Part I

‡ Four Approaches
‡ Linear-Stages-of-Growth Models
‡ Structural-Change Models
‡ International Dependence
Revolution
 Four Approaches

‡ Four major and often competing development

theories, all trying to explain how and why
development does or does not occur.
‡ Newer models often draw on various aspects
of
these classical theories.

‡ In the 1950¶s and 1960¶s, linear-stages-of-

growth models were popular. They described
the process of development as a series of
successive stages.
‡ These models were replaced in the 1970¶s by
Structural Change and International
Dependence models.
‡ Structural change models emphasized the
internal process of structural changes that a
developing country must go through, while
international dependence models viewed
underdevelopment in terms of international and
domestic power relationships, institutional and
structural rigidities and the resulting proliferation
of dual economies and dual societies both within
and among nations of the world.
 ‡ In the 1980¶s and 1990¶s the
neoclassical
counterrevolution focused on the
beneficial role of free markets, open
economies and the privatization of public
enterprises and suggested that the failure
of some economies to develop is a result
of too much government intervention and
regulation.
 Linear-Stages-of-Growth Models
± Rostow¶s Stages of Growth
± Harrod-Domar¶s Growth Model

‡ The thinking here was that the

developing
countries could learn a lot from the historical
growth experience of the now developed
countries in transforming their economies
from
poor agrarian societies to modern industrial
giants.
‡ Emphasized the role of accelerated
capital
accumulation.
 Rostow¶s Stages of Growth
‡
Rostow argued that economic development can be
described in terms of a series of steps through which
all countries must proceed:
1. The Traditional Society
2. The Pre-conditions for take-off into self-sustaining growth
3. The Take-off
4. The Drive to Maturity
5. The Age of High Mass Consumption
‡
Advanced nations were considered well beyond the
take-off stage while underdeveloped nations were
seen as still in the traditional or pre-conditions stages.
‡
Emphasized the need for the mobilization of domestic
and foreign investment in order to accelerate growth.
 ‡ Rostow¶s model states that countries may need to
depend on a few raw material exports to finance the
development of manufacturing sectors which are not yet
of superior competitiveness in the early stages of take-
off. In that way, Rostow¶s model allows for a degree of
government control over domestic development not
generally accepted by some ardent free trade advocates.

‡ As a basic assumption, Rostow believes that

countries want to modernize as he describes
modernization, and that the society will ascent to the
materialistic norms of economic growth.
 Traditional Societies

‡ Traditional societies are marked by their

pre-Newtonian understanding and use of
technology. These are societies which
have pre-scientific understandings of
gadgets, and believe that gods or spirits
facilitate the procurement of goods, rather
than man and his own ingenuity. The
norms of economic growth are completely
absent from these societies.
 Preconditions for Take-off

‡ The preconditions to take-off are, to

Rostow, that the society begins committing
itself to education, that it enables a degree
of capital mobilization, especially through
the establishment of banks and currency,
that an entrepreneurial class form, and
that the secular concept of manufacturing
develops, with only a few sectors
developing at this point. This leads to a
take off in ten to fifty years.
 The Take-off

‡ Take-off then occurs when sector led

growth becomes common and society is
driven more by economic processes than
traditions. At this point, the norms of
economic growth are well established.
‡ Transition from traditional to modern
economy
 The Drive to Maturity

‡ The drive to maturity refers to the need

for
the economy itself to diversify. The sectors
of the economy which lead initially begin to
level off, while other sectors begin to take
off. This diversity leads to greatly reduced
rates of poverty and rising standards of
living, as the society no longer needs to
sacrifice its comfort in order to strengthen
certain sectors.
 Age of High Mass Consumption

‡ The age of high mass consumption refers to the

period of contemporary comfort afforded many
western nations, wherein consumers
concentrate on durable goods, and hardly
remember the subsistence concerns of previous
stages.

‡ in the age of high mass consumption, a society

is able to choose between concentrating on
military and security issues, on equality and
welfare issues, or on developing great luxuries
for its upper class.
 Criticism

‡ Strong bias towards western model of

modernization (free vs. controlled markets,
China).
‡ Tries to fit economic progress into a
linear
system
 Harrod-Domar Growth Model
(AK Model)

‡ Following on Rostow¶s theory theAK model

describes the mechanism by which more
investment leads to more growth.
‡ Pointed to the necessity of net additions to the
capital stock

‡ Used to explain an economy's growth rate in

terms of the level of saving and productivity of
capital.
‡ It suggests there is no natural reason for an
economy to have balanced growth.
 Concepts of Growth
‡ Warranted growth - the rate of output growth at which
firms believe they have the correct amount of capital and
therefore do not increase or decrease investment, given
expectations of future demand.

