 Linear Theories of

UNIT 3 LINEAR THEORIES OF UNDERDEVELOPMENT

Underdevelopment

Structure
3.0 Objectives
3.1 Introduction
3.2 Linear Theories
3.2.1 Marx's Stages of Growth
3.2.2 Linear Stages of Growth Model – Rostow
3.2.3 Kuznets’ Theory
3.2.4 Harrod–Domar Model
3.3 Limitations of Linear Theories
3.4 State Intervention and Related Policy Implications
3.5 Let Us Sum Up
3.6 Hints to Check Your Progress Exercises

3.0 OBJECTIVES
After studying this Unit, you should be able to:
 outline the theory behind economic underdevelopment;
 discuss the evolution of classical theories of economic underdevelopment;
 analyse the implications of the Linear Theories [viz. Marx’s Stages of
Growth, Rostow’s Linear Stages of Growth, Kuznets’ Theory and Harrod-
Domar Model];
 state the limitations of the Linear Theories of underdevelopment and
 explain the policy implications of the linear theories.

3.1 INTRODUCTION
Economic progress is an essential component of every country. Development is
not purely an economic phenomenon. It encompasses more than the material and
financial side of people’s lives. It is, therefore, perceived as a multidimensional
process involving the reorganization and reorientation of entire economic and
socio-political systems. In addition to improvements in incomes and output, it
typically involves radical changes in institutional, social and administrative
structures as well as popular attitudes, customs and beliefs. The first idea that


Dr. Puja Saxena Nigam, Associate Professor, Economics, Hindu College, University of Delhi,
New Delhi.
55
Theories of emerged was that all major countries have a potential for development i.e. those
Underdevelopment
that have not developed, but can, are underdeveloped. With respect to this, two
questions came up and were answered by economists worldwide. One is how is
the level of development measured? The second is, compared to which desirable
characteristics of development, the backward countries are classified as
underdeveloped? In answers to these two questions, it was agreed that the
standard of living and per capita income are the measures of development and the
level of development of advanced or developed countries would be the
benchmark for their relative comparison. As a result, the idea of
underdevelopment equilibrium gained acceptance. This was followed by the
theories of Balanced and Unbalanced Growth.
Development theory is a collection of theories on how desirable change in
society is best achieved. If we explore the historical and intellectual evolution of
development, we come across four development theories. These offer valuable
insights and a useful perspective on the nature of development process. The
post-World War II literature on economic development dominated the four major
schools of thought. These are:
1) The Linear Stages of Growth Model
2) Theories and Patterns of Structural Change
3) The International-Dependence Revolution
4) The Neoclassical Free-Market Counter-Revolution
The 1950’s and 1960’s saw the economic theorists viewing the process of
development as a series of successive stages of economic growth through which
all countries must pass. It primarily focused on the right quantity and mixture of
‘Savings, Investment and foreign capital’. This was considered necessary to
enable the developing countries to proceed along an economic growth path that
had historically been followed by most developed countries.
This Linear-Stages approach was largely replaced in the 1970’s by two
competing schools of thought. The first of these focused on Theories and Patterns
of Structural Change. It used modern economic theory and statistical analysis to
portray the process of structural change needed by a growing country to
experience sustained rapid economic growth. The second, the International-
Dependence Revolution was more radical and political. It explained
underdevelopment in terms of: (i) international and power relationships, (ii)
institutional and structural economic rigidities, and (iii) the resulting proliferation
of dual economies. Dependence theories emphasized on the external and internal
institutional and political constraints on economic development. These, thus,
placed emphasis on the need for policies to eradicate poverty, to create
employment opportunities and to reduce inequalities.
Throughout the 1980s and 1990s, the fourth approach of neoclassical/neoliberal
56 counterview prevailed. It focused on the beneficial role of free markets, open
 Linear Theories of
economies and the privatisation of inefficient public enterprises. According to Underdevelopment
this theory, failure to develop is the result of too much government intervention
and regulation of the country instead of exploitative external and internal forces.

3.2 LINEAR THEORIES

When interest in the poor countries of the world materialized following the
Second World War, economists in the industrialized countries were caught off-
guard. They had no experience to analyze the process of economic growth for
countries which were mainly agrarian and lacked modern economic structures.
They had the recent experience of Marshall Plan, under which massive amounts
of U.S. financial and technical assistance enabled the war-torn countries of
Europe to rebuild and modernize their economies. Thus, came the Stage Theory.
This approach came to be known as ‘Capital Fundamentalism’ as it emphasized
on the role of accelerated capital accumulation.

