investment in
related industries. For example, if mining jobs are created, miners will demand more retail services.
Thirdly, if the mining industry develops and creates more infrastructure, this will later benefit different industries which
can make use of the same infrastructure and derive external economies. For example, we built railways to transport
coal, but now these railways are used by commuters to get into the city and work in the service sector.

COMPARISON OF BALANCED AND UNBALANCED GROWTH STRATEGY

Balanced Growth Theory:
1. Focuses on simultaneous growth of all sectors of the
economy.
2. Seeks to accelerate the process of growth through
simultaneous investment across all sectors of the economy.
3. Requires lot of capital investment right from the beginning of
growth process.
4. A long period of strategy of growth
5. Size of the market is the principal limiting factor.
Unbalanced Growth Theory:
1. Focuses on the growth of certain key
sectors of the economy.
2. The process of growth through Imbalances
in the system.
3. Requires relatively much less investment.
4. A Short period strategy of growth.
5. It is decision making and entrepreneurial
skill
MYRDAL MODEL OF UNDERDEVELOPMENT
Circular Cumulative Causation of Economic Development is a theory developed by Swedish economist Gunnar
Myrdal in the year 1956. It is a multi-causal approach where the core variables and their linkages are delineated. The
idea behind it is that a change in one form of an institution will lead to successive changes in other institutions. These
changes are circular in that they continue in a cycle, many times in a negative way, in which there is no end, and
cumulative in that they persist in each round. The change does not occur all at once as that would lead to chaos, rather
the changes occur gradually.
Myrdal mentions that the key characteristics relevant to the development process of an economy are: the
availability of natural resources, the historical traditions of production activity, national cohesion, religions and
ideologies, economic, social and political leadership. According to Myrdal the immediate effect of closing down certain
lines of production in a community is the reduction of employment, income and demand. Through the analysis of the
multiplier he pointed out that other sectors of the economy are also affected.
Then he argued that the contraction of the markets in that area tends to have a depressing effect on new
investments, which in turn causes a further reduction of income and demand and, if nothing happens to modify the
trend, there is a net movement of enterprises and workers towards other areas. Among the further results of these
events, fewer local taxes are collected in a time when more social services is required and a vicious downward
cumulative cycle is started and a trend towards a lower level of development will be further reinforced.
Prof. Gunnar Myrdal maintains that economic development results in a circular causation process leading to
rapid development of developed countries while the weaker countries tend to remain behind and poor.
Spread Effect and Backwash Effect: Backwash and Spread effects are two effects which follow when a region is disturbed
from the state of equilibrium through an external or internal change.
These terminologies were introduced first by Prof. Gunnar Myrdal in his book “Economic development in
Underdeveloped Economies”. He introduced the circular causative process by which these two effects operate leading
to further aggravation of inequalities.
1. Spread effect is the aggregation of the land or labour or capital or technological advancement in a region which
leads to further accumulation of these inputs. They act as a base on which promote further accumulation of these
inputs. On the other hand Backwash effects are diminishing in nature they lead to further diminishing of these
inputs.
2. Spread effect provides incentive to further development of industries. The accumulation of inputs leads to
economies of scale and scope which promote further development. Backwash effect on the other hand provide
disincentive which do not promote further development of these economic forces.
3. Spread effect is followed by economic and non economic development i.e. promotion of education, health facilities,
smart cities etc. On the other hand backwash effect leads to the further deterioration of health, education etc.
Operation of BWE and SPE: The backward economies are characterized by the backwash effect of global development.
Due to globalization there is a movement of labour and capital from the backward economies to the developed
economies. On the one hand they promote further development of these developed economies by creating additional
demand of consumer goods, on the other hand they lead to scarcity of these inputs in the backward economies. Scarcity
of inputs leads to reduction in the factor payment which inhibits further development of the consumer goods industries.
There is associated shortfall of education and health facilities which promote technological backwardness and lack of
skilled labour.
Circular Cumulative Causation: The cumulative causation action has been built upon “spread effect” and “backwash
effect”. The main cause of backwardness and regional disparities has been the strong “backwash effect” and the weak
“spread effects”. The theory emphasizes that “poverty is further perpetuated by poverty” (BWE > SPE) and “affluence is
further promoted by affluence” (SPE>BWE).
Inequalities emerge because BWE > SPE. Developed region is developing at a faster rate at the cost of backward region.
Income earned by developed region is not reinvested in backward regions but is repatriated to the developed
sectors/regions leading to more development in these areas. SPE continued to become stronger in developed countries
while BWE continued to become even more spread in backward countries.
Illustration:
Backwash Effect: It basically means that if one particular area in a country starts growing or developing, it causes people,
human capital as well as physical capital (infrastructure, finance, machines etc.) from other parts of the country to
gravitate towards this growing centre.
This essentially leaves the other areas worse off than before because their best brains and capital leave them to go to
the growing centre. It means that growth in one area adversely affects the growth in the other.
For instance, in India, let’s say - Delhi is the developing centre with all the companies being set up there. Then people
from all over Haryana, Punjab, UP, Bihar etc. have a tendency to move to Delhi because all companies are located there
and better employment opportunities exist. So Delhi will grow but the remaining areas will be worse off. This is
Backwash effect. Counter to the Backwash Effect is the Spread Effect
Spread Effect: Development in one place, spreads to its suburbs and all the adjoining areas. Again taking the example of
Delhi, we could argue that suburbs like Faridabad, Gurgaon, Ghaziabad etc. have benefited from Delhi’s growth due to
the Spread Effect caused by Delhi’s growth.