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Classic Theories of Economic Development

This document outlines four classic theories of economic development: 1) Linear stages of growth model including Rostow's stages of growth and Harrod-Domar growth model 2) Theories of structural change including the Lewis two-sector model of transferring surplus rural labor to industry 3) International dependence revolution models including neocolonial dependence and false paradigm models 4) Neoclassical, free market counterrevolution arguing underdevelopment results from poor pricing and too much state intervention.

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101 views2 pages

Classic Theories of Economic Development

This document outlines four classic theories of economic development: 1) Linear stages of growth model including Rostow's stages of growth and Harrod-Domar growth model 2) Theories of structural change including the Lewis two-sector model of transferring surplus rural labor to industry 3) International dependence revolution models including neocolonial dependence and false paradigm models 4) Neoclassical, free market counterrevolution arguing underdevelopment results from poor pricing and too much state intervention.

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Classic Theories of Economic Development: Four Approaches

1. Linear stages of growth model

 Rostow’s Stages of Growth -A theory of economic development, associated with the American economic historian Walt
W. Rostow, according to which a country passes through sequential stages in achieving development.

 Harrod-Domar Growth Model (sometimes referred to as the AK model)- -A theory of economic development,
associated with the American economic historian Walt W. Rostow, according to which a country passes through
sequential stages in achieving development.

Capital-output ratio A ratio that shows the units of capital required to produce a unit of output over a given period of time
Net savings ratio Savings expressed as a proportion of disposable income over some period of time

Criticisms of the Stages Model:


- Necessary versus sufficient conditions

Necessary condition A condition that must be present, although it need not be in itself sufficient, for an event to occur.
Sufficient condition A condition that when present causes or guarantees that an event will or can occur

2. Theories and Patterns of structural change

- Structural-change theory 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.

 The Lewis two-sector model- A theory of development in which surplus labor from the traditional agricultural sector is
transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization,
and stimulates sustained development.

Structural transformation The process of transforming an economy in such a way that the contribution to national income by
the manufacturing sector eventually surpasses the contribution by the agricultural sector. More generally, a major alteration
in the industrial composition of any economy

Surplus labor The excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the
Lewis two-sector model of economic development

Criticisms of the Lewis Model:


- Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation
- Surplus labor in rural areas and full employment in urban?
- Institutional factors?
- Assumption of diminishing returns in modern industrial sector

Empirical Patterns of Development - Examples:


- Switch from agriculture to industry (and services)
- Rural-urban migration and urbanization
- Steady accumulation of physical and human capital
- Population growth first increasing and then decreasing with decline in family size

3. International-dependence revolution

 The neocolonial dependence model- A model whose main proposition is that underdevelopment exists in developing
countries because of continuing exploitative economic, political, and cultural policies of former colonial rulers toward less
developed countries
 The false-paradigm model- The proposition that developing countries have failed to develop because their development
strategies (usually given to them by Western economists) have been based on an incorrect model of development
 The dualistic-development thesis

Criticisms and limitation:


- Does little to show how to achieve development in a positive sense; accumulating counterexamples

4. Neoclassical, free market counterrevolution

-The central argument of the neoclassical counterrevolution is that underdevelopment results from poor resource
allocation due to incorrect pricing policies and too much state intervention by overly active developing-nation governments.

Free markets The system whereby prices of commodities or services freely rise or fall when the buyer’s demand for them rises or
falls or the seller’s supply of them decreases or increases.

Public-choice theory (new political economy approach)The theory that self-interest guides all individual behavior and that
governments are inefficient and corrupt because people use government to pursue their own agendas.

Market-friendly approach The notion historically promulgated by the World Bank that successful development policy requires
governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy
in areas where the market is inefficient

Main Arguments :
-Denies efficiency of intervention
- Points up state owned enterprise failures
- Stresses government failures
- Traditional neoclassical growth theory - with diminishing returns, cannot sustain growth by capital accumulation alone

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