THE INSTITUTE OF FINANCE
MANAGEMENT (IFM)
DEVELOPMENT STUDIES
2022/2023
MARTHA MWOLO, PhD
DEVELOPMENT THEORIES
 INTRODUCTION
 WHAT IS A THEORY?
o A theory is a systematic explanation of the interrelationships among
development (economic, social, human) variables, and its purpose is to
explain the causal relationships among these variables. Usually, a theory is
used not only to understand the world better, but also to provide a basis for
policy.
 WHAT IS A DEVELOPMENT THEORY
o Briefly, Development theories are about understanding how the processes
of change in societies take place.
o Therefore, like any other theory, development theories are normative in
the sense that they seek not only to analyze their perspective of
development or define what development should be, but also to suggest
the seeming better way in which it should occur in order to achieve good
change, and for whom.
o For example, the way states and development practitioners rationalize
where to commit resources to promote development is influenced to a
greater extent by their level of understanding and persuasion towards
certain development theory or theories.
o Related to that, all real world efforts as pursued by development
actors and practitioners to achieve development in practice
(economic, human, sustainable), are what are considered
development strategies or approaches.
o Further to that, development theories and strategies define and
describe different development goals and objectives that reflect
diverse influences of development including social, economic,
political, ethical, ecological, and religious. Hence, the goals portrayed
by a development agenda ─ which can be theoretical, practical or
both─ constitute the development ideologies defining the various
aspects of the development process.
o In other words, the theories, strategies, and ideologies tend to sum
up the themes or paradigms of discourses in development.
CAPITALIST OR BOURGEOIS THEORIES OF DEVELOPMENT
o So during medieval period, the term bourgeois (has its origin in France) was
identified with a certain level of income ─ that of being well of ─which
implied both the possibilities of consumption (life style) and the
possibilities of investment (capital). There were different types of
bourgeois, for example petty bourgeois. Later on, and in modern politicoeconomic discourse, bourgeois as capitalist has been the centerpiece. By
and large during medieval time, the bourgeois was understood as a person
who capitalized and/or has made full use of the means of production; hiring
workers for wages, who in turn make things to be sold to the market but to
the extent the revenue collected from sales is greater than the costs of
production including wages. Profit maximization is presumably the main
objective of the bourgeois capitalist.
o Since the 19th Century, probably to date, the following are the salient
features of a bourgeois; merchant, business tycoon, employer of wage
labor, and owner of the means of production, primarily the one whose
workers are producers of goods, his economic motor is profit maximization
and capital accumulation, and he/she is driven by cultural values such as
non-reckless, rational, pursuing his or her own interests.
o According to bourgeois theories, economic growth is a panacea, and
is based on the private ownership of capital and property and other
factors of production. It is the ambitious and aggressive individuals
and the market that drive the economy rather than the state.
o Capitalism on the other hand requires free flow of the factors of
production ─ labour, capital and commodities. It operates via market
forces or mechanisms, based on the law of supply and demand.
(A) CLASSICAL THEORIES OF ECONOMIC GROWTH
o These theories became prominent in 18th and 19th century, when
most countries in Europe and USA were undergoing INDUSTRIAL
CAPITALISM OR REVOLUTION. The focus of the English classical
economists was to analyze process of economic growth. The main
contributors were Adam Smith, David Ricardo, Thomas Robert
Malthus, and John Stuart Mill. These are regarded as main
precursors of modern economic growth theory.
o Thus, drawing from the emerging conditions of industrial capitalism
in Britain in their own time, the proponents of the classical model or
school of thought had wanted to provide an account of the factors
that hinder or promote development. Hence, they had intended to
provide an account of the broad forces influencing economic growth
and the mechanisms underlying growth process. These scholars
equate progress or change with the development of the material
basis of the society. In other words, the classical economists
understood the development of the material basis of society as an
essential condition of progress.
• The basic assumptions advanced by classical economy scholars are;
(a) employment is determined by the amount of capital, (b)
population growth depend upon the wage rate, (c) current wage
rate is higher when labor is scarce, and low when labor is abundant.
• On the whole, early classical economists perceived accumulation and
productive investment of a part of the social surplus in the form of
profits as the main driving forces of economic growth. The other
central feature of classical approach is that production involves labor,
produced, means of production, and natural resources.
• They also believe that, the market if left itself, it was capable of
solving all the problems, magically balancing out supply and demand
(invisible hand of the market)
 ADAM SMITH (1723-1790)
o He was a British philosopher. He is widely recognized as father of modern
economics. He was Scottish philosopher. He is perceived as the father of
modern economics. In 1776 he published a book called The wealth of the
nations
o He views industrial sector as an engine of economic growth.
 SMITH’S IDEAS ON INFLUENCES OF ECONOMIC GROWTH
 He believes economies grow if there is individualism, competition,
capitalism, free market, division of labor, capital accumulation, research
and development of new industrial design and new technical knowledge,
and labor productivity.
 Smith explained economic growth as endogenous phenomenon, meaning
growth is an automatic and natural outcome of economic interactions.
The classical economists were influenced by Newtonian physics which
posited that activities in the universe were not random, but subject to some
grand design, so do economic affairs), whereby growth rate is described to
depend mainly on the decisions and activities of agents.
 In other words, Smith perceives pursuit of self interest as the engine
that moves the economy and profit maximizing as the main power
of economic activity.
 Accordingly, he proposed natural law in economic affairs to be
respected. That every individual member of society should be left to
pursue economic activities, and to maximize the output to the best of
his/her ability. Individuals must be free because freedom of action
brings out the bests of an individual which increases society wealth
and progress.
