THEORIES OF DEVELOPMENT

1.

LINEAR-STAGES OF GROWTH THEORY

 Rostow s Stages of GrowthWalt Whitman Rostow was an American economist who presented Stages of Growth model of development. According to Rostow, the process

whereby all the developed industrial nations of the world transformed themselves from backwardness to prosperity can be described in terms of series of stages. Five Stages to Economic Development According to Walt Whitman Rostow:

Stage 1: The Traditional Society Stage 2: The Transitional Stage (the preconditions for takeoff ) Stage 3: The Takeoff Stage Stage 4: The Drive to Maturity Stage 5: The High Mass Consumption

Stage 1: Traditional Society:

The economy is dominated by subsistence activity where output is consumed by producers rather than traded. Any trade is carried out by barter where goods are exchanged directly for other goods. Agriculture is the most important industry and production is labor intensive using only limited quantities of capital. Resource allocation is determined very much by

traditional methods of production.

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Stage 2: Transitional Stage (the preconditions for take-off)

Increased specialization generates surpluses for trading. There is an emergence of transport infrastructure to support trade. As incomes, savings and investments grow, entrepreneurs emerged. concentrating on primary products. External trade also occurs

Changes occurred during the transitional period:

1) Crucial role by agriculture

for the sake of transition the self-

sufficiency in agriculture is required. Such self-sufficiency is justified on the following grounds: i. ii. To meet the increased needs of growing population. With agri-surplus foreign exchange can be earned to meet the import bill of capital of goods. iii. The overall increase in the productivity due to agridevelopment will provide stimulus to other sectors of the economy. In short, agri sector must supply expanded food, expanded markets and expanded funds to the modern sector. 2) Growing Outlays on SOC according to Rostow in this period, the The SOC has three distinctive

resources are diverted to SOC. characteristics. i. ii. iii.

The gestation period is long It is lumpy It is beneficial for the community

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Stage 3: Take-Off Stage

Industrialization

increases,

with

workers

switching

from

the

agricultural sector to the manufacturing sector. Growth is

concentrated in The

a few regions of the country and in one or two manufacturing industries. level of investment reaches over 10% of GNP. The economic transitions are accompanied by the evolution of

new

political and social institutions that support the industrialization. The growth is self-sustaining as investment leads generating more savings to finance to increasing incomes in turn,

further investment.

Stage 4: Drive to Maturity

The economy is diversifying into new areas. Technological innovation is providing a diverse range of investment opportunities. producing a wide range of goods and services and imports. The economy is there is less reliance on

Stage 5: High Mass Consumption

The economy is geared towards mass consumption. The is durable industries flourish. The service sector dominant. becomes

consumer

increasingly

According to Rostow, development requires substantial investment in capital. For the economies of LDCs to grow, the right conditions for such investment would have to be created. If aid is given or foreign direct

investment occurs at stage 3, the economy needs to have reached stage 2. If the stage 2 has been reached then injections of investments may lead to rapid growth.

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Rostow s Stages of Development

 Harrod-Domar Growth Model

The Harrod-Domar model is used in development economics to explain an economy s growth rate in terms of the level of savings and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed

independently by Sir Roy F. Harrod in 1939 and Evsey Domar in 1946. The Harrod-Domar model was the precursor to the exogenous growth model. Every economy must save a certain proportion of its national income, if only to replace worn-out or impaired capital goods (buildings, equipment, and materials). However, in order to grow, new investment
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representing net additions to the capital stock are necessary. If we assume that there is some direct economic relationship between the size of the total capital stock, K, and total GNP, Y for example, if $3 of capita is always it follows that any net addition to

necessary to produce a $1 stream of GNP

the capital stock in the form of new investment will bring about corresponding increases in the flow of national output, GNP. Any economy which wishes to grow it is in need of new investment, i.e., the net additions to capital stock. If for the output worth $1, the stock of capital worth $3 is required, then the ratio between capital and output will be 3 to 1. Such relationship is known as COR.

It means that to increase GNP worth $1, the new investment worth $3 will be required. The COR is represented by 'k', it is as:

Formula of COR: k = K/Y or k = K/ Y The saving ratio is shown by 's'. The saving ratio is shown by the equation: S = sY The investment (I) is defined as the change in capital stock ( K) then: I= K As we told above that k = K/Y or k = K/ Y which means that there exists a direct relationship of total output and stock of capital. Solving for K. K = k. Y We know at equilibrium: I = S As I = K, and K = k. Y, then: I = K = k. Y While S = sY, then I = S.

