Leading Theories oI Economic Development : Five Approaches

1he posLWorld War ll llLeraLure on economlc developmenL has been domlnaLed by four
ma[or and someLlmes compeLlng sLrands of LhoughL
1 1he LlnearSLages 1heory
2 SLrucLuralChange Models
3 1he lnLernaLlonaluependence 8evoluLlon
4 1he neoclasslcal CounLerrevoluLlon

1PL LlnLA8 S1ACLS 1PLC8?
kostow's Stages of Growth
1he advanced counLrles lL was argued had all passed Lhe sLage of Lakeoff lnLo self
susLalnlng growLh" and Lhe underdeveloped counLrles LhaL were sLlll ln elLher Lhe
LradlLlonal socleLy or Lhe precondlLlons" sLage had only Lo follow a cerLaln seL of rules of
developmenL Lo Lake off ln Lhelr Lurn lnLo selfsusLalnlng economlc growLh
Cne of Lhe prlnclpal Lrlcks of developmenL necessary for any Lakeoff was Lhe
moblllzaLlon of domesLlc and forelgn savlng ln order Lo generaLe sufflclenL lnvesLmenL Lo
acceleraLe economlc growLh




1he narrodDomar Growth Mode|
Lvery economy musL save a cerLaln proporLlon of lLs naLlonal lncome lf only Lo
replace wornouL or lmpalred caplLal goods (bulldlngs equlpmenL and maLerlals) Powever
ln order Lo grow new lnvesLmenLs represenLlng neL addlLlons Lo Lhe cap|ta| stock are
necessary
Supposed LhaL Lhls relaLlonshlp known ln economlcs as Lhe cap|ta|output rat|o ls
roughly 3 Lo 1 lf we deflne Lhe caplLalouLpuL raLlo as k and assume furLher LhaL Lhe
naLlonal sav|ngs rat|o s ls a flxed proporLlon of naLlonal ouLpuL and LhaL LoLal new
lnvesLmenL ls deLermlned by Lhe level of LoLal savlngs we can consLrucL Lhe followlng slmple
model of economlc growLh
1 Savlng (S) ls some proporLlon s of naLlonal lncome (?) such LhaL we have Lhe slmple
equaLlon
S s?(31)
2 lnvesLmenL (l) ls deflned as Lhe change ln Lhe caplLal sLock k and can be represenLed
I = AK(32)
uL because Lhe LoLal caplLal sLock k bears a dlrecL relaLlonshlp Lo LoLal naLlonal
lncome or ouLpuL ? as expressed by Lhe caplLalouLpuL raLlo k lL follows LhaL

K

=
Cr
AK
A
=

Cr flnally
AK = A .(33)

3 lnally because LoLal naLlonal savlngs S musL equal LoLal lnvesLmenL l we can wrlLe
Lhls equallLy as
5 l(J4)
uL from LquaLlon 31 we know LhaL S s? and from LquaLlons 32 and 33 we know
LhaL
I = AK = A
lL Lherefore follows LhaL we can wrlLe Lhe ldenLlLy" of savlng equallng lnvesLmenL
shown by LquaLlon 34 as
= s = A = AK = I(33)
Cr slmply as
s = A(36)
ulvldlng boLh sldes of LquaLlon 36 flrsL by ? and Lhen by k we obLaln Lhe followlng
expresslon
A

=
s
k
(37)
noLe LhaL Lhe lefLhand slde of LquaLlon 37
A
,
, represenLs Lhe raLe of change or
raLe of growLh of Cn (le lL ls Lhe percenLage change ln Cn)
LquaLlon 37 whlch ls a slmpllfled verslon of Lhe famous equaLlon ln Lhe Parrod
uomar Lheory of economlc growLh sLaLes slmply LhaL Lhe raLe of Cn (
A
,
, ) ls deLermlned
[olnLly by Lhe naLlonal savlngs raLlo s and Lhe naLlonal caplLalouLpuL raLlo k More
speclflcally lL says LhaL ln Lhe absence of governmenL Lhe growLh raLe of naLlonal lncome
wlll be dlrecLly or poslLlvely relaLed Lo Lhe savlngs raLlo (le Lhe more an economy ls able Lo
saveand lnvesLouL of a glven Cn Lhe greaLer Lhe growLh of LhaL Cn) wlll be and
lnversely or negaLlvely relaLed Lo Lhe economy's caplLalouLpuL raLlo (le Lhe hlgher k ls Lhe
lower Lhe raLe of Cn growLh wlll be)
1he economlc loglc of LquaLlon 37 ls very slmple ln oreder Lo grow economles
musL save and lnvesL a cerLaln proporLlon of Lhelr Cn 1he more Lhey can save and lnesL
Lhe fasLer Lhey can grow uL Lhe acLual raLe aL whlch Lhey can grow for any level of savlng
and lnvesLmenLhow much addlLlonal ouLpuL can be had from an addlLlonal unlL of
lnvesLmenLcan be measured by Lhe lnverse of Lhe caplLalouLpuL raLlo k because Lhls
lnvers 1/k ls slmply Lhe ouLpuLcaplLal or ouLpuLlnvesLmenL raLlo lL follows LhaL
mulLlplylng Lhe raLe of new lnvesLmenL s l/ by lLs producLlvlLy 1/k wlll glve Lhe raLe by
whlch naLlonal lnome of Cn wlll lncrease