 Related to the above, Smith beliefs that progress depends on
preserving private property and the interests of property owning
class. Why? Because exercise of individual initiatives, especially
individual accumulation of wealth through private ownership and
control of property would eventually lead to efficient utilization of
resources such as labor, land, capital, skills, brains, ingenuity,
inventiveness to mention but a few, to produce results beneficial to
the society as a whole i.e. the role of the invisible hand.
 SMITH’S MAIN POLICY SUGGESTIONS
 DIVISION OF LABOR: Smith also view division of labour as a powerful
device for increasing labor productivity and it has the following
advantages; (a) improvement in the dexterity or efficiency of workers, (b)
the saving of time in production process which would otherwise be lost in
passing from one sort of work to another, (c) encourage innovation,
creativity and invention of specific machinery. Put it differently, he believes
that the key to the growth of labor productivity is the division of labor
which in turn depends on the extent of the market, and thus upon capital
accumulation.
 FREE MARKET: Therefore, he suggests that, in order to stimulate economic
growth, there should be free and competitive market. In the sense that,
conflicting economic interests of different groups should be reconciled by
the operation of competitive market forces.
 PURSUIT OF SELF INTEREST: Smith perceives pursuit of self interest as the
engine that moves the economy and profit maximizing the main power of
economic activity. Therefore, he proposed natural law in economic affairs
to be respected. That, every individual member of society should be left to
pursue economic activities, and to maximize the output to the best of
his/her ability. Individuals must be free because freedom of action brings
out the bests of an individual which increases society wealth and progress.
 LAISSEZ FAIRE POLICY ; Smith believes, in order to maximize total
production, individual liberty is important. Hence, in order to sustain the
role of market forces in promoting economic growth, governments should
adopt a laissez-faire policy. This means individuals should be encouraged
to acquire personal profit, and wealth. There should be freedom to venture.
Meaning, people should be encouraged to take risks. This will lead to
effective utilization of all resources (labor, land, capital, skills, brains,
ingenuity and inventiveness).
 Therefore, Smith is against restrictions, protectionism and interventionism.
 ROLE OF THE GOVERNMENT: He proposed the economy to be regulated by
a responsible government (institutions) whose main roles should be to
promote fair competition, security, and reducing monopoly.Generally, Smith
consider having strong institutions i.e educational, legal, etc critical for a
country to achieve economic growth. However, it is safe to leave the
economy to be propelled, controlled, and regulated by invisible hand of the
market i.e forces of competition motivated by pursuit of self interest.
 INDUSTRIAL ECONOMY: Furthermore, since Smith views the industrial
sector an engine of growth, therefore goverments have to adopt policies to
encourage the expansion of the industrial sector.
 TECHNICAL KNOWLEDGE: Related to the above, Smith perceives creation of
new knowledge or technical change important for growth. And that
technical change depends on division of labor and change in the methods of
production.
 INTERNATIONAL TRADE: He also considers international trade and foreign
investment to be important for growth as they avoid stationary state or
stagnation of the economy.
 BARRIERS OF ECONOMIC GROWTH: There are three barriers of economic
growth according to Smith; (1) an insufficient supply of worker, (2) the
scantiness of natural resources (the scantiness & potential depletion of
renewable & depletion of exhaustive resources may constrain human
productivity and the growth of the economy), and (3) erosion of the
motives of accumulation (self interests of capitalists, merchants, landlords,
and workers).
 POSITIVE ASPECTS: He views capital accumulation industries as engine of
the economy; Governments have an important role to play in promoting
economic growth by mainly devising policies that encourage investment;
regulate the market to prevent fraud, monopoly; and to maintain domestic
peace and security;
 NEGATIVE ASPECTS: Most of his ideas were and are still perceived as
relevant and realistic. According to analyses, his economic theory is
described to have influenced recent rapid economic growth in East
Asian Tigers; South Korea, Taiwan, Hongkong, and Singapore.
However, the idea of private ownership of land and capital is not an
economic necessity; He considers government expenditure as
unproductive. The role of the government is to set institutions that
would regulate competition, to protect infant industries and
introduction of tariffs to protect nation’s interests and counteract the
effect of taxation on certain national products. However, evidence
suggests that government intervention and/or investment in the
economy had helped in stirring industrial revolution in CHINA &
JAPAN; He did not acknowledge the role of colonization in promoting
capital accumulation and industrial revolution inn Europe & USA.
 DAVID RICARDO (1772-1823)
o He was the successor of Adam Smith. Also a British. His economic
ideas were more abstract and philosophical than Smith who minded
theoretical rigor and he was more realistic. He published a book
called Principles of Political Economy and Taxation in 1817.
 RICARDO’S IDEAS ON INFLUENCES OF ECONOMIC GROWTH
 Ricardo viewed agriculture as the backbone or engine of economic
growth. Therefore, all land should be used for production of corn
and working force must be devoted in agriculture which helps in
distribution in industries.
 He focused on explaining economic growth and all that is needed to
achieve it. Just like Smith he believes that scarcity and depletion of
the resources (diminishing returns in agriculture or stationary state)
would limit economic growth. Moreover, he views capital
accumulation and savings as important determinants of economic
growth. Related to that, Ricardo believes that capital accumulation is
the outcome of profit because profit leads to savings of wealth,
which is used for capital accumulation.