‡ Natural rate of growth - The rate at which the labour

force expands, a larger labour force generally means a
larger aggregate output.
‡ Actual growth - The actual aggregate output change.

‡ There is no guarantee that an economy will achieve

sufficient output growth to sustain full employment in a
context of population growth.

‡ The problem arises when actual growth either exceeds

or fails to meet warranted growth expectations. A vicious
cycle can be created where the difference is
exaggerated by attempts to meet the actual demand,
causing economic instability.
 Components

± Capital stock (K)

± Output (Y) - GDP
± Capital-Output ratio (k): the dollar amount of
capital needed to produce a $1 stream of
GDP. K/Y or K/Y

± Savings (S) and the savings ratio (s): the fixed

proportion of national output that is used for
new investment.
 s/k =
So
S = sY
(1)
‡ Net investment is the change in the capital stock
I = K
(2)
‡ Remember that k = K/Y or K/Y, so that
K = kY
(3)
‡ Net savings must equal to net investment so that
S = I. Combining (1), (2) and (3):
sY = kY
Y/Y
Y/Y is the growth rate of GDP.
 ‡ Increasing the savings rate,
increasing the
marginal product of capital, or
decreasing
the depreciation rate will increase
the
growth rate of output;
‡ So the growth rate of GDP is determined
jointly by the savings ratio, s, and the
national capital-output ratio

‡ So the rate of growth of GDP is positively

related to the economies savings ratio and
negatively related to the economies
capital-output ratio.

‡ The more economies save and invest, the

faster they can grow but the actual rate of
growth is measured by the inverse of the
capital-output ratio ± the output-capital
ratio.
‡ The fact that LDCs savings levels are often not enough
to meet the levels suggested by the linear-stages
models, the need to fill the ³savings gap´ was used to
justify massive transfers of capital and technical
assistance from developed countries to LDCs.

‡ More savings and investment is not a sufficient condition

for accelerated rates of economic growth. Many LDCs
lack the necessary structural, institutional and attitudinal
conditions to convert new capital effectively into higher
levels of output. They also lacked the complementary
factors of production (e.g. skilled labour and managerial
competence).

‡ Also the development strategies proposed by the stages

models failed to take into account the global environment
in which developing countries exist ± one in which
development strategies can be thwarted by external
forces beyond the countries control.
 Structural Change Models
± Lewis Two-Sector Model
± Patterns-of-Development Approach

‡ These models tend to emphasize the

transformation of domestic economic
structures from traditional subsistence
agriculture economies to more modern,
urbanized and industrially diverse
manufacturing and service economies.
 Lewis Two-Sector Model
‡ The economy consists of two sectors
± The traditional agricultural sector is typically characterized by low
wages, an abundance of labour, and low productivity through a
labour intensive production process.

± the modern manufacturing sector is defined by higher wage

rates than the agricultural sector, higher marginal productivity,
and a demand for more workers initially
‡ Labour can be withdrawn from the traditional sector
without any loss of output

‡ Focus is on labour transfer and output and employment

growth in the modern sector. The rate at which this
occurs is determined by the rate of industrial investment
and capital accumulation in the modern sector.

‡ Wages in the industrial sector are fixed at a premium

above wages in the traditional sector. It is assumed that
rural labour supply is perfectly elastic.
 ‡ Lewis assumed that with the urban wage above the
average rural wage, that the modern-sector employers could
hire as many surplus rural workers as the wanted without
fear of rising wages

‡The successive reinvestment of profits from the modern

sector would increase the production possibilities of that
sector leading to successive increases in the demand for
labour. The employment expansion in the industrial sector
would continue until all the excess labour from the traditional
sector is absorbed. From that point onwards, modern sector
wages would rise in order for industrial employers to attract
additional workers from the traditional sector.

‡Improvement in the marginal productivity of labour in the

agricultural sector is assumed to be a low priority as the
hypothetical developing nation's investment is going towards
the physical capital stock in the manufacturing sector.
 Over time as this transition continues to take place and
investment results in increases in the capital stock, the
marginal productivity of workers in the manufacturing will
be driven up by capital formation and driven down by
additional workers entering the manufacturing sector.
Eventually, the wage rates of the agricultural and
manufacturing sectors will equalize as workers leave the
agriculture for the manufacturing, increasing marginal
productivity and wages in the agriculture while driving
down productivity and wages in manufacturing.

‡ The end result of this transition process is that the

agricultural wage equals the manufacturing wage, the
agricultural marginal product of labour equals the
manufacturing marginal product of labour, and no further
manufacturing sector enlargement takes place as
workers no longer have a monetary incentive to
transition.