1. Overview
Development theories aim to explain the conditions that are essential for
development to occur and weigh up the relative importance of particular conditions. Early
theories focused on understanding economic growth, and strived to find general
determinants of growth that could be applied to any instance under consideration. Each
theory offers valuable insights and a useful perspective on the nature of the development
process.
By examining at patterns of growth the goal was to discover some of the laws or
principles which govern growth at all times and in all countries. Modern theories tend to
accept that conditions for growth change over time, and are often more critical of the
attempts to generate one-size-fits-all growth theories.
Approaches to economic growth are discussed throughout this lesson. You will
learn a range of competing theories and approaches to the study of economic
development although there is no universally accepted doctrine or paradigm. Each
approach has its strengths and weaknesses. Moreover, we have a continually evolving
pattern of insights and understandings, reflecting in part improved data and emergence of
new technologies and institutions that together provide the basis of examining the
possibilities of contemporary development (Todaro and Smith, 2015).
2. Desired Learning Outcomes
At the end of the lesson, you should be able to:
● Discuss the Rostow’s Stages of Growth.
● Explain the Harrod Domar Model.
● Describe the Lewis Model of Structural Economic Growth and Development.
● Understand the Neoclassical Growth Theory.
3. Content / Discussion / Learning Resources / Links
The previous lesson taught us that development is not purely an economic
phenomenon. It must encompass more than the material and financial side of people’s
lives, to expand human freedoms. Today, we try to look at development as a
multidimensional process involving the reorganization and reorientation of entire economic
and social systems. In this lesson, we explore the historical and intellectual evolution in
scholarly thinking about how and why development does or does not take place by
examining four major development theories.
A. Rostow’s Stages of Growth
At the end of the Second World War there was a renewal of interest in the subject of
development economics and the stages of growth once again preoccupied many scholars.
As a non-communist manifesto, W. W. Rostow’s stages of economic growth (1960, 1971)
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is a foray into positioning the sweep of modern economic history under capitalism into
neat and hopeful epochs. Rostow’s version is an outstanding examples of continuity and
evolution. Moreover, if Marx’s theory is regarded as the banner of capitalism doomed,
Rostow’s version may be referred to as a capitalism viable (Anushree, n.d.).
Rostow has conceived five universal stages of growth:
a. The Traditional Society
A traditional society is one of the simplest and primitive forms of social
organisation. It is one whose structure is developed within limited production function,
based on Pre-Newtonian science and technology and old Pre-Newtonian attitude to the
physical world.
The characteristics of the traditional society are:
Per Capita. Within a limited range of available technology there is a low ceiling per capita
output.
Employment in Agriculture. A high proportion of workforce (75% or more) are devoted in
the production of agricultural goods. High proportion of resources are also devoted in the
agricultural section.
Social Mobility. A hierarchical, hereditary, status-oriented social structure held down the
mobility of society at that time.
Political Power. The centre of gravity of political power was localistic, region-bound and
primarily based on land ownership.
b. Pre-Conditions for Take-Off
It is that stage of economic growth in which the progressive elements creep into the
otherwise barbaric and primitive members of the society. People try to break free from the
rigidities of the traditional society and a scientific attitude, a quest for knowledge in short, a
questioning mid-set is very much visible in the changing face of the society.
The features of pre-conditions for take-off are:
Economic Progress. Economic progress became an accepted social value. At this time
the change of human mind took place and they were able to think about their respective
countries.
New Enterprises. New types of enterprising people emerged on the society. Their
objective was to establish a firm or industry and produce output for a long time. As the
new enterprising persons emerged in the society, the gross investment raised from 5% to
10%, so that the rate of growth of output outstrips the rate of population growth.
Infrastructure. As different industries were established in different parts of the country,
automatically transportation, more mobilised communication, roads, railways, ports were
required. So infrastructure was built all over the country.
Credit Institutions. At that time necessary credit institutions were developed in order to
mobilise savings for investment.
Mobilisation of Work Force. Due to industrialisation a large portion of workforce was
shifted from agricultural section to the manufacturing sector. This was experienced in
Great Britain in the time of industrialisation (1760’s).
Decline of Birth rate. At that time medical science was slowly developing. The citizens
understood the essence of control of birth rate and death rates. At first the death rate was
controlled and then the birth rate was controlled. This was the second stage of
Demographic Transition experienced by the developed countries.
Political Power. Centralised political power based on nationalism replaced the land- based
localistic or colonial power.
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c. The Take-Off Stage
The take-off stage marks the transition of the society from a backward one to one
that is on the verge of freeing itself from the elements that retard growth. In fact, it is one
stage in which there is a dynamic change in the society and there is a meteoric rise in the
standards set by the members of society in all walks of life like industry, agriculture,
science and technology, medicine, etc.
The characteristics of the take-off stage are:
The Rate of Investment. The first property of the stage of take-off is nothing but the rate of
investment. At the time of Industrial Revolution the rate of investment was from 5% or less
to over 10% of the national income. At this time, agricultural lands were acquired for
industrialisation. This led to a depression in the further period. For this purpose
colonialism was required for Britain. As a result they came to India and other colonies for
business purpose at the first time and gradually took the political power of this country.