 Furthermore, capital accumulation depends on TWO FACTORS; THE WILL
TO SAVE, AND THE CAPACITY TO SAVE. The larger the surplus, the larger
the capacity to save. Hence, savings is important for capital accumulation
which is a result of less expenditure and more production. This
automatically, increase profit and lead to decrease in price of commodities.
 Accordingly, he believes, profits in agriculture regulate profits in all other
sectors. Meaning, when profit in the agricultural sector declines, profit of all
trade decline. Also wages, rent, etc.
 He also believes on distribution of profit or income. Simultaneously, he
believes that, when the economy is driven by the market all the sectors of
the economy would grow.
 Although he lived during the era of industrial revolution in Britain, Ricardo
views agriculture (production of corn) as the most important sector of the
economy. He was concerned with how capital accumulation in agricultural
sector could contribute to economic growth. He considers changes that
increase land productivity and changes that increase machinery use in
agriculture are key for increase profit in the agricultural sector.
 He believes in payment of subsistence or minimum wages. But
increase in capital accumulation could in the long run lead to increase
demand of labor force needed in production, increase in wages and
increase in population (food is plenty, low prices, life is good).
 RICARDO’S MAIN POLICY SUGGESTIONS
 LAW OF COMPARATIVE ADVANTAGE: Ricardo important policy
contribution could be the law of comparative advantage. He
believes that, in order to promote economic growth there should be
massive capital and mechanization directed in sector (s) of the
economy which a country enjoys comparative advantage. Meaning,
there are produces which are not produced by other countries. In this
way, it can accrue largest and quickest profit by trading with other
countries. While this idea emphasizes on making full use of
commerce and international trade for a country to grow its
economy, this also contributed to colonization of Africa and other
developing countries in 17th and early 18th century.
 LAW OF DIMINISHING RETURNS: described the law of diminishing returns.
Although he believes that increase in country’s agricultural productivity
would lead to increase demand for labor, and increase in wages. But
eventually, as population increases, demand for produce (corn) would
increase, which would also raise the price of corn, and increase in the cost
of renting a piece of land, also due to over cultivation, and in the long run
contribute to diminishing return in land productive capacity. Hence,
increase in population and rent would lower profit, limit capital
accumulation, and lead to a STATIONARY STATE.
 Accordingly, increasing population and rents eliminate profit and lead to
STATIONARY STATE. Ricardian theory is based on the interrelations of three
groups in the economy; landlords, capitalists, and laborers, among who the
entire produce land is distributed as RENT, PROFIT and WAGES. This would
hamper on distribution of profit among capitalists, landlords, and laborers.
He therefore proposed distributive policies to address that situation.
 Ricardo believes that payment of tax limit savings and capital accumulation
as it is like taking money from the pockets of bourgeois capitalists and put it
in the pockets of a government.
 BARRIERS OF ECONOMIC GROWTH: Just like Smith he believes that scarcity
and depletion of the resources (diminishing returns in agriculture or
stationary state) would limit economic .
 POSITIVE ASPECTS: Agricultural sectors is the primary engine of any
country’s economic growth. Hence, all land and manpower should be
devoted in agriculture. And countries and/or individuals can accumulate
capital through savings and less expenditure. Related to that countries have
to invest more in the production of a crop that give them comparative
advantage in international trade.
 NEGATIVE ASPECTS RICARDIAN IDEAS:
 He acknowledge the role of technical change and mechanization in boosting
agricultural productivity, but not on redressing diminishing returns of land;
Corn is not the main agricultural produce; Ricardo opposes payment of tax
because it limits savings and capital accumulation. It is like taking money
from the pockets of bourgeois capitalists and put it in the pockets of a
government; He ignores the role of macro-economic and other institutions
in promoting free and fair competitive market and economic growth as a
whole; The theory does not reflect social formation of African societies,
many societies in Africa and elsewhere did not have vivid class i.e.
capitalists, landlords, and workers.
 Literary Ricardo offered a profit distribution (landlords, capitalists, &
Workers) than a growth theory.
 Generally, classical economists perceive economic growth as AN
AUTOMATIC PROCESS. It is not. Moreover, the theorists did not
acknowledge the role of colonization in facilitating capital
accumulation and investment in the industrial sectors.
 MARXIST OR SOCIALIST THEORIES OF DEVELOPMENT
o Orthodox Marxism and Neo Marxism- Karl Marx Theory of Social
Development, and Dependency theory
o There are three main differences between the classic orthodox
Marxist movement and the neo-marxist positions, the latter
providing a basis for the dependency theory;
(1) First, the classical approach focuses on the role of extended
monopolies at the global level, and the neo- marxist on providing a
vision from peripheral conditions.
(2) Second, the classical movement foresaw the need for a bourgeois
revolution at the introduction of national transformation processes;
from the neo-marxist position and based on current conditions of
Third World countries, it is imperative “to jump” to a socialist
revolution, mainly because it is perceived that national bourgeoisies
identify more strongly with elite positions rather than with
nationalistic ones.
 MARXIST OR SOCIALIST THEORIES OF DEVELOPMENT
(3) Third, the classical Marxist approach perceived the industrial
proletariat as having the strength and vanguard for social revolution;
the neo-marxist approach emphasized that the revolutionary class
must be conformed by peasants in order to carry out an armed
revolutionary conflict.