3.2.1 Marx's Stages of Growth

Karl Marx’s theory combines economics and sociology to view economic
development as a continuous change in the social, cultural and political life of a
society. In Marx’s analysis, economic systems reach higher stages through the
strained relations that run between the dynamic forces of production and the
slowly-evolving social and political organization which permits production.
According to Marx, there are five stages of capitalist economic development viz.,
(i) primitive-communal society (ii) feudalism (iii) capitalism (iv) socialism and
(v) communism. The stages of development spans out from the beginning of the
evolution of medieval feudalism to ‘industrial capitalism’. The most advanced
stages of capitalism which features international imperialism carries the seeds of
its own destruction. Periodic crises wreck the international capitalist system to a
point of its eventual decay leading to the formation of a socialist state. The class
struggle propels this transformation. Workers and capitalists represent domestic
class struggle that spreads internationally in advanced capitalism to become
imperialism at world level. Marx predicted that growing conflicts between
workers and owners/capitalists would eventually lead to a violent revolution in
which capitalism would be transformed to socialism. This has not come true in
case of advanced industrial economies. In fact, the Marxian theory gives an
important insight into the problem faced by today’s Least Developed countries.
Many of them have attempted to achieve rapid development by concentrating
investment in the modern industrial sector. However, what could be seen is
growing inequality and social instability in these economies similar to the mid
19th century Europe.
The followers of Marx have extended the scope of Marxist theory to encompass
the international dimension on the role of capital in economic development.
According to them, the international capitalist system, which has led to great
inequalities between the rich and poor countries, has increased the dependence of 57
Theories of the least developed countries on the industrial capitalist countries for their basic
Underdevelopment
economic needs. Paradoxically, this has resulted in a lot of capital and other
resources being transferred from poor to rich countries. This is the phenomenon
of International Dependence that needs to be restructured to transform the nature
of relationship between the poor and the rich countries.

Check Your Progress 1

Note: i) Use the space given below for your answers.
ii) Check your progress with those answers given at the end of the unit.
1) Specify the evolution of classical theories of underdevelopment.
………………………………………………………………………………….
………………………………………………………………………………….
………………………………………………………………………………….
2) State the Marxian views on economic development.
………………………………………………………………………………….
………………………………………………………………………………….
………………………………………………………………………………….

3.2.2 Linear Stages of Growth Model – Rostow

American Economic Historian Walt W. Rostow (1960) came up with his Stages
of Growth model. According to him, the transition from underdevelopment to
development can be described in terms of a series of steps or stages through
which all countries must pass. They are:
i) The Traditional Society: This is the stage defined by a society that is
primitive with a large agricultural sector and hierarchical social structure. It is
characterized by the backward nature of its technology and thus possesses a
low ceiling of attainable output per head.
ii) The Pre-conditions for Take-off: This is the stage related to application of
modern science to agriculture. There must be entrepreneurs in the society and
investors who can offer financial support to new ideas. This involves slow
changes in attitudes and organization, and, sharp break from traditional
rigidity towards mobility.
iii) The Take-off: As the economy overcomes resistances to growth and change,
rate of investment jumps. This gives rise to substantial and rapid growth of
manufacturing industries. A political, social and institutional framework
emerges that is favourable to sustained growth. Rostow called this stage as
Industrial Revolution.
iv) The Drive to Maturity: This movement from take-off to maturity is the
stage of spread of technical change for improved efficiency from the leading
58 sectors of the economy to the other sectors. Rate of growth of income
 Linear Theories of
outstrips the rate of growth of population to raise the per capita income. In Underdevelopment
this stage, according to Rostow, "an economy demonstrates that it has
technological and entrepreneurial skill to produce not everything, but
anything it chooses to produce".
v) High Mass Consumption: This stage characterizes the movement of an
economy from maturity to high mass consumption such that consumer
durable goods become accessible. In addition, the economy, via its political
process, expresses willingness to allocate increased resources to social
welfare and security.

Overall, the above diagram represents the Rostow's stages of growth discussed
here. In his work, Rostow admits that his theory and the stages are not merely
descriptive or factual, but is based on logic and continuity. He suggested increase
in savings and investment for economic growth and "capital constraint" as main
obstacle to the path of development.