Development of One Leading Sector. At the time of Industrial Revolution (1760 on) we
saw the development of particular secondary section of each country in Europe. In Britain
we saw a large development in textile and iron and steel industry. As iron and steel
industry is essential for development of every country each country experienced growth in
iron and steel industry in Europe. Nowadays the development of a country is measured by
per capita consumption of iron and steel.
Existence of Different Frameworks in the Society. There was the existence of political,
social and institutional framework which exploited impulses to expansion in the modern
sector and the potential external economies affected the take-off and gave the process of
growth a sustained and cumulative character.
d. The Drive to Maturity
Maturity is a period when a society effectively applies the range of available modern
technology to the bulk of its resources; and growth becomes the normal mode of
existence. Industries like heavy engineering, iron and steel, chemicals, machine tools,
agricultural implements, automobiles etc. take the driver’s seat.
The economic characters of this stage are:
Shift in the Occupational Distribution. As due to Industrial Revolution many industries
were established in Britain and the countries of. Western Europe, the work force was
shifted from agricultural sector to the manufacturing sector. The proportion of the working
force engaged in the agricultural sector went down to 20% or less.
Shift in the Consumption Pattern. A new type of workforce was created which was termed
white-collar workers. They were mainly officials or managing officials of a factory’s
governing body. Due to high income their preferences were shifted to luxury goods. As a
result the consumption pattern of non-agricultural goods increased. This led to
development of the existing industries and also variation in tastes and preferences took
place more rapidly in this period.
Shift in the Consumption of Leading Sector. The change in composition was observed to
vary from country to country. The Swedish take-off was initiated by timber exports, wood
pulp and pasteboard products followed by the emergence of railways, hydropower, steel,
and animal husbandry and dairy products. The Russian take-off started with grain exports,
followed by railways, iron and steel, coal and engineering.
e. The Age of High Mass Consumption
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From maturity the economy moves with growth to high mass consumption, the stage
at which durable consumer goods like radios, TV sets, automobiles, refrigerators, etc., life
in the suburbs, college education for one-third to one half the population came within
reach. In addition the economy, through its political process, expresses willingness to
allocate increased resources to social welfare and security. This stage was defined in
terms of shift in emphasis from problems of production to that of consumption (Anushree,
n.d.).
4. Learning Check:
What made Rostow’s doctrine plausible is that its main facts were on continuity
and evolution of society treated each stage as being mutually inclusive from the other
stages. Despite the plausibility of his theory, write a critical review of the Rostow’s Theory
of Growth.
B.Harrod Domar Model
The Harrod Domar model shows the importance of saving and investing in a
developing economy. The model was developed independently by Roy F. Harrod and
Evsey Domarin 1939. The growth of an economy is positively related to its savings ratio
and negatively related to the capital-output ratio. It suggests that there is no natural
reason for an economy to have balanced economic growth.
It implies that a higher savings rate allows for more investment in physical capital.
This investment can increase the production of goods and services in a country, therefore
increasing growth. The capital-output ratio shows how much capital is needed to produce
a dollar’s worth of output. It reflects the efficiency of using machines. This efficiency
means that a lower capital-output ratio leads to higher economic growth since fewer inputs
generate higher outputs (Agarwal, 2017).
Importance of Harrod-Domar
It is argued that in developing countries low rates of economic growth and
development are linked to low saving rates. This creates a vicious cycle of low investment,
low output and low savings. To boost economic growth rates, it is necessary to increase
savings either domestically or from abroad. Higher savings create a virtuous circle of
self-sustaining economic growth.
Impact of increasing capital
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The transfer of capital to developing economies should enable higher growth, which in
turn will lead to higher savings and growth will become more self-sustaining (Pettinger,
2019).
Problems with the Harrod Domar Model
a. Development. The model implies that growth is the same as development. Growth is
an improvement in factors such as health, education, literacy rates and a decline in
poverty levels. Development alleviates people from low standards of living into proper
employment with suitable shelter.
b. Foreign Aid. The model focuses on acquiring foreign aid. Foreign aid can be difficult to
pay back afterward.
c. Physical Capital. Investment in physical capital in developing countries is not efficient.
There are corruption and wastage, so results are not always as expected. Even with more
efficient capital, there might not be skilled labor to use the machines efficiently.
d. Savings Ratio. Developing nations tend to have low marginal propensities to save.
Families usually spend the additional income earned rather than save it. Increasing the
savings ratio will be difficult.
e. Financial System. In an undeveloped financial system, the availability of increased
savings may not translate into extra funds for investment. The country may not have the
system to maximize savings into loans for businesses (Agarwal, 2017).
4. Learning Check:
The Harrod Domar model shows the importance of saving and investing. If you had
twenty thousand pesos, would you save or invest it? Why?
C. Lewis Model of Structural Economic Growth and Development
Arthur Lewis put forward a development model of a dualistic economy, consisting of
rural agricultural and urban manufacturing sectors. Initially, the majority of labor is
employed upon the land, which is a fixed resource. Labor is a variable resource and, as
more labour is put to work on the land, diminishing marginal returns eventually set in.