 CLASSICAL MARXIST THEORY OR KARL MARX OR OF SOCIAL
DEVELOPMENT
o The theory emerged as a criticism of classical theories of economic growth.
o Karl Marx lived during early period of industrialization in the developed world,
especially in England, Germany, and USA. He is regarded as the founder of modern
communism. He wrote his famous book ‘Das Capital’. Karl Marx was born in Trier, in
Germany (1818-1883)
o According to Karl Marx during this period, overwhelming majority of people in
these societies were poor, especially women and children. The rural poor became
urban poor who only owned their labor and received SUBSISTENCE WAGES after
selling it. Merchants, industrial owners, landlords esp. those who possessed the
means of production possessed great wealth, power, and prestige due to profit and
surplus production. In other words, those who owned and control the factories &
other means of production exploited the masses who worked for them.
o Karl Marx had tried to understand the institutional arrangements that produced
such misery and inequalities, and suggested for the means to change them to
improve human conditions and to bring social change.
o Karl Marx believes that, ownership of the means of production determines the
distribution of wealth, power, and even ideas. Further to that, those who own
and control the major means of production not only control the economy, but
also political, educational and religious institution, and even the state.
 MAIN THEORETICAL ASSUMPTIONS
 Marx like many other contributors for example of modernization theory has
challenged the view that the world or reality is unchanging, predetermined,
& god-given.
 FUNDAMENTAL THEORETICAL IDEAS
 DIALECTICAL APPROACH TO KNOWLEDGE AND SOCIETY
 Dialectical approach to knowledge and society/ dialectical materialism:
According to Karl Marx the nature of reality is dynamic and conflictual. In
other words, nature is regarded as being in a state of continual movement,
of constant change, this being brought about by the interaction of opposing
forces. Hence, Karl Marx believes that nature of reality is dynamic and is
characterized by conflicts and tensions. Change only take place due to
CLASS STRUGGLE and the working out of contradictions inherent in social
and political context in a particular society. Thus, there is continuous
economic struggle between differences classes in the society. Struggle or
conflict between a class which owns the means of production and who own
nothing is viewed as an engine of progress, and social conflicts is the core of
historical process. This happens because of unequal distribution of
resources and power. Those who control the means of production have
economic power, also control the state or have political power.
 MATERIALISTIC APPROACH TO HISTORY
 He also believes that development of the productive forces i.e. land,
capital, technology and economic activities (material basis of the society)
is central to historical change and it operates through CLASS STRUGGLE.
Struggle over the distribution of the social product supply, the primacy of
class struggle. In other words, Marx believes material forces play crucial
roles in the formation and evolution of human societies. He added the most
important aspect of social reality is the economic structure of a particular
society; the ways in which different groups of people are related to
economic resources of the society and their respective production relations.
And that a change in methods and technique of production is followed by a
change in social relations (relations of production) with it.
 HISTORICAL DEVELOPMENT OF SOCIETY
 Marx does not consider capitalism as an end in itself, but a means to an
end. According, socialist society is both necessary and a desirable end in
historical development. This will be achieved through overthrow of the
exploitative capitalist society and establishment of the proletariat rule. He
believes that the working class is the leading force of social economic
development.
 Following that line of thinking, Karl Marx had argued that,
development is not only a process of transforming from poor
economic level to a sound industrial economic growth, but also a
transition from exploitative and inequality based society to a society
fee from exploitation and the one based on equality.
 Therefore, Marx outlined several components of the production of
material wealth. They are objects of labor, which are constitutive of
the earth, plant and animal world.
 In sum, according to Karl Marx change only take place by changing
the mode of production of a society; but replacing the essentially
exploitative mode of production with the model that reflects the
essence of man’s species being. He claims that the mode of
production of a particular society is not static as it changes and
develops all the time. The changes in production are initiated by
changes in production relations, which in turn lead to the
transformation of the entire social system, social ideas and political
views, which make up the superstructure of the society.
 FIVE STAGES OF SOCIAL DEVELOPMENT
 Marx has analyzed the main stages which have taken place in human
history. According to him, all historical events are the results of a
continuous economic struggle between different classes in society.
 Further to that, Karl Marx believes that the mode of production which
determines the general character of social, political, and spiritual processes
of life is the main cause of change. Accordingly, as the methods and
techniques of production change, the social relations which follow them
also change. In other words, Karl Marx affirmed that the Productive forces
and Production relations constitute the mode of production of a particular
society, which exists as objective reality.
 According to Karl Marx there are FIVE socio-economic formations;
 PRIMITIVE COMMUNALISM/COMMUNAL MODE OF PRODUCTION
 Forces of production; instruments of labor were crude and rudimentary.
 Relations of production; were collective in the sense that the means of
production were owned communally and people lived and engaged in
production in groups to survive. Classless society, no states, etc people
organized themselves in CLAN and FAMILY.
 Organization; No classes, no states, kingdom etc. People organized
themselves in clan and family.
• Labor productivity; low, no surplus, equal distribution of surplus
 FEUDALISM OR FEUDAL MODE OF PRODUCTION
 According to some literature sources, slavery preceded feudalism.
 Forces of production; Land became private property. Serfs owned their
means of labor
 Relations of production; land owners exploited serfs
 Labor productivity; there was surplus which was not distributed equally
 Organization; society has classes land owners and those who did not own
land.
 CAPITALISM
• Forces of production; It emerged during industrial. It was an economic
system that based on commodity production. Labor also became a
commodity. Industries, capital, land, technology and labor were the major
means of production
• Relations of production; were exploitative. Bourgeois capitalists who
owned and controlled the means of production i.e. capital, capital and
industries exploited the working class. The working class had only labor to
sell. There was/is tension capital and labor as capitalism expanded through
export of capital.
