Alternative Theories and
the Meeting of Development
Topics
• What is development?
• Leading theories of economic
development: Four approaches.
• Theories of development: Reconciling the
difference
• Underdevelopment and development: A
Multidimensional schematic.
What Do we mean by
Development?
• has
Development
is also perceived
that the
It
traditionally
meant
then developed countries of Western
European Nations
are in master
role
to
achieving
sustained
rates
of
dominate and civilize the less developed
countries
the Asia and
African
regions.
growth
ofinincome
per
capita
to
Western European countries did all the
enable
a nation
to inexpand
colonization
activities
the nameits
of
development and in the name of
output
at acivilization.
rate faster than the
promoting
growth rate of its population
New Economic View
of Development
•
Economic development came to be redefined in terms of the
reduction or elimination of poverty, inequality, and
unemployment within the context of a growing economy. (1970’s)
Questions to ask about a country’s development
1. What has been happening to poverty?
2. What has been happening to unemployment?
3. What has been happening to inequality?
•
Development must therefore be conceived of as a
multidimensional process involving major changes in social
structures, popular attitudes, and national institutions, as well as
the acceleration of economic growth, the reduction of inequality,
and the eradication of poverty
Development
The 3 Core Values
• Sustenance. The ability to meet basic needs.
• Self-Esteem: To Be a Person
• Freedom from servitude: To be Able to Choose
The 3 Objectives
• Increase basic life-sustaining goods (food, shelter, health and protection)
• Raise living standards (higher incomes, jobs, education, to cultural and
humanistic values)
• Expand the range of economic and social choices.
Theories of Economic
Development (Four Approaches)
1950s &
1960s
1. Linear Stage
Series of successive economic growth
1970
2. Structural change
2. Structural Change
used modern economic theory & statistical
analysis to portray internal process of
structural change
3. International dependence
3. International Dependence
International & domestic power
relationships, institutional & structural
economic rigidities; dual
economies/societies
4. Neoclassical
4. Neoclassical
Beneficial role of free markets, open
economics, privatization of inefficient public
enterprises
1980s &
1990s
Linear Stages
Linear stages theory - associated with a unidirectional
rather than cyclic view of development
Rostow’s Growth
Model
Harrod – Domar
Model
(a).Rostow’s growth model
DEVELOPMENT
Rostow's growth model - the transition from underdevelopment to development
can be described in terms of a series of steps or stages through which all
countries must proceed
High mass
The drive to
maturity
The takeoff
Preconditions for
takeoff
Traditional
society
TIME
consumption
Take off
Maturity
HighDrive
MasstoConsumption
Pre-take
off
Traditional
Industrialization,
Diversification,
Consumer
oriented,
growing
investment,
specialization,
Subsistence,
barter,
innovation,
less flourish,
reliance
durable goods,
regional
growth &
surpluses,
infrastructure
agriculture
on
imports,
investment
service
sector
becomes
political change
dominant
(b). Harrod-Domar model
• The rate of growth depends on: The level of national
saving
• The productivity of capital investment (this is known
as the capital-output ratio) (c)
(b). Harrod-Domar model
RATE OF GROWTH /GDP ∆Y= s/c
Assumptions:
1. Savings leads to investment S = I
2. Investment leads to changes in capital stock I= ∆K
3. Constant Capital Output Ratio c= K/Y , c= ∆K/∆Y
RATE GROWTH
∆Y. c = ∆K
∆Y. c = I
∆Y= I/c
∆Y= s/c
Example:
∆Y= I/c = 0.5/10 =0.05 or 5%
∆Y= I/c = 1/10 =0.1 or 10%
Example:
∆Y= I/c = 0.5/5=0.05 or 10%
∆Y= I/c = 1/5 =0.1 or 20%
(b). Harrod-Domar model
• Savings & Capital accumulation may be necessary for
economic growth, but not a sufficient condition
• Other factors such as institutions, human capital,
skilled labor, transparency, etc.. may be lacking.
• Historical Example. "The Marshal Plan”
Structural Change
Model
Focuses on the mechanisms by which underdeveloped countries
transform their domestic economic structure from a heavy
emphasis on traditional subsistence agriculture to a more
modern, urbanized and industrially diverse manufacturing and
services sector.
Lewis Theory
Chenery’s Pattern
(a). Lewis Theory of
Development
Lewis Theory of Development
• Also, known as “Dual-Sector”Model or “Unlimited Supplies of Labour” Model
• Explains how economic growth gets started through structural change- increase in
size of the industrial sector relative to subsistence agricultural sector.