3.2.3 Kuznets’ Theory

Simon Kuznets developed an approach to the analysis of economic growth over
long historical periods which he called as “economic epochs”. Each economic
epoch is characterized by innovation. He elaborated the idea of Modern
Economic Growth (MEG). He defined a country’s economic growth as “a long-
term rise in capacity to supply increasingly diverse economic goods to its
population. This growing capacity is based on advancing technology and the
institutional and ideological adjustments that it demands.” The following three
components of the definition are crucial.
59
Theories of i) While the sustained rise in national output is a clear manifestation of
Underdevelopment
economic growth, the ability to provide a wide range of goods is a sign of
economic maturity.
ii) Modern technology provides the basis or preconditions for continuous
growth.
iii) To realize the potential for growth inherent in new technology, institutional,
ideological and other adjustments must be made.
MEG is characterized by a rapid growth in per capita production, higher rates of
capital formation than previous epochs and extensive use of science-based
technology. Kuznets identified the following characteristics of economic growth
of every developed nation:
1) High Rates of Growth of Per Capita Output and Slowing Down of
Population Growth: From around 1770, all contemporary developed
countries experienced high rates of growth of both per capita output and
population. Kuznets also highlighted the trend of slowing down of the rate of
population growth.
2) High Rates of Increase in Total Factor Productivity (TFP): TFP is the
output per unit of all inputs. It shows the efficiency with which all inputs are
used in the production process. High rate of rise in TFP constitutes MEG.
3) High Rates of Structural Transformation of the Economy: MEG is
characterized by a high rate of structural and sectoral change inherent in the
growth process. The changes include: (i) a gradual shift away from
agriculture to non-agricultural activities and towards services; (ii) a
significant change in the scale or average size of productive units; and (iii) a
corresponding shift in the spatial location and occupational status of the
labour force away from rural to urban sector.
4) High Rates of Social and Ideological Transformation: The major structural
changes in an economy have to be accompanied by transformation in
attitudes, institutions and ideologies. These are termed broadly as
“modernization”.
5) The Propensity of Economically Developed Countries to Reach out to the
Rest of the World for Markets and Raw Materials: Kuznets had observed
the ongoing propensity of rich countries to reach out to the rest of the world
for primary products and raw materials, cheap labour and lucrative markets
for their manufactured products. This was made feasible by the growing
power of modern technology especially in transport and communications.
6) The Limited Spread of Economic Growth to only one-third of the
World’s Population: Kuznets observed that the increase in world output was
enjoyed by only 33% of the world’s population. Two-thirds of the people in
the third world continued to live in poverty.
60
 Linear Theories of
Kuznets had expressed that the six characteristics he laid out were inter-related Underdevelopment
and mutually reinforcing. However, it all included mass application of
technological innovations. Most of the poor countries do not benefit because 90%
of research and development happens in rich countries. The poor countries lack
in resources and institutions vis-a-vis rich countries.
In his Nobel Lecture in 1971, Simon Kuznets laid out his observations as
follows: “whatever the weight of the several factors in explaining the failure of
the less developed countries (to take advantage of the potential of modern
economic growth), backwardness of the native economic and social framework
lends itself to the factual findings. At present, about two-thirds or more of world
population is in the economically less developed group. Even more significant is
the concentration of the population at the low end of the product per capita range.
In 1965, the last year for which we have worldwide comparable product
estimates, the per capita GDP (at market prices) of 1.72 billion out of a world
total of 3.27 billion, was less than $120, whereas, 0.86 billion in economically
developed countries had a per capita product of some $1900. Even with this
narrow definition of less developed countries, the intermediate group was less
than 0.7 billion, or less than 20 percent of world population. The preponderant
population was thus divided between the very low and the rather high level of per
capita economic performance. Obviously, this aspect of modern economic
growth deserves our greatest attention, and the fact that the quantitative data and
our knowledge of the institutional structures of the less developed countries are,
at the moment, far more limited than our knowledge of the developed areas, is