 Labor productivity; There is surplus production and surplus profit
 Organization; There were/is two classes, the bourgeois and workers. There
was competition between owners of the means of production stimulated
the incentive for accumulation of capital, increase in production and
technological progress on the one hand. On the other hand there was/is
increasing exploitation and impoverishment of industrial workers.
Increasing contradictions between capitalists and working classes inevitably
led to revolution and collapse of capitalism.
 SOCIALISM:
 Emerged after capitalism was overthrown. Marx understands capitalism
especially private ownership of property as hindrance of development.
 Forces of production; land, capital, technology and industries are controlled
by workers
 Relations of production; emerged after the collapse of capitalism. Relations
of production were/are non-antagonistic and non-exploitative
 Organization; Classless society. Situation of workers improved due to
emergence of the new social order whereby wealth and power are in the
hands of workers. In other words, there is dictatorship of the proletariat or
working class. Karx Marx believes that socialist society is both the necessary
and desirable end of historical development. This will be achieved through
overthrow of the establishment of proletariat rule.
 COMMUNISM
 It is the highest stage of social development. Also the advanced stage
of socialism
 There is no any form of exploitation. All the major means of
production are controlled by the proletariat.
 Poverty is rooted out. Every individual contributes to national income
according to his/her abilities, and receives according to his/her
needs.
 There is abundance production which is important for promotion of
stability and non-exploitative relationships.
 According to Karl Marx development is determined by communism
whereby all major means of production are owned communally. In
communist or socialist economy investment & consumption are
primarily determined by the national plan. The government
engineers and intervenes in the distribution and allocation surplus
and of the available resources.
 In sum, Marxism is a social, political, and economic philosophy named after
Karl Marx. It examines the effect of capitalism on labor, productivity, and
economic development and argues for a worker revolution to overturn
capitalism in favor of communism. Marxism posits that the struggle
between social classes—specifically between the bourgeoisie, or capitalists,
and the proletariat, or workers—defines economic relations in a capitalist
economy and will inevitably lead to revolutionary communism.
• POSITIVE ASPECTS: He believes that development is not only a process of
transforming from poor economic level to a sound industrial economic
growth, but also a transition from exploitative and inequality based
society/economy to a society/economy free from exploitation and the
one based on equality; While Marx understand the importance of
generating wealth through surplus production and profit maximization, he
describe the exploitative nature of capitalist economic system and how it
gives rise to social classes and tensions; Karl Marx predicted about
emergence of conflicts between labor and capital. Meaning, in the short
run, increase in productivity will lead to increase in demand for labor,
increase in wages and the related outcomes
However, in the long run, cost of production will increase, and
companies’ pursuit of profits and capital accumulation would
naturally lead them to cutting production costs, needing fewer and
fewer high skilled workers, creating an “industrial reserve army” of
the poor and unemployed and increase in income inequality; Marx
believes that socialist society is both the necessary and desirable
end of historical development which facilitate establishment of
proletariat rule. Hence, governments worldwide even in countries
which have adopted liberal economic policies play a very large role in
sectors such as law and order, physical infrastructure, education, and
research, in the socialist model the state has a much greater place in
the creation and operation of industrial and agricultural enterprise,
in control of marketing, in price regulation and in general
management of the economy. There is generally lack of faith in
individual profit seeking and the market mechanism as efficient
instruments of resource allocation and mobilization;
In sum, Marx believes an economic system which grows through
exploitation of workers would give rise to classes, inequalities and
conflicts.
• NEGATIVE ASPECTS: He ignores the role of peace and stability in
promoting development. He thinks development can only be
achieved through class struggle; Karl Marx believes that conflicting
social classes are motive forces of development or change. He did
not point out on the role of peace and stability in bringing change;
The theory may not be very relevant in African context where
capitalism has not penetrated deeply, and the there is no an active
and big working class. Majority are rural farmers or peasants;
Development is not only about control and ownership of property or
major means of production; Countries are not homogenous. He had
proposed a one-size-fits all theory; Development is not necessarily a
linear or stage process of social formation. It can also be a zigzag,
and/or back and forth one.
 MODERNIZATION THEORIES
 They do relate, in a way, to other theories belonging to the capitalist
bourgeois or classical economic theories.
 Modernization theories emerged around early 1950s and late 1960s after
USA had gained the position as the leader of the new international
hegemony following the collapse of the socialist or communist hegemony
USSR. In other words, modernization theory emerged following World War
II to address the issue of how to shape the economies of states emerging
from European colonization. Modernization was, thus, conceived of as the
relations of production and standards of living characteristic of western
Europe and the United States. At that time, due to the collapse of the Soviet
Union, USA had the dominant position in international hegemony. Its
implicit aim, as the subtitle of Rostow’s book makes clear, was to shape the
development of the newly independent countries along capitalist lines.
 According to modernization theories western countries are the model of
development or modernity, and countries can develop by following the
development path taken by western countries.
 In line with Rostow’s model, modernization theorists treated
underdevelopment as a stage common to all developing countries and a
result of weaknesses in the various factors of production—land, labor,
technology, and capital.
o Modernization theorists emphasized increased savings and
investment as the key to development and argued that international
trade in products particularly suited to national factor endowments
would enable more efficient resource allocation and greater earnings,
and these could be translated into savings and then used to promote
development.
o They also envisioned that—by disseminating technology, knowledge,
managerial skills, and entrepreneurship; encouraging , capital inflow;
stimulating competition; and increasing productivity—foreign trade,
together with foreign investment and aid, would be the engine of
growth for developing countries.
o According to modernization theories western countries are the model
of development or modernity, and countries can develop by following
the development path taken by western countries.
o Therefore modernization is the process of change that constitutes
(developing countries) adopting those types of social, economic and
political systems that have had contributed to the development of
Western Europe and North America from the 17th to 19th Century.
o The main argument is that development and/or underdevelopment
of Third World Countries is an internal phenomenon.
o Accordingly, in order to develop a country need to invest in
introducing features of modernity because development depends on
traditional values being displaced by modern values.
o Related to the above, modernization theories stress the shift of
modern technology, development of institutions and labor habits
complementary to industrialization. Modern beliefs are considered to
have significant role.
o Following that line of thinking, modernization theories have two
dimensions; (i) Structural, (ii) Psychological .