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S = sy= k. Y = K = I or simply, it is: sY = k. Y Dividing the above equation by Y and k: sY = k. Y or s = Y or Y = s = MPS Y(k) Y(k) k Y Y k COR

The last equation shows that the rate of growth of GNP ( Y/Y) is determined by saving ratio (s) and national COR (k).

In other words, it says that the growth rate of national income is directly or positively related to saving ratio (i.e., the more an economy is able to

save - and invest - out of given GNP, the greater will be the growth of GNP), and inversely or negatively related to the economy's COR (i.e., the higher is k, the lower will be the rate of GNP growth).

The economic logic of last equation is this that if the economies want to grow they must save and invest a certain proportion of their GNP. The more they save and invest, more will be their growth rate. The actual rate at which they can grow for any level of savings and investment depends upon on how productive that investment is.

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2. STRUCTURAL-CHANGE MODELS

 The Lewis Theory of Development

Structural change model focuses on the mechanism by which underdeveloped economies transform their domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, more urbanized and more industrially diverse manufacturing and service economy. Nobel laureate Lewis said that underdeveloped economy consists of two sectors. (1) Subsistence sector - a traditional, over populated rural

subsistence sector with surplus labor and (2) Industrial Sector - a high productivity modern sector to which this surplus labor is transferred.

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3. THE INTERNATIONAL-DEPENDENCE REVOLUTIONARY

Developing countries face institutional, political and economic rigidities, both on the domestic and the international front and are caught in a dependence and relationship with rich countries. dominance

Three major streams of thoughts can be sorted out as: a. Neo-Colonial Dependence b. The False-Paradigm Model c. The Dualistic- Development Thesis

Neo-Colonial Dependence Model:

It is an indirect outgrowth of Marxist thinking. It refers to the existence and continuance of underdevelopment in a highly unequal international capitalist system. The international system is dominated by unequal power relationships between the centre (the developed nations) and the periphery (the less developed countries). The poor nations attempt to become self-reliant and independent but this system makes it difficult and sometimes even impossible.

According to this theory, certain groups in the developing countries (including landlords, entrepreneurs, military rulers, merchants, salaried public officials, and trade union leaders) who enjoy high incomes, social status, and political power constitute a small elite ruling class whose principal interests are in perpetuation of the international capitalist system of inequality. Directly and indirectly, they serve (are dominated by)and are rewarded by (are dependent on) international specialinterest power groups including multinational corporations, national

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bilateral-aid agencies, and multilateral assistance organizations like the World Bank or the International Monetary Fund (IMF). Therefore, a major restructuring of the world capitalist system is required to free dependent developing nations from the direct and indirect economic control of their developed-world and domestic oppressors.

Curiously, a very similar but obviously non-Marxist perspective statement was expounded by Pope John Paul II in his widely quoted 1988 encyclical letter:

One must denounce the existence of economic, financial, and social mechanisms which, although they are manipulated by people, often function almost automatically, thus accentuating the situation of wealth for some and poverty for the rest. These mechanisms, which are

manoeuvred directly or indirectly by the more developed countries, by their very functioning, favour the interests of the people manipulating them. But in the end they suffocate or condition the economies of the less developed countries.

False-Paradigm Model:

The second and less radical international-dependence approach to development, the false-paradigm model, attributes underdevelopment to faulty and inappropriate advice provided by well-meaning but often uninformed, biased, and ethnocentric international expert advisers from developedcountry assistance agencies and multinational donor organizations. These experts offer sophisticated concepts, elegant theoretical structures, and complex econometric models of development that often lead to inappropriate or incorrect policies. Because of institutional factors such as the central and
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remarkably resilient role of traditional social structures (i.e., tribe, caste, class, etc.), the highly unequal ownership of land and other property rights, the disproportionate control by local elites over domestic and international financial assets, and the very unequal access to credit, these policies, based as they often are on mainstream, Lewis-type surplus labour or Chenery-type structural-change models, in many cases merely serve the vested interests of existing power groups, both domestic and international.

Dualistic Development Thesis:

Dualism is a concept widely discussed in development economics. It represents the existence and persistence of increasing divergences between rich and poor nations and rich and poor peoples on various levels. One of the elements of dualism is that there is a coexistence of wealthy, highly educated elites with masses of illiterate poor people within the same country or city. According to this theory, there is a coexistence of powerful and wealthy industrialized nations with weak, impoverished peasant societies in the international economy.