S18uC1u8AL CPAnCL MCuLLS
1he Lew|s 1heory of Deve|opment
8as|c Mode|
Cne of Lhe besLknown early LheoreLlcal models of developmenL LhaL focused on Lhe
structura| transformat|on of a prlmarlly subslsLence economy was LhaL formulaLed by nobel
laureaLe W ArLhur Lewls ln Lhe mld1930s and laLer modlfled formallzed and exLended by
!ohn el and CusLav 8anls 1he Lew|s twosector mode| became Lhe general Lheory of Lhe
developmenL process ln surpluslabor 1hlrd World naLlons durlng mosL of Lhe 1960s and
early 1970s lL sLlll has many adherenLs Loday especlally among Amerlca developmenL
economlsLs
ln Lhe Lewls model Lhe underdeveloped economy conslsLs of Lwo secLors a
LradlLlonal overpopulaLed rural subslsLence secLor characLerlzed by zero marglnal labor
producLlvlLy a slLuaLlon LhaL permlLs Lewls Lo classlfy Lhls as surp|us |abor ln Lhe sense LhaL
lL can be wlLhdrawn from Lhe agrlculLural secLor wlLhouL any loss of ouLpuLand a hlgh
producLlvlLy modern urban lndusLrlal secLor lnLo whlch labor from Lhe subslsLence secLor ls
gradually Lransferred 1he prlmary focus of Lhe model ls on boLh Lhe process of labor
Lransfer and Lhe growLh of ouLpuL and employmenL ln Lhe modern secLor oLh labor
Lransfer and modernsecLor employmenL growLh are broughL abouL by ouLpuL expanslon ln
LhaL secLor 1he speed wlLh whlch Lhls expanslon occurs ls deLermlned by Lhe raLe of
lndusLrlal lnvesLmenL and caplLal accumulaLlon ln Lhe modernsecLor proflLs over wages on
Lhe assumpLlon LhaL caplLallsLs relnvesL all Lhelr proflLs lnally Lhe level of wages ln Lhe
urban lndusLrlal secLor ls assumed Lo be consLanL and deLermlned as a glven premlum over
a flxed average subslsLence level of wages ln Lhe LradlLlonal agrlculLural secLor AL Lhe
consLanL urban wage Lhe supply curve of rural labor Lo Lhe modern secLor ls consldered Lo
be perfecLly elasLlc
1he ma[or hypoLhesls of Lhe sLrucLural change model ls LhaL developmenL ls an
ldenLlflable process of growLh and change whose maln feaLures are slmllar ln all counLrles
Powever as menLloned earller Lhe model recognlze LhaL dlfferences can arlse among
counLrles ln pace and paLLern of developmenL dependlng on Lhelr parLlcular seL of
clrcumsLances acLors lnfluenclng Lhe developmenL process lnclude a counLry's resource
endowmenL and slze lLs governmenL's pollcles and ob[ecLlves Lhe avallablllLy of exLernal
caplLal and Lechnology and Lhe lnLernaLlonal Lrade envlronmenL



1radlLlonal (Cld") neoclasslcal CrowLh 1heory
AnoLher cornersLone of Lhe neoclasslcal freemarkeL argumenL ls Lhe asserLlon LhaL
llberallzaLlon (openlng up) of naLlonal markeLs draws addlLlonal domesLlc and forelgn
lnvesLmenL and Lhus lncreases Lhe raLe of caplLal accumulaLlon ln Lerms of Cn growLh Lhls
ls equlvalenL Lo ralslng domesLlc savlngs raLes whlch enhances caplLallabor raLlons and per
caplLa lncomes ln caplLalpoor developlng counLrles 1radlLlonal neoclasslcal models of
growLh are a dlrecL ouLgrowLh of Lhe Parroduomar and Solow models whlch boLh sLress
Lhe lmporLance of savlngs
1he solow neoclasslcal growLh model ln parLlcular represenLed Lhe slmnal conLrlbuLlon Lo
Lhe neoclasslcal Lheory of growLh and laLer earned Solow Lhe nobel rlze ln economlcs lL
expanded on Lhe Parroduomar formulaLlon by addlng a second facLor labor and
lnLroduclng a Lhlrd lndependenL varlable Lechnology Lo Lhe growLh equaLlon unllke Lhe
flxed coefflclenL consLanL reLurnsLoscale assumpLlon of Lhe Parroduomar model Solow's
neoclasslcal growLh model exhlblLed dlmlnlshlng reLurns Lo labor and caplLal separaLely and
consLanL reLurns Lo boLh facLors [olnLly 1echnologlcal progress became Lhe resldual facLor
explalnlng longLerm growLh and lLs level was assumed by Solow and oLher growLh LheorlsLs
Lo be deLermlned exogenously LhaL ls lndependenLly of all oLher facLors
More formallu Lhe Solow neoclasslcal growLh model used Lhe sLandard aggregaLe
producLlon funcLlon (slmllar Lo Lhe Lewls modernsecLor equaLlon)