 Structural dimension of the modernization theory is a uniform
evolutionary vision of economic, social, and political development
along the path of the industrial ‘first world’, which is based on
capitalism or capitalist economy and democracy.
 Prof. Walt Whitman Rostow gave the modernization theory it’s most
and best form in his well-known five stages of economic transition;
traditional economies, adoption of modern technology, rapid capital
accumulation and early industrialization, high industrialization and
age of mass consumption.
 Socio-psychological dimension of the modernization theory explain
the rise of the West by claiming that westerners, especially
protestants possess a high need for rationality and achievement
(values, morality & individuals) which may explain the underlying
factors of economic prosperity in Western Europe i.e commitment to
hard work and the steady accumulation of capital through careful
investment.
o Modernization was, thus, conceived of as the relations of production
and standards of living characteristic of western Europe and the
United States. such as capital accumulation, and other cultural,
political, social, institutional, regulatory, technological, and attitude
towards risk and investment are important factors for creating
conducive environment for development to occur.
o According to modernization theories, development depends on
traditional economic activities, institutions, technology, and values
being replaced by modern ones (Andrew Webster, 1995;110).
 ROSTOW’S STAGES OF ECONOMIC GROWTH
o In 1960, Prof. Walt Whitman Rostow had published a book called “The
Stages of Economic Growth: A Non-Communist Manifesto”
 MAIN ARGUMENTS/ ASSUMPTIONS
 Rostow postulates that economic growth is a linear process
• Rostow argues, it is possible to identify all countries according to a stage of
development they are in. And all advanced economies have passed through
the stage of take off into self-sustaining economic growth. Thus developing
countries are either in traditional society or precondition for take- off.
• Rostow gave the modernization theory its most and best form in his well
known five stages of transition or change; traditional economies, adoption
of modern technology, rapid capital accumulation, early industrialization,
high industrialization, and the age of high mass consumption.
 He believes economies of all countries have the possibility to evolve to
move to another stage depending on certain national factors and
opportunities that give an economy competitive advantage. For example,
while a factor driven economy gains its competitive advantage from natural
resources, favorable conditions for growing crops and low cost labor
source; an investment driven economy from the willingness of firms and
individuals to invest in modern plant, equipment, and technology;
Innovation driven economy based on firms creating new processes,
product, and business models; and a wealth driven economy where
investment is based on accumulated capital in low risk ventures and
activities like shopping centers.
o On the other hand, opportunities such as the accumulation of capital,
social, cultural, political, regulatory, technological, and attitudes
towards risk and investment are all important factors in the creation
of the opportunity landscape for a nation’s economy to evolve from
one stage to another.
o Hence, it is possible to identify ALL countries according to their stage
of economic growth.
 TRADITIONAL (PRIMITIVE) SOCIETY OR TRADITIONAL ECONOMIES
 Large part of the workforce is devoted in agriculture, at least 75% of the
population. Farming and barter trade are the main economic activities.
 There is limited production, insufficient for surplus production due to preNewtonian science and technology. Therefore, there is ceiling on the level
of attainable output per head because of the fact that potentialities which
flow from modern science and technology were either not available or not
regularly or systematically applied.
 People have fatalistic/superstitious views about the physical worlds. It is
during this period in history where man had little knowledge.
 Society organized in family and clan and family connection ─ who is your
father? ─ played a large role in social organization.
 EMERGENCE OF THE PRE-CONDITION FOR TAKE-OFF
 Societies are in the process of transition. Rostow describes the stage
between feudalism and take off as the transitional stage.
 There is advancement in level of science and technology which lead to
emergence of production function in agriculture and industry.
 Modern manufacturing sector emerges.
 There is expansion of market based on competition.
 Economic progress is regarded as necessary.
 Major savings and investment happening ─ directed towards infrastructure,
communication, transport, social services, and raw materials in which other
nations may have interest (comparative advantage), and increase in
overhead capital.
 People are trained to be entrepreneurs and are willing to take up the
challenge of investing their risk capital, innovative capabilities and division
of labor in industrial production and running an economic system geared
towards industrial development.
 Commerce, internal and external widened.
 Political changes particularly building of effective centralized national state
happening.
 TAKE-OFF
 This stage is characterized by a dynamic economic growth due to industrial
revolution. Economic growth becomes a normal condition due to massive
application of science and technology. This stage requires that the level of
investment to be raised to at least 10% of the national income to ensure
self sustaining growth. There is rise of new industries and growth is driven
by two or more leading industrial sectors, new plant ─ cotton textiles,
timber cutting, and rail-road industry.
 The scale of productive economic activities reaches a critical level and
produces change, which lead to massive and progressive structural
transformation in economy and society i.e. increasing urbanization.