This coexistence is chronic and not merely transitional. It is not due to a temporary phenomenon, in which with the capacity of time, the discrepancy between superior and inferior elements would be eliminated.

4. THE NEOCLASSICAL COUNTERREVOLUTION

This approach can be implemented through the following three models: (a) Free-Market Analysis: Free-market analysis argues that markets alone are efficient if:

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Product markets provide the best signals for investments in new activities,

y y

Labour markets respond to these new industries in appropriate ways, Producers know best what to produce and how to produce it efficiently, and

Product and factor prices reflect accurate scarcity values of goods and resources.

Under

free-market,

competition

is

effective

not

necessarily

perfect.

Technology is freely available and nearly costless to absorb. Information is correct and nearly costless to obtain. (b) Public-Choice Theory: Public-choice theory, also known as new political economy approach , goes even further to argue that government can do

nothing right. This is because that politicians, bureaucrats, citizens and states act solely from a self-interested perspective, using their powers and the authority of government for their own selfish needs. Citizens use political influence to obtain special benefits (sometimes also referred to as rent ) from government policies, for example, import licenses, or rationed forex. Politicians use government resources to consolidate and maintain positions of power and authority. Bureaucrats use their positions to extract bribes from rent-seeking citizens and to operate protected business on the side. And finally state uses its power to confiscate private property from individuals. The net result is not only a misallocation of resources but also a general reduction in individual freedoms. The conclusion, therefore, is that minimal government is the best government. (c) Market-Friendly Approach: The third approach is market-friendly approach, which is the most recent variant on the neoclassical

counterrevolution. It is associated principally with the writings of the World

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Bank and its economists, many of whom were more in the free-market and public-choice camps during the 1980s. This approach recognizes that there are many imperfections in LDC product and factor markets and that governments do have a key role to play in facilitating the operation of markets through nonselective (market-friendly) interventions for example, by investing in

physical and social infrastructure, health care facilities, and educational institutions and by providing a suitable climate for private enterprise.

5. THE NEW GROWTH THEORY OR THE ENDOGENOUS GROWTH

An economic theory which argues that economic growth is generated from within a system as a direct result of internal processes. More specifically, the theory notes that the enhancement of a nation's human capital will lead to economic growth by means of the development of new forms of technology and efficient and effective means of production.

This view contrasts with neoclassical economics, which contends that technological progression and other external factors are the main sources of economic growth. Supporters of endogenous growth theory argue that the productivity and economies of today's industrialized countries compared to the same countries in pre-industrialized eras are evidence that growth was created and sustained from within the country and not through trade.

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ACRONYMS AND TERMINOLOGIES

SOC

- Social Overhead Capital - SOC is the capital spent on social infrastructure such as roads, school buildings, hospitals, libraries and ect. - Gross National Produce - GNP is the total value of all the goods and services produced by a country in one year. It also includes the income that comes from foreign countries. - Capital Outlay Ratio - Less Developed Countries - Underdeveloped Countries - Developed Countries - International Monetary Fund - the monetary payment received for goods or services and from other sources such as rents or investments, revenue, receipts. - From Greek words exo and gignome meaning outside and to come to be - economic system characterized by the following: (1) private property ownership exists; (2) individual and companies are allowed to compete for their own economic gain; (3) free market forces determine the prices of goods and services. - any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods.

GNP

COR LDCs UDCs DCs IMF Income

Exogenous

Capitalism

Socialism

Communism - A political and economic ideology based on communal ownership and the absence of class. Communism, which can be though of as capitalism's opposite, says that in a capitalist society, the working class (the proletariat) is exploited by the ruling class (the bourgeoisie). While based on a Utopian ideal of equality and abundance, as expressed by the popular slogan, "From each according to his ability, to each
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according to his need," communism in practice has only existed under authoritarian government and has been the source of millions of human rights violations and deaths. Feudalism - The Feudal System was introduced to England following the invasion and conquest of the country by William I (The Conqueror). The system had been used in France by the Normans from the time they first settled there in about 900AD. It was a simple, but effective system, where all land was owned by the King. One quarter was kept by the King as his personal property, some was given to the church and the rest was leased out under strict controls.

References: y y y y www.economicsconcepts.com www.investopedia.com www.wikipedia.org www.erikkrantz.wordpress.com

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