EC-617 ISSUES IN ECONOMIC DEVELOPMENT

