The chapter focuses on four primary approaches to understanding economic development,

examining their key ideas, assumptions, strengths, and criticisms.

Chapter 3: Classic Theories of Economic Growth and Development

3.1 Overview
• Economic growth theories have evolved to explain the processes of development and
offer frameworks to guide policy formulation in developing countries.
• Four major classic approaches are discussed:
1. Linear-Stages of Growth Model
2. Structural-Change Models
3. International-Dependence Revolution
4. Neoclassical, Free-Market Counter-Revolution
These theories offer different perspectives on how countries can achieve sustainable economic
growth and development.

3.2 Development as Growth: The Linear-Stages Theory

The Linear-Stages Theory suggests that economic development is a series of linear steps
through which all countries must progress.
3.2.1 Rostow’s Stages of Growth
• Proposed by Walt Rostow, this theory outlines a universal path that all developing
countries should follow to achieve economic growth.
• Five Stages of Growth:
1. Traditional Society:
▪ Predominantly agricultural economies with limited productivity and
technology.
▪ Heavy reliance on subsistence farming, with little surplus production.
2. Pre-Conditions for Takeoff:
▪ Introduction of basic infrastructure (transport, education, and banking).
▪ Increasing productivity in agriculture and early stages of
industrialization.
▪ Growth of entrepreneurial class and investments.
3. Takeoff:
▪ Rapid industrialization and economic growth.
 ▪ Increase in investments (10% of GDP or higher), with significant
technological innovations.
▪ Shift from traditional to modern industries.
4. Drive to Maturity:
▪ Economy diversifies, with new industries emerging.
▪ Steady growth of national income and technological advancements
across sectors.
5. Age of High Mass Consumption:
▪ Economy reaches a state of high affluence.
▪ Expansion of consumer goods industries and improved living standards.
Criticisms of Rostow’s Model:
• Assumes a uniform path for all countries, ignoring differences in culture, institutions,
and history.
• Overemphasizes investment and savings without considering social and institutional
factors.
• Ignores the role of government policies, market imperfections, and external influences.
3.2.2 The Harrod-Domar Growth Model
• Developed by Roy Harrod and Evsey Domar, this model highlights the relationship
between savings, investment, and economic growth.
• The model’s equation is:
Economic Growth Rate (g) = Savings Rate (s) / Capital-Output Ratio (c)
o Savings Rate (s): The portion of national income saved.
o Capital-Output Ratio (c): The amount of capital required to produce one unit
of output.
• Key Insights:
o High savings and investment rates are crucial for growth.
o Low capital-output ratios indicate efficient use of capital.
• Criticisms:
o Assumes a direct relationship between investment and growth, neglecting
factors like technology and labor productivity.
o Overlooks social, institutional, and political factors that can hinder the growth
process.
3.2.4 Criticisms of the Linear-Stages Model
• Necessary vs. Sufficient Conditions:
 o While investment is necessary for growth, it is not sufficient without the right
institutional framework, education, and political stability.
• This model’s limited applicability is evident in countries that have not achieved
expected growth despite following high investment policies.

3.3 Structural-Change Models

• Structural-change models emphasize the shift from an agricultural-based economy to a
modern industrial economy.
• These models focus on how economies transition through changes in economic
structures.
3.3.1 The Lewis Two-Sector Model
• Proposed by W. Arthur Lewis, this model divides the economy into:
1. Traditional Agricultural Sector:
▪ Characterized by surplus labor (underemployment), low productivity,
and subsistence farming.
2. Modern Industrial Sector:
▪ Capital-intensive, higher productivity, and driven by profit-seeking
businesses.
• Key Concept:
o Development occurs when labor moves from the low-productivity agricultural
sector to the high-productivity industrial sector.
o The surplus labor is absorbed into the industrial sector, where wages are higher,
increasing overall productivity.
• Criticisms:
o Assumes an unlimited supply of labor in the agricultural sector, which may not
be true in all cases.
o Ignores factors such as wage rigidities, capital constraints, and government
intervention.
3.3.2 Structural Change and Patterns of Development
• Structural-change models also examine the patterns of development through
diversification of the economy, growth of industry, and urbanization.
• Successful development requires changes in:
o Industrial Composition: Shift from primary (agriculture) to secondary
(industry) and tertiary (services) sectors.
 o Investment in Human Capital: Enhancements in education and health.

3.4 International-Dependence Revolution

• This approach critiques the structural and linear models, emphasizing the global power
dynamics and their impact on developing countries.
• It argues that underdevelopment is a result of unequal international relations and
domestic inequalities.
3.4.1 The Neocolonial Dependence Model
• Suggests that underdevelopment is a result of exploitative relationships between
developed countries (core) and developing countries (periphery).
• Emphasizes the legacy of colonialism and its role in creating a dependency framework.
3.4.2 The False-Paradigm Model
• Argues that underdevelopment persists due to the imposition of inappropriate Western
economic models and policies on developing countries.
• Blames external advisors and international organizations for implementing strategies
that do not align with the realities of developing nations.
3.4.3 The Dualistic-Development Thesis
• Proposes that economic and social dualism exist in developing countries, characterized
by:
o Modern vs. Traditional Sectors: Modern sectors enjoy higher productivity and
income, while traditional sectors lag behind.
o Wealth Inequality: A small elite controls a disproportionate share of wealth
and resources.

3.5 Neoclassical Counter-Revolution: Market Fundamentalism

• This theory emerged in the 1980s, advocating for market-oriented policies and reduced
government intervention.
• Emphasizes the importance of free markets, privatization, and deregulation as drivers
of economic growth.
3.5.2 Traditional Neoclassical Growth Theory
• Based on the Solow Growth Model, which highlights the importance of technology
and capital in driving long-term growth.
• It argues that diminishing returns to capital eventually slow down growth, making
technological progress the main driver of sustained growth.
Criticisms:
• Overlooks the role of social and institutional factors.
• Assumes perfect markets, which rarely exist in developing countries.

3.6 Reconciling the Differences

• Each theory offers valuable insights but also has limitations.
• A comprehensive approach that integrates elements of investment, structural change,
external constraints, and market mechanisms is necessary to understand the
complexities of economic development.
• Modern development strategies often draw on all these theories, adapting them to
specific country contexts.

Conclusion
• Economic development is a multifaceted process influenced by economic, social,
political, and institutional factors.
• Classic theories provide a foundation, but contemporary approaches often require a
nuanced, eclectic strategy that incorporates multiple perspectives.