not reason enough for us to ignore it”.
Several preliminary findings, or rather plausible impressions, may be noted.
First, the group of less developed countries, particularly if we widen it (as we
should) to include those with a per capita product somewhat larger than $120 (in
1965 prices), covers an extremely wide range in size. This is in terms of the
relationship between population and natural resources. This is also in terms of
the past impact upon them of the developed countries (coming as it did at
different times and from different sources). There is a striking contrast in terms
of population size, between the giants like Mainland China and India, on the one
hand, and the scores of tiny states in Africa and Latin America. Furthermore, the
remarkable institutions by which the Asian civilizations produced the unified,
huge societies, that dwarfed in size any that originated in Europe until recently,
bore little resemblance to those that structured the American Indian societies or
those that fashioned the numerous tribal societies of Africa.
Generalizations about less developed countries must be carefully and critically
scrutinized in the light of this wide variety of conditions and institutions. To be
sure, their common failure to exploit the potential of modern economic growth
means several specific common features: a low per capita product, a large share
of agriculture or other extractive industries and a generally small scale of
61
Theories of production. But the specific parameters differ widely. Because the obstacles to
Underdevelopment
growth may differ critically in their substance, they may suggest different policy
directions.
Second, the growth position of the Less Developed countries today is
significantly different, in many respects, from that of the presently developed
countries on the eve of their entry into modern economic growth. This is with
the possible exception of Japan. The Less Developed areas that account for the
largest part of the world population today are at much lower per capita product
levels than were the developed countries just before their industrialization. The
latter at that time were economically in advance of the rest of the world, not at
the low end of the per capita product range. The very magnitudes, as well as
some of the basic conditions, are quite different. No country that entered modern
economic growth (except Russia) approached the size of India or China, or even
of Pakistan and Indonesia. No currently developed country had to adjust to the
very high rates of natural increase of population that have characterized many
Less Developed countries over the last two or three decades. Particularly, before
World War I, the older European countries, and to some extent even Japan, were
relieved of strains of industrialization by a substantial emigration of the displaced
population to areas with more favourable opportunities. Such an avenue was
closed to the populous Less Developed countries today. However, the stock of
material and social technology that can be tapped by Less Developed countries
today is enormously larger than that was available in the nineteenth and even
early twentieth centuries. But it is precisely this combination of greater
backwardness and seemingly greater backlog of technology that makes for the
significant differences between the growth position of the Less Developed
countries today, and that of the developed countries when they were entering the
modern economic growth process.
Despite the tremendous accumulation of material and social technology, the stock
of innovations most suitable to the needs of the less developed countries is not
too abundant. Even if one were to argue that progress in basic science may not be
closely tied to the technological needs of the country of origin, the applied
advances are a response to the specific needs of the country within which they
originate. This was certainly true of several major inventions associated with the
Industrial Revolution in England. Illustrations abound of necessity as the mother
of invention. To the extent that this is true, and that the conditions of production
in the developed countries differed greatly from those in the populous less
developed countries today, the technology that evolved in the developed
countries may not supply the needed innovations. Nor is the social technology
that evolved in the developed countries is likely to provide models of institutions
or arrangements suitable to the diverse institutional and population-size
backgrounds of many less developed countries. Thus, modern technology with its
emphasis on labour-saving inventions may not be suited to countries with a
62 plethora of labour but a scarcity of other factors. Such factors include land and
 Linear Theories of
water, modern institutions, etc. They would not be suited to the more traditional Underdevelopment
life patterns of the agricultural communities that predominate in many less
developed countries.