The new technique of production are commercialized. The take off
stage is usually sparked by a sharp stimulus such as political
revolution affecting the balance of social power, effective values,
character of the economy, institutions, distribution of income, and
patterns of investment
 England went through take off stage in the middle of the 17th
Century, and Germany in the end of the 17th Century. Take off stage
can last for two to three decades (Chinese economy grew rapidly
after 35 years of change, institutional building, and investment).
Some countries needed external financial assistance (is financial aid
useful?) to go through take off stage. Other relied on domestic
sources of revenue. According to Rostow the following factors would
determine an economy to take off stage: (i) existence of enlarged and
sustained effective demand for the products of key economic sectors,
(ii) introduction of new productive technologies and techniques in
these sectors, (iii), the society’s increasing capacity to generate or
earn enough capital to complete the take-off transition.
 DRIVE TO MATURITY STAGE
 The main feature of the road to maturity is widespread application of
technology to its full range
 10-20% of national income is invested or saved
 New leading sectors replace the old ones. One of the symbols of maturity
being the development of steel industry. Britain, North America, Germany
and France had their economies matured during the same period.
 During this stage there were changes in the industrial structure associated
with the changes in the society such as the distribution of the workforce,
growth in urban population, increase in the population of white collar jobs,
there is development of industrial leadership from the entrepreneur to the
manager.
 AGE OF HIGH MASS CONSUMPTION
• Real income per head rise to a point where people gain command over
consumption in a way that transcends basic needs. They can save and invest
on luxurious goods and services
• There is free competition and this is seen as the key for economic
development
Rostow’s Model of Economic Growth
 There is investment in social welfare and security.
 The economy is able to extend consumption to goods that increases
its power internationally i.e. launching satellite, expedition to the
moon and other planets e.g. to find out whether mars is inhabitable.
 BARRIERS OF DEVELOPMENT; Absence of industrial capitalism,
traditional economic structures, weak institutions, and traditional
values. Internal factors.
 POSITIVE ASPECTS: Rostow highlights the importance of economic
growth for progress, specifically role of market economy and
democracy.
• NEGATIVE ASPECTS: He believes that development depends entirely
on certain internal economic, institutional, and socio-psychological
dynamics; development is a linear process. Development path is not
universal; neglect role of external factors i.e colonialism, neocolonialism, etc; Not all traditional values hinder economic growth;
Development is beyond economics.
 NURKES VICIOUS CYCLE OF POVERY THEORY (1907-2007)
 MAIN THEORETICAL IDEAS
o The theory was contributed by one of the pioneers of modern economics
Prof. Ragnar Nurkes, in 1953.
o According to Nurkes, low economic growth, poverty, and most economic
challenges are a result of the vicious cycle of poverty (low capital
formation) in developing countries.
o He argues that many developing countries are poor because they are poor.
This implies a circular constellation of forces tending to act and react in
such a way as to keep a country in the state of poverty. In other words,
poverty begets poverty. Poverty causes poverty and trap countries and
people in a vicious cycle.
o Accordingly, the process of capital formation is continuously obstructed and
restricted.
o Unlike Classical economists, Nurkes does not agree that cumulative
economic growth is an endogenous process which flows naturally as it
depends on the economic interaction. Countries with low income also
have low savings, which in turn lead to low investment. Low investment
would create deficiency of capital which leads to low productivity. Low
level of productivity contributes to low income. And forms the cycle which
viciously, continue to perpetuate low level of development in TWCs.
o According to Ragnar Nurkes, vicious cycle of poverty has two sides; (1)
Supply Side, and (2) Demand Side.
 THE SUPPLY SIDE
 On the supply side: Low income leads to low savings, low investment,
capital deficiency, low productivity.
 THE DEMAND SIDE
 On the demand side: Low income leads to low savings, low purchasing or
buying power, low demands for goods, limited or small domestic market,
low investment.
• WAYS TO BREAKING THE VICIOUS CYCLE OF POVERTY
• Although Nurkes argued that some countries may not be able to break the
vicious cycle of poverty without external intervention, he is pessimistic
about the role of foreign aid in stimulating development. He insists on
generation of domestic savings by encouraging entrepreneurs to invest in
the agricultural sector for instance.
• On the supply side, Nurkes had urged government in poor countries to
increase savings. To discourage huge expenditure on marriage ceremonies,
other social ceremonies etc. Since government interference is considered
important, governments can increase saving by changing their fiscal
policies.
 Also can impose heavy tax on luxurious goods. Increase direct tax,
and reduce its consumption. Apart from increasing its saving
investment, governments can reduce, in the short term, rate of
necessary goods and encourage investment in iron and chemical
fertilizer. Governments should also adopt proper monetary and
banking policies which may provide facilities and encourage savings.
 On the demand side of the vicious cycle, he proposed what is known
as the doctrine of balanced growth which entails: (i) expansion of the
size of the market which will reinvigorate investment incentives, and
enable the economy to embark on the path towards growth, (ii)
increase in broad based investment in the manufacturing sectors,
increase in productivity and employment (disguised unemployment)
these will stimulate increase in the demand side of the economy, and
(iii) increase in savings and consumption. He had insisted that, if
income is spent for consumption than savings, this would slow down
the process of capital accumulation and economic growth as a whole.
o In development studies dependency is described as a situation in which a
particular country or region relies or depend on another for support,
survival, and growth.
o In general his theory of balanced growth suggests that governments in poor
countries need to make large investment in a number of industrial sectors,
but particularly in agriculture.
 BARRIER OF ECONOMIC GROWTH: Vicious cycle of poverty or low capital
formation.
