DEVELOPMENT THEORIES

LEADING THEORIES

1. Linear Stages Model

2. Structural Change Models
3. Intl-Dependence Models
4. Neoclassical Counterrev’n
5. New Growth Models
 LINEAR STAGES THEORY
• Most influential advocate :
Walt W. Rostow
• Accdg. to Rostow, the
transition from underdevt can
be described in terms of a
series of stages thru which all
countries must proceed.
 LINEAR STAGES THEORY
• Rostow argued that all econ
lies within one of five
categories:
1. Traditional society;
2. Pre-conditions to take-off
into self- sustaining growth;
3. Take-off;
4. Drive to maturity; and
5. Age of high mass
consumption
• One of the principal tricks of
devt was: the mobilization of
domestic & foreign saving in
order to generate sufficient
investment to accelerate
growth.
 HARROD-DOMAR MODEL
• 2 equations should remind us
of the macro fundamentals:
1. ΔK/ ΔY = ICOR = k;
and
2. S = I
The Equation : ΔY/Y = s/k
where: Left-hand is GNP g.r.
Harrod-Domar model states that:
the GNP g.r. is determined
jointly by the natl savings ratio
(s), and the natl capital-output
ratio (k).
The logic of the model is simple

• In order to grow, econ must

save & invest a certain
proportion of their GNP. The
more they can save & invest,
the faster they can grow.
• Ex: if we assume that the natl
capital-output ratio of one
LDC is 3 & the aggregate
saving ratio is 6%, then,
ΔY/Y = s/k = 6%/3 = 2%
• Now, if s can be increased
from 6% to 15% (thru
increased T, foreign aid, &
C-sacrifices), the GNP g.r.
ΔY/Y = s/k = 15/3=5%
 Criticisms of the Stages Model
• The tricks of devt embodied
in the theory did not always
work.
• Reason: More “S” and “I”
are not the only necessary
conditions for growth.
Illust: Marshall Plan worked
for Europe because European
countries receiving aid
possessed the necessary
structural, institutional, and
attitudinal conditions ...
• At a more fundamental level,
devg nations are part of a
highly integrated & complex
intl system in which even
the best & most intelligent
devt strategies can be
nullified by external forces
beyond the dev’g countries
control. (To be discussed
further under International-
Dependence Model)
 STRUCTURAL CHANGE
• Two well-known models:
(1) two-sector model by
Arthur Lewis; and (2)
patterns of devt empirical
analysis by Hollis Chenery.
Lewis Theory of Development
• In the Lewis model, an LDC
consists of two sectors:
1.A tradl, overpopulated rural
subsistence sector w/ zero
marginal labor productivity.
By “zero marginal prodt’y”,
Lewis classified the tradl
rural sector as a surplus labor
economy in the sense that it
can be withdrawn from agri
sector w/o any loss of output.
2. A high-prodt’y modern
urban industrial sector into
which labor from rural-agri
sector is gradually
transferred.
• The primary focus of the
model is on both the process
of labor transfer and the
growth of output & employ’t
in the modern sector.
• The speed with which this
expansion occurs is det. by
the rate of ind’l investment
“I” & capital accumulation in
the modern sector.
• Such “I” is made possible by
the excess of modern sector
profit over wages , assuming
that capitalists re-invest all
their profits.
• Finally, the wage level in
ind’l sector is assumed to be
constant and determined as a
given premium over a fixed
average wage in the rural-
agri sector.
 Criticisms of the Lewis Model

• Although the Lewis model is

simple & roughly reflects the
historical experience of econ
growth in the West, three of
its key assumptions do not fit
institutional and economic
realities of most
contemporary developing
countries:
 Criticisms of the Lewis Model

First, the model implicitly

assumes that the rate of
transfer & employ’t creation
in modern sector is proport’l
to the rate of modern sector
capital accumulation.
• But, what if capitalist profits
are re-invested in more
sophisticated labor-
displacing capital
equipment?
• And what if capitalists do not
re-invest profits in the local
economy but are actually
invested in other countries
(i.e, capital flight)?
 Criticism of the Lewis Model

• The second questionable

assumption is the notion that
surplus labor exists in rural
areas while there is full
employ’t in urban areas.
• But most contemporary
researches indicate that the
reverse is more likely in
many LDCs -- there’s
substantial unemployment in
the urban areas ...
 Criticism on the Lewis Model

The third unreal assumption is

the notion of a competitive
modern-sector labor market
that guarantees continued
existence of constant real
urban wages up to the point
where supply of rural surplus
labor is exhausted.
Structural Change & Patterns of
Devt (by: Hollis Chenery)

• Like the Lewis model, the

patterns-of-development
analysis of structural change
focuses on the sequential
process through which the
economic, industrial, and
institutional structure of a
developing economy is
transformed over time to
permit new industries
(replacing trad’l agri) as the
engine of economic growth.
• The best-known model of
structural change is the one
based on the empirical work
of Harvard economist Hollis
Chenery.
• Chenery examined patterns
of devt for numerous 3rd
world countries during the
post-war period.
• His empirical studies (both
cross-sectional & time series)
of countries at different
levels of per capital income
led to the identification
 of several characteristic
features of the development
process.
• These include the following:
1. a shift from agri’l to ind’l
production;
2. the steady accumulation
of physical & human
capital;
3. The change in consumer
demand from emphasis on
food & basic necessities TO
the desires for diverse
manufactured goods;
4. The growth of cities &
urban industries as people
migrate from farms and small
towns;
5. The decline in family size
& overall population growth
as children lose their econ
value as parents substitute
quality (education) for
quantity.
 Conclusions & Implications

• Structural change economists

argue that despite variations,
one can identify certain
patterns occurring in almost
all countries during the
development process.
• Further, they argue that these
patterns may be affected by
the choice of devt policies as
well as the intl trade &
foreign assistance policies of
developed nations.
 Implications (con’t) ...
• The structural change
analysts are basically
optimistic that the “correct”
mix of econ policies will
generate beneficial patterns
of self-sustaining growth.
• In contrast, the international
dependence analysts are
PESSIMISTIC.
• We will discuss this model
next.
INT’L DEPENDENCE MODELS

• During the 70s, international

dependence models gained
increasing support, especially
among the 3rd world
intellectuals.
• This resulted from the
disenchantment with both the
stages and structural change
models.
• These models view dev’g
countries as beset by inst’l,
political, & econ rigidities --
both domestic & int’l -- and
caught up in a “dependence
and dominance’ relationship
with the rich countries.
 Three Major Streams of Thought

1. Neocolonial Dependence
Model
2. False-Paradigm Model
3. Dualistic-development
Thesis
Neocolonial Dependence Model

• Attributes the existence &

continuance of underdevt
primarily to the historical
evolution of a highly unequal
intl capitalist system of rich -
poor country relationship.
 ...
• Because rich nations are
intentionally exploitative,
the coexistence of rich &
poor nations in an int’l
system dominated by such
unequal power relationship
between the “center”
(developed countries) and the
“periphery” (the LDCs)
virtually impossible.
• In short, the neo-Marxist,
neocolonial view of underdevt
attributes a large part of the 3rd
World’s continuing and
worsening poverty to the
existence and policies of the
industrial capitalists of the
Northern Hemisphere & the
elite “compradors” in the
host LDCs.
 The False-Paradigm Model
• A less radical international-
dependence approach to
development, False-
Paradigm model attributes
underdevelopment to faulty
and inappropriate advice
provided by well-meaning but
often uninformed, biased
international expert advisers
from developed countries
and multilateral donor
agencies.
 Dualistic Devt Model
• Dualism’s 4 key elements:
1. Different sets of
conditions, of which
some are “superior” and
others “inferior”, can coexist
in a given space.
2. This dualistic coexistence is
chronic.
3. The degrees of superiority
or inferiority fail to show any
signs of diminishing but a
tendency to increase.
• The inter-relations bet. the
two are such that the
Superior does little to pull up
the inferior, let alone “trickle
down”.
Neoclassical Counter-revolution
• Challenges the Statist Model:
Free Markets, Public Choice,
and Market-Friendly
Approaches
 The Neoclassical Counterrevolution Model

• Leading advocates:
(Lord Peter Bauer, Deepak
Lal, Ian Little, Harry Johnson,
Bela Balassa, Julian Simon,
Jagdish Bhagwati, and Anne
Krueger)
(Three Component Approaches)

1. Free-market analysis
2. Public Choice theory
or new political economy
3. Market-friendly approach
 Free-Market Analysis
• Argues that markets alone are
efficient-- product markets
provide the best signals for
investments in new activities;
labor markets respond to these
new industries in appropriate
ways, producers know best
what to produce, & product
as well as factor prices
reflect the scarcity value of
goods and services.
 New Political Economy
• Goes even further to argue that
govts can do nothing right.
• Assumes politicians, bureaucrats,
citizens, & states act solely from a
self-interested perspective, using
power and authority of govt for
their own selfish ends.
• To conclude, good
government is minimal
government.
 Market-Friendly Approach
• Recognizes the many imper-
fections in LDC product &
factor markets and that govts do
have a key role in facilitating
the operation of markets thru
“market-friendly” interventions.
 Market-Friendly Approach
• How? by investing in
physical & social infra,
health care facilities, and
educ’l institutions & by
providing a suitable climate
for private enterprises.
 NEW GROWTH MODEL
• Though still eclectic and not
quite as fully developed as the
earlier four (4) approaches, the
New Growth Theory represents
a key component of the
emerging development theory.
• This theory provides a
framework for analyzing
endogenous growth, persistent
GNP growth that is determined
by the system governing the
production process rather than
by forces outside of the system.
• The principal motivations of
the New Growth Model are
to explain both growth rate
differentials across countries
and a greater proportion of
the growth observed.
• A useful way to contrast the
new growth with traditional
neoclassical theory is to
recognize that endogenous
growth theories can be
expressed by the simple
equation: Y = AK
 Y = AK
where:
A= any factor that affect tech
K= physical & human capital
• The potentially high rates of
return to I offered by dev’g
econ with low capital-labor
ratios are greatly eroded by
lower levels of complementary
“I” in human capital
(education), infra, and R&D.
• Thus, the endogenous or new
growth models suggest AN
ACTIVE ROLE for public policy
in promoting econ devt thru direct
and indirect investments in human
capital formation
• Though in many ways new
growth theory remains strongly
rooted in the neoclassical
tradition, it represents a
departure from strict adherence
to a dogma of free markets and
passive governments.
 Summary:
RECONCILING DIFFERENCES

• The existence of controversy --

ideological, theoretical, or
empirical -- makes the study of
development economics or
development administration
BOTH CHALLENGING AND
EXCITING.
• Devt studies has no universally
accepted doctrine. Instead, we
have a continually evolving
pattern of insights that together
provide the basis for examining the
possibilities of contemporary devt
of the diverse LDCs.
• Each of the approaches to
understanding development
has something to offer.
THE END