Check Your Progress 2

Note: i) Use the space given below for your answers.
ii) Check your progress with those answers given at the end of the unit.
1) What is the concept of Modern Economic Growth (MEG) given by Kuznets?
How do the countries across the world differ when it comes to the
characteristics of MEG?
………………………………………………………………………………….
………………………………………………………………………………….
………………………………………………………………………………….
2) State the Rostow’s Stages of growth to explain underdevelopment in poor
countries.
………………………………………………………………………………….
………………………………………………………………………………….
………………………………………………………………………………….

3.2.4 Harrod –Domar Model

Ever since the end of Second World War, interest in the problems of economic
growth has led economists to formulate growth models of different types. These
models deal with and lay emphasis on the various aspects of growth of the
developed economies. They constitute in a way alternative stylized pictures of an
expanding economy. A feature common to all of them is that they are based on
the Keynesian saving-investment analysis. The first and the simplest model of
growth—the Harrod-Domar Model—is the direct outcome of projection of the
short-run Keynesian analysis into the long-run.
The HD model is based on capital as the crucial factor of economic growth. It
concentrates on the possibility of steady growth, through an adjustment of supply
of demand for capital. It assumes substitution between capital and labour and a
neutral technical progress. This in the sense that technical progress is neither
labour saving nor results in substituting labour for capital. That is, both the
factors are used in the same proportion with the technical change taking place
playing a neutral role.
Although the Harrod and Domar models differ in details, they both are similar in
substance. One may call Harrod’s model as the English version of Domar’s
model. Both these models stress the essential conditions of achieving and
maintaining steady growth. They both assign a crucial role to capital
accumulation in the process of growth. In fact, they emphasize the dual role of
capital accumulation in the following sense. 63
Theories of On the one hand, new investment generates income through multiplier effect.
Underdevelopment
On the other hand, it increases the productive capacity of the economy by
expanding its capital stock. You should note here that classical economists
emphasized the productivity aspect of investment, taking for granted the income
aspect. Keynes had done the opposite i.e. he had given due attention to the
problem of income generation but neglected the problem of productive capacity
creation. Harrod and Domar took special care to deal with both the problems
generated by investment in their models. Let us now note down the general
assumptions of the HD model first.
General Assumptions: The main assumptions of the Harrod-Domar models are
as follows:
i) A full-employment level of income already exists.
ii) There is no government interference in the functioning of the economy.
iii) The assumption of “closed economy” holds. In other words, government
restrictions on trade and the complications caused by international trade are
ruled out.
iv) There are no lags in adjustment of variables i.e., the economic variables such
as savings, investment, income, expenditure adjust themselves completely
within the same period of time.
v) The average propensity to save (APS) and marginal propensity to save
(MPS) are equal to each other. That is APS = MPS. This is written in
symbols as: S/Y= ∆S/∆Y
vi) Both the propensity to save and “capital coefficient” (i.e., capital-output
ratio) are given and is constant. This amounts to assuming that the law of
constant returns to scale operates in the economy because of fixed capital-
output ratio.
vii) Income, investment, savings are all defined in the net sense, i.e., they are
considered over and above the depreciation. Thus, depreciation rates are not
included in these variables.
viii) Saving and investment are equal in ex-ante as well as in ex-post sense i.e.,
there is accounting as well as functional equality between saving and
investment.
These assumptions were meant to simplify the task of growth analysis which
could be relaxed later. Harrod’s growth model raised the following three issues:
i) How can steady growth be achieved for an economy with a fixed capital-
output ratio (capital-coefficient) and a fixed saving-income ratio?
ii) How can the steady growth rate be maintained? Or what are the conditions
for maintaining the steady uninterrupted growth?
64 iii) How do the natural factors put a ceiling on the growth rate of the economy?
 Linear Theories of
In order to discuss these issues, Harrod adopted three different concepts of Underdevelopment
growth rates: (i) the actual growth rate, G, (ii) the warranted growth rate, Gw and
(iii) the natural growth rate, Gn. The Actual Growth Rate is the growth rate
determined by the actual rate of savings and investment in the economy. In other
words, it can be defined as the ratio of change in income (∆Y) to the total income
(Y) in the given period. Thus, if the actual growth rate is denoted by G, then G =
∆Y/Y. The actual growth rate (G) is determined by saving-income ratio and
capital-output ratio. Both the factors have been taken as fixed in the given period.
The relationship between the actual growth rate and its determinants was
expressed as:
GC = S .... (1)
where G is the actual rate of growth, C represents the capital-output ratio ∆K/∆Y
and S refers to the saving-income ratio ∆S/∆Y. This relationship states the simple
truism that saving and investment (in the ex-post sense) are equal in equilibrium.
This is clear from the following:

The above relationship explains that the condition for achieving the steady state
growth is that ex-post savings must be equal to ex-post investment. “Warranted
growth” refers to that growth rate of the economy when it is working at full
capacity. It is also known as Full-capacity growth rate. This growth rate, denoted
by Gw, is interpreted as the rate of income growth required for full utilisation of a
growing stock of capital, so that entrepreneurs would be satisfied with the
amount of investment actually made.
Warranted growth rate (Gw) is determined by capital-output ratio and saving-
income ratio. The relationship between the warranted growth rate and its
determinants can be expressed as:
Gw Cr = S
where Cr shows the needed C to maintain the warranted growth rate and S is the
saving-income ratio. According to Harrod, the economy can achieve steady
growth when G = Gw and C = Cr. This condition states two things. Firstly, that
actual growth rate must be equal to the warranted growth rate. Secondly, the 65
Theories of capital-output ratio needed to achieve G must be equal to the required capital-
Underdevelopment
output ratio in order to maintain Gw, given that the saving co-efficient is S. This
amounts to saying that actual investment must be equal to the expected
investment at the given saving rate.
We have stated above that the steady-state growth of the economy requires an
equality between G and Gw on the one hand and C and Cr on the other. In a free-
enterprise economy, these equilibrium conditions would be satisfied only rarely,
if at all. Therefore, Harrod analyzed the situations when these conditions are not
satisfied. That is:

We first analyze the situation where G is greater than Gw. Under this situation,
the growth rate of income being greater than the growth rate of output, the
demand for output (because of the higher level of income) would exceed the
supply of output (because of the lower level of output) and the economy would
experience inflation. This can be explained in another way when C < Cr. Under
this situation, the actual amount of capital falls short of the required amount of
capital. This would lead to deficiency of capital, which would in turn adversely
affect the volume of goods to be produced. Decline in the level of output would
result in scarcity of goods and hence inflation. Thus, under this situation, the
economy will find itself in the quagmire of inflation.
On the other hand, when G is less than Gw, the growth rate of income would be
less than the growth rate of output. In this situation, there would be excess goods
for sale. But the income would not be sufficient to purchase those goods. In
Keynesian terminology, there would be deficiency of demand and consequently
the economy would face the problem of deflation. This situation can also be
explained when C is greater than Cr. In this situation, the actual amount of
capital would be larger than the required amount of capital for investment. The
larger amount of capital available for investment would dampen the marginal
efficiency of capital in the long run. Secular decline in the marginal efficiency of
capital would lead to chronic depression and unemployment. This is the state of
secular stagnation.
From the above analysis, it can be concluded that steady growth implies a
balance between G and Gw. In a free-enterprise economy, it is difficult to strike a
balance between G and Gw as the two are determined by altogether different sets
of factors. Since a slight deviation of G from Gw leads the economy away from
the steady-state growth path, it is called ‘knife-edge’ equilibrium.
Gn, the natural growth rate, is determined by natural conditions such as labour
force, natural resources, capital equipment, technical knowledge, etc. These
66 factors place a limit beyond which expansion of output is not feasible. This limit
 Linear Theories of
is called Full-Employment Ceiling. This upper limit may change as the Underdevelopment
production factors grow, or as technological progress takes place. Thus, the
natural growth rate is the maximum growth rate which an economy can achieve
with its available natural resources.
The third fundamental relation in Harrod’s model showing the determinants of
natural growth rate is GnCr is either = S or ≠ S.

Fig. 3.1: Interaction of G, Gw and Gn

Comparing the second and the third relations about the warranted growth rate and
the natural growth rate given above, we can say that Gn may or may not be equal
to Gw. In case Gn happens to be equal to Gw, the conditions of steady growth
with full employment would be satisfied. But such a possibility is remote because
of the variety of hindrances that are likely to intervene making the balance among
all these factors difficult. As such, there is a definite possibility of inequality
between Gn and Gw. If Gn exceeds Gw, G would also exceed Gw for most of the
time (as is shown in the Fig. 3.1 above). Thus, there would be a tendency in the
economy for cumulative boom and full employment. Such a situation will create
an inflationary trend. To check this trend, savings become desirable as it would
enable the economy to have a high level of employment without inflationary
pressures. If, on the other hand, Gw exceeds Gn, G must be below Gn for most of
the time and there would be a tendency for cumulative recession resulting in
unemployment (See Fig. 3.2 below).

Fig. 3.2: Cumulative Recession

67
Theories of The Domar Model: The Domar model bears a certain resemblance to the Harrod
Underdevelopment
model. In fact, Harrod regarded Domar’s formulation as a rediscovery of his own
version after a gap of seven years. Domar’s theory was just an extension of
Keynes’ General Theory, particularly on two counts as stated below:
1) Investment has two effects i.e. (a) an income-generating effect and (b)
productivity effect by creating capacity. The short-run analysis governed by
Keynes ignored the second effect.
2) Unemployment of labour generally attracts attention as one feels sympathy
for the jobless. But unemployment of capital attracts little attention.
However, unemployment of capital inhibits investment and hence reduces
income. Reduction of income brings about deficiency in demand and
unemployment. Thus, the Keynesian concept of unemployment misses the
root cause of the problem.
Domar wanted to analyze the genesis of unemployment in a wider sense. The
main points of the Harrod-Domar analysis are summarized below:
1) Investment is the central variable of stable growth. It plays a double role; on
the one hand, it generates income and on the other, it creates productive
capacity.
2) The increased capacity arising from investment can result in greater output or
greater unemployment depending on the behaviour of income.
3) Conditions concerning the behaviour of income can be expressed in terms of
growth rates i.e., G, Gw and Gn. Equality between the three growth rates can
ensure full employment of labour and full-utilization of capital stock.
4) These conditions, however, specify only a steady-state growth. The actual
growth rate may differ from the warranted growth rate. If the actual growth
rate is greater than the warranted rate of growth, the economy will experience
cumulative inflation. If the actual growth rate is less than the warranted
growth rate, the economy will slide towards cumulative deflation.
5) Business cycles are viewed as deviations from the path of steady growth.
These deviations cannot go on working indefinitely. These are constrained by
upper and lower limits i.e. the ‘full employment ceiling’ acts as an upper limit
and effective demand (composed of autonomous investment and
consumption) acts as the lower limit. The actual growth rate fluctuates
between these two limits.
It can be seen from the above that: (i) the three growth rates (G, Gw and Gn) vary
from country to country depending on their inherent socio-economic conditions,
and hence, (ii) HD’s results are useful for cross country comparison.

68
 Linear Theories of
3.3 LIMITATIONS OF LINEAR THEORIES Underdevelopment

The mechanisms of development embodied in the theory of Stages of Growth do

not always work. The key weakness of these models lies in their simplified
assumptions. A single production function is simply assumed for all countries.
Every economy is assumed to have the same necessary conditions and that they
would pass through the same phases, stage by stage. But such an economic
growth path, which historically had been followed by the more developed
countries, is not the only pathway. The development process is actually highly
nonlinear. Hence, countries would pursue their own distinct development paths.
Economies may miss stages, or become locked in one particular stage, or even
regress depending on many other complementary factors (such as managerial
capacities, and the availability of skilled labour for a wide range of development
projects). Overall, therefore, the criticism or the limitations of Linear Theories
highlights the following:
1) Although savings is regarded as highly significant, modern growth theory
takes into account a broad set of growth factors.
2) General weakness in terms of the unrealistic assumptions of these models,
such as perfect knowledge, stable exchange rates and constant terms of trade
do not exist.
3) Most analysis are based on the reconstruction of Europe after World War II.
But most developing countries do not have Europe’s institutions, attitudes,
financial markets, levels of education, etc.
4) Modern Theory tends to see savings as a necessary but not a sufficient
condition for growth.

3.4 STATE INTERVENTION AND RELATED

POLICY IMPLICATIONS
There are several implications for the growth problems of the less developed
countries. As Kuznets highlighted, “a substantial economic advance in the less
developed countries may require modifications in the available stock of material
technology, and probably even greater innovations in political and social
structure”. It will not be a matter of merely borrowing existing tools: material and
social. Nor is it a matter of directly applying the past patterns of growth, or
merely allowing for the differences in parameters.
The innovational requirements are likely to be particularly great in the social and
political structures. It would be an oversimplification to argue that these
innovations (in the social and political structures) were made primarily in
response to the strain between economic backwardness and the potential of
modern economic growth. For whatever reasons, the struggle for evolved
political and social organization is a response, once it has been achieved, the
results significantly shape the conditions under which economic growth can 69
Theories of occur. It seems highly probable that a long period of experimentation and
Underdevelopment
struggle (for achieving a viable political framework compatible for adequate
economic growth) lies ahead for most less developed countries of today. This
process will become more intense and acute as the perceived gap between what is
attained and what is attainable with modern economic growth widens. The most
distinctive feature of modern economic growth is the combination of a high rate
of aggregate growth with disrupting effects giving rise to new problems. The
high rate of growth is sustained by the interplay between mass applications of
technological innovations on the one hand (based on the stock of knowledge) and
further additions to that stock on the other. The disrupting effects are those that
are imposed by the rapid rate of change in economic and social structure. The
problems are the unexpected and unforeseeable results of the spread of
innovations. All these, pose a range of problems for the slow spread of economic
growth in the less developed countries. The less developed countries have a long
history of separation and relative isolation from the conditions within which
modern economic growth has originated in the developed economies. Further,
concurrent with the remarkable positive achievements of modern economic
growth, there are also unexpected negative results even within the developed
countries. The less developed countries have to therefore struggle in their
attempt to use the modern technology in order to assume their role in the
interdependent world from which they cannot withdraw even if they wished to do
so.
In general, therefore, if we look at state intervention, the following points need to
be considered:
 Common concerns include raising national savings rate; balancing growth in
different sectors of the economy; managing the demographic and economic
shifts that go along with the transition from a rural, agrarian society to an
urban, industrial one; managing monetary policy so that foreign investors will
invest in the country and trust the national currency, etc.
 Very often, the state has to raise huge amounts of capital by borrowing in the
international lending markets. The government itself need to intervene in
shaping industrialization. For example, the South Korean government acted
as an entrepreneur, a banker, and a shaper of industrial structure. It
deliberately adjusted its economy through subsidies, protection, price controls
(food, etc.), and restrictions on foreign direct investment.
There is, thus, no one formula that works equally well for all countries. Each of
the models or strategies discussed above will or won’t work depending upon
historical contingencies, government structure, geopolitical positioning,
environmental resource endowments, etc. In this, the international organizations
of the global economy (in terms of how they make rules, regulate and evolve
over time) will determine how any one strategy will fare in the global market.
70
 Linear Theories of
Nonetheless, though each country has its own set of circumstances that facilitate Underdevelopment
its economic development path, all countries and their economies are linked to
the global economy. One way to learn therefore is to investigate global
commodity chains (also known as the “global assembly line”) that produce our
everyday products.

Check Your Progress 3

Note: i) Use the space given below for your answers.
ii) Check your progress with those answers given at the end of the unit.
1) How does the Harrod-Domar model help to explain economic growth across
countries?
………………………………………………………………………………….
………………………………………………………………………………….
………………………………………………………………………………….
2) State the limitations of Linear Growth theories.
………………………………………………………………………………….
………………………………………………………………………………….
………………………………………………………………………………….
3) Specify the areas of state intervention needed in developing countries in the
light of linear theories of growth.
………………………………………………………………………………….
………………………………………………………………………………….
………………………………………………………………………………….

3.5 LET US SUM UP

Development theory is a conglomeration of theories about how desirable change
in society is best achieved. One of the key development models is the ‘linear
stages of growth model’. This is heavily inspired by the Marshall Plan of the US
which was used to rehabilitate Europe’s economy after the Post-World War II
Crisis. The linear stages of growth models are the oldest and the most traditional
of all development models. It was an attempt by economists to come up with a
suitable concept as to how underdeveloped countries of Asia, Africa and Latin
America can transform their agrarian economy into an industrialized one.
In this Unit, we have introduced the schools of thought that emerged in the post-
World War II era to explain economic growth and the factors responsible for it.
The beginning of this study was the core idea of Marx and his followers. This
helped us understand the evolution of these growth theories. We studied the most
popular of the linear stage models - Rostow’s Stages of Growth Model and the
Harrod-Domar Growth Model. Also, we took an insight of Kuznets’ ideas on
71
Theories of Modern Economic Growth and the important characteristics that help us to
Underdevelopment
distinguish between developed and underdeveloped countries.
We could understand the working of these models and their broad limitations.
Overall, we could conclude that developed and underdeveloped countries behave
differently and so all models based on the experience of present-day advanced
countries (viz. The Linear Stages models of growth) do not work the same way as
they did or could then. The Marxian prediction of growing class conflicts due to
increasing inequality in capitalist systems, and an eventual violent revolution that
would end capitalism paving the way for socialism, has not come true in case of
advanced industrial economies.
The less developed countries are grappling with underdevelopment and other
correlated struggles. The basic reason is not because more Saving and Investment
is not the necessary condition for accelerated rates of growth. It rather is because
it is not a sufficient condition. The Marshall Plan worked for Europe because the
European countries receiving aid possessed the necessary structural, institutional
and attitudinal conditions to convert new capital effectively into higher levels of
output. The Rostow and Harrod-Domar Model implicitly assumed the existence
of same attitudes and arrangements in underdeveloped countries. Yet, they
actually lack in many such basic factors, and complementary factors, like
managerial competence, skilled labour, ability to plan and administer a wide
assortment of development projects, to name a few. Kuznets’ MEG approach
explained how it works for the advanced countries but such a concept is
meaningless given the state of the underdeveloped world. All the structural
characteristics explained by him show the light to the polarized world of which
we are all so much a part of.

3.6 HINTS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1
1) Linear Stages of Growth, Patterns of Structural Change, International
Dependence, Free Market.
2) Capitalist imperialism leading to wider inequality and socialism.

Check Your Progress 2

1) A growth characterised by rapid growth in per capita production, TFP and
capital formation.
2) Rostow specifies five stages through which a country has to transit to become
a developed country from being an underdeveloped country.

72
 Linear Theories of
Check Your Progress 3 Underdevelopment

1) By linking the behaviour of income in terms of growth rates in G, Gw and Gn

i.e. actual rate of growth, the warranted growth rate and the natural growth
rate respectively.
2) It assumes for all countries: (i) a single production function and (ii) same
necessary conditions to prevail.
3) (i) Raising national Savings rate, (ii) balancing growth in different sectors of
the economy, (iii) managing the demographic and economic shifts, (iv)
borrowing from international lending markets, etc.

73