 POSITIVE ASPECTS: He helps us to understand the relevant economic
insights of development and underdevelopment that persistently affect and
challenge the endogenous growth process that leads to a development path
with sustained increase in standards of living and sustained development
gains; He describes some of the economic causes of poverty and
backwardness in developing countries; He does not view economic growth
or development as endogenous process.
 NEGATIVE ASPECTS: The model may not be new. It seems to be just an
elaboration of some of the ideas proposed by Classical economists,
especially Adam Smith & David Ricardo; The model is misleading and
oversimplified. Nurkes neglects the historical factors that may relate to
poverty, and the role played by inequalities in the global economy in
deepening poverty.
 Utilization of a disguised unemployment is not a new idea
 He views entrepreneurs as to have an important role in breaking the cycle.
But where would they get the fund? Capital? Although he understands that
many poor countries have low savings he rejects the idea of supplying fund
through credit creation.
 He does not also explain where a poor country will get the funds to buy
machines and raw materials which will be provided to the labor for capital
formation.
 NEO-MARXIST THEORIES OF DEVELOPMENT: DEPENDENCY THEORY/
THEORY OF UNDERDEVELOPMENT
o The theory emerged as a critic to modernization theories which is based on
neo-liberal free market and democracy, and is considered as an extension of
Marxist theory. While bourgeois and modernization theories have
positioned capitalist system, free market and competition as key drivers of
economic growth and development, dependency theory scholars
understand capitalist system, free market and competition as causes of
underdevelopment and economic stagnation in Third World Countries.
o Therefore underdevelopment and economic stagnation in TWCs is not a
result of internal factors, but external factors.
 MAIN THEORETICAL ARGUMENTS
 Dependency theory became popular in the 1970s and 1980s. It was
advanced by Third World Countries scholars, especially from Latin America
such as Paul Baran, Andre Gunder Frank, John Galtung, Ruy Mauro Marinin,
Tetonuo Dos Santos, and Samir Amir.
 Marxist theories analyze ‘development’ and ‘underdevelopment’ in the
context of the international capitalist system. Under developed countries
have the following common characteristics: distorted and highly dependent
economies; devoted to producing primary products for the developed
world; and to provide market for their finished goods, traditional;
traditional rural social structures, high population growth; and widespread
poverty.
 However, despite of the fact that majority of people and communities in the
TWCs are poor, the ruling elites are rich and wealthy. This is happens
because advance rich nations form alliance with pre-capitalist domestic
elites to have easy access to market, domestic resources and continue to
dominate traditional modes of surplus production. This limits economic
growth and nurture dependency How? (i) Surplus they generated would be
expropriated by foreign capitals and/or otherwise squandered on luxury
consumption by traditional elites; (ii) investment would be reduced as
capital goods have to be purchased abroad.
 According to dependency theory capitalist system, market, competition
enhances INEQUALITY among the countries of the world to result into a
dominant, wealthy core, and a subservient impoverished periphery
(capitalist periphery). In other words, underdevelopment and economic
stagnation in Third World Countries is a result of the incorporation of the
Third World Countries’ economies in the global capitalist system, which is
dominated by the West and North America.
 Capitalism in the context of dependency, losses its progressive character,
and can only generates underdevelopment. How this happened? (i)
Capitalist countries exported their manufacturing
products to the
peripheral countries and at the same time plundering wealth and slaves, (ii)
Export of capital, the competition for supplies of raw materials and the
process of monopolization by advanced countries, (iii) post-colonial
dependency of the periphery countries, where foreign capital (in particular
international corporations), profit repatriation, adverse changes in the
terms of trade (unequal exchange) work together to hinder and distort
economic development and industrialization.
 Dependency theorists argue that dependency is nurtured by free
trade policies which is mainly in the interest of businesses in the
developed world (they have big capitals, modern technology, and
quality and quantity capacity).
 Structural inequalities between industrialized and developing
countries are also nurtured by conscious adoption of policies
followed by already developed countries. For example free market
policies call for TWCs to open their local markets to allow foreign
investment and import of manufactured goods.
 Dependency is also nurtured by encouraging production of cash crops
or raw materials based on comparative advantage.
 HOW TO BREAK DEPENDENCY & THE UNEQUAL AND EXPLOITATIVE
RELATIOSHIP?
 Revolution. Divorce. Break the unequal and exploitative relationship
with the Western advanced economies.
 Disintegration/delinking of TWCs economies from the global capitalist
economy.
 Adoption of protectionism and inward directed development. For
example form trade alliances with other TWCs. United Nations of
Africa for example?
 Develop and implement nationalistic development agenda i.e. be self
reliant.
 POSITIVE ASPECTS: The theory explains how the integration of TWCs
economies in the international capitalist system promotes
underdevelopment and economic stagnation than prosperity; The
theory elucidates on how the unequal and exploitative structural
relationship that have developed between the different parts of
capitalist system create the centre (dominant & wealthy core) and
periphery (poor & subservient); Highlights the historical and
external factors that may be responsible for underdevelopment and
economic stagnation in TWCs. Accordingly, underdevelopment or
low development of TWCs is not a result of lacking certain modern
economic and social attributes or systems, but the presence of
capitalist world economy. ie. Walter Rodney’s book “How Europe
underdeveloped Africa" is a good example of their thesis.
 NEGATIVE ASPECTS: Some TWCs economies that have prospered by
integrating their national economies and the international capitalist
economy ; TWCs countries are not homogeneous. They have
different internal dynamics and policies, history; The theory ignores
the role of factors internal to TWCs that result into
underdevelopment and economic stagnation.