There may be insufficient tasks for the marginal worker to undertake, resulting in reduced
marginal product or output produced by an additional worker and underemployment.
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Urban workers, engaged in manufacturing, tend to produce a higher value of output
than their agricultural counterparts. The resultant higher urban wages (Lewis stated that a
30% premium was required) might therefore tempt surplus agricultural workers to migrate
to cities and engage in manufacturing activity. High urban profits would encourage firms to
expand and hence result in further rural-urban migration.
The Lewis model is a model of structural change since it outlines the development from a
traditional economy to an industrialized one ([Link]).
Evaluation:
a. China provides a good example: official Chinese statistics place the number of
internal migrants over the past 20 years at over 10% of the 1.3billion population. 45%
were aged 16-25 and two-thirds were male. Urban incomes are around 3.5 times
those of rural workers.
b. A Marxist criticism states that profits will be retained by the capitalist entrepreneur,
at the expense of workers. In addition, urban expansion might be driven by increases
in capital rather than labour.
c. Evidence suggests that surplus labour is as likely in the urban sector as in the
agricultural sector. Migrating workers may possess insufficient information about job
vacancies, pay and working conditions. This results in high unemployment levels in
towns and cities.
d. Towns and cities may also be fixed in size and unable to accommodate large
numbers of immigrants. This gives rise to slums and shanty towns, which are often
illegal, built on flood planes or areas vulnerable to landslides and without sanitation or
clean water. Cape Town provides a good example. Globally 1billion people live in
slums.
4. Learning Check:
Know the minimum wage in different regions. What is your insight about the varied
payment the daily wage earners are receiving?
b. Neoclassical Growth Theory
The Neoclassical growth theory is an economic theory that outlines how a steady
economic growth rate results from a combination of three driving forces—labor, capital,
and technology. The National Bureau of Economic Research names Robert Solow and
Trevor Swan as having the credit of developing and introducing the model of long-run
economic growth in 1956. The model first considered exogenous population increases to
set the growth rate but, in 1957, Solow incorporated technology change into the model
(Banton, 2020).
Robert Solow and Trevor Swan first introduced the neoclassical growth theory in
1956. The theory states that economic growth is the result of three factors—labor, capital,
and technology. While an economy has limited resources in terms of capital and labor, the
contribution from technology to growth is boundless.
How the Neoclassical Growth Theory Works
The theory states that short-term equilibrium results from varying amounts of labor
and capital in the production function. The theory also argues that technological change
has a major influence on an economy, and economic growth cannot continue without
technological advances.
Special Consideration
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This growth theory posits that the accumulation of capital within an economy, and
how people use that capital, is important for economic growth. Further, the relationship
between the capital and labor of an economy determines its output. Finally, technology is
thought to augment labor productivity and increase the output capabilities of labor.
Therefore, the production function of neoclassical growth theory is used to measure the
growth and equilibrium of an economy. That function is Y = AF (K, L).
● Y denotes an economy's gross domestic product (GDP)
● K represents its share of capital
● L describes the amount of unskilled labor in an economy
● A represents a determinant level of technology
However, because of the relationship between labor and technology, an economy's
production function is often re-written as Y = F (K, AL). Increasing any one of the inputs
shows the effect on GDP and, therefore, the equilibrium of an economy. However, if the
three factors of neoclassical growth theory are not all equal, the returns of both unskilled
labor and capital on an economy diminish. These diminished returns imply that increases
in these two inputs have exponentially decreasing returns while technology is boundless
in its contribution to growth and the resulting output it can produce.
The authors find a consensus among different economic perspectives all points to
technological change as a key generator of economic growth. For example, neoclassicists
have historically pressured some governments to invest in scientific and research
development toward innovation.
Endogenous theory supporters emphasize factors such as technological spillover
and research and development as catalysts for innovation and economic growth. Lastly,
evolutionary and institutional economists consider the economic and social environment in
their models for technological innovation and economic growth.
4. Learning Check:
“Economic development depends on technology.” Give your reaction on this
statement.
5. Evaluation
Among the four theories of economic growth, which do you find most plausible?
Explain your answer.
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References
Books:
Samuelson, P. and Marks, S. (2015). Managerial Economics (7th edition). John Wiley and
Sons,
Inc.
Todaro, M. and Smith, S. (2015). Economic Development. Pearson.
Online sources:
Agarwal, P. (2017). Harrod Domar Model. Retrieved from
[Link]
Anushree, A. (n.d.) Rostow’s Theory of Growth | Theories | Economics Retrieved from
[Link]
wth-theories-economics/26745
Banton. C. (2020). Neoclassical Growth Theory Retrieved from
[Link] terms/n/neoclassical- [Link]
Lewis Model of Structural Economic Growth and Development. (n.d.) Retrieved from
[Link]
economic-growth-and-development
Pettinger, T. (2019). Harrod-Domar Model of Growth and its Limitations. Retrieved from
[Link]
and-its-limitations/
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