Capitalist/Industrial Sector
Subsistence/Agricultural
Sector
Capital intensive
manufacturing process
Labour intensive production
process
Higher average wages
Low dependency on capital
Higher Marginal & Ave
Productivity
Low Marginal & Average
Productivity
Higher Demand for labour
Low average wages
•
•
it became the general theory of
the development process in
surplus-labor Third World
Nations during the 1960s and
early 1970s.
It focuses on the process of labor
transfers from the traditional
economy to the urbanized,
industrial sector and the growth
of output and employment in the
high-productivity sector.
(b). Chenery’s Patterns of
Development
Chenery's model defines economic development as a set of interrelated changes in the
structure of an underdeveloped economy that are required for its transformation from an
agricultural economy into an industrial economy for continued growth in addition to
accumulation of capital both human and physical.
Patterns
1. Shift from agriculture to industrial
2. Steady accumulation of human and physical capital
3. Desire for more manufactured goods instead of food items (basic necessities and
services)
4. Migration from rural to urban-increase in urbanization
5. Increased integration through trade
6. Slow down in population growth - smaller families
International
Dependence Model
• View developing countries as beset by institutional,
political & economic rigidities both domestic and
international
Neocolonial
dependence Model
False Paradigm
Model
Dualistic Dev’t
Theory
(a). Neocolonial Dependence
Model
•
•
•
Underdevelopment resulted from highly unequal international capitalist
system
Developed countries' exploitative and neglectful relationship with
developing countries
Underdevelopment is due to the existence and policies of industrial
capitalist countries of the northern hemisphere and their extensions in the
form of small but powerful elite or comprador groups (local elites who act
as fronts for foreign investors)
(b).False Paradigm Model
•
•
underdevelopment resulted from faulty and inappropriate advice from
foreign experts and donors
the policies, in many cases, merely serve the vested interest of existing
power groups
(c). Dualistic Development
Theory
Existence and persistence of the increasing gap between rich and poor
nations and rich and poor peoples on various level
Concept of dualism has 4 key elements:
1. 2 different set of conditions can occur at the same time i.e., "superior"
and "inferior", e.g., the coexistence of wealthy, highly educated elites with
masses of illiterate poor people
2. Gap continues to increase as development takes place
3. Superior do not uplift the inferior
4. Coexistence is chronic and not merely transitional
Neoclassical
Counterrevolution
•
•
•
•
Underdevelopment is primarily internally induced.
Underdevelopment results from poor resource allocation due to incorrect
pricing policies and too much government intervention.
Implications: Need for free and competitive market; privatization of stateowned enterprises; Deregulation
Sources of growth: Increase in quality of labor; Improve capital through
investments in technology.
Free Market
Public Choice
Market Friendly
Free Market
• Assumes markets are efficient. Competition is
effective. The state or Government intervention is
ineffective.
• Given the efficiency of markets, any imperfections in
markets are of little significance
Public Choice or
New Political Economy
• •Argues that governments can not solve economic
problems, since the state itself is dominated by
politicians, bureaucrats, that use power for selfish ends.
• •State officials extract “rents”, taking bribes, and
confiscate or nationalize property, and reduce freedom
of citizens. Therefore, it is best to minimize the role of
governments.
• •Big corporations also suffer from similar problems but
market and public policy desciplines them.
Market Friendly
• This is the most recent variant of Neo-Classical Theory. It
is an approach used by World Bank & IMF economists.
• This approach recognizes market imperfections, missing
markets, and externalities. Therefore, there is a need for
government role in areas such as providing public goods,
developing market supporting institutions or rules, and
defining and protecting property rights.
Solow Growth
Model
• The Solow model expanded the Harrod-Domar
Model, that stressed the critical role of savings,
Investment & capital accumulation.
• •It formalized & expanded the Harrod Model by
adding labor, capital, and technology.
Solow Growth Model
Inputs:
e.L = Human Capital
A= Ideas
K= Factories, Machineries, Tools
Output: GDP (Y)
PRODUCTION FUNCTION
Y = Fn(K)
Y= √K
Theories of Development:
Reconciling the Differences
• Governments do fail, but so do markets
• Must attend to institutional and political realities in developing
world.
• Development economics has no simplistic and universally accepted
paradigm. Insights and understandings are continually evolving.
• Each theory has some strengths and some weaknesses. Incites can
be gained from a combination of alternative theories and
experiences of successful countries to guide development policy.
Underdevelopment &
Development:
Multidimensional Schematic
Adverse Factor
• Location and Physical
Geography
• Climate
• Demographic Boom
• Degradation of natural
resources
• Land property structure
• Political Immaturity
• Technological inequality
with developed countries
• Agricultural or mining
• External Debt
Favorable Factors
•
•
•
•
•
•
•
Natural Resources
Abundance of manpower
Education level
Migration
Low interest rates
Tourism potential
Possibilities of the
Information Era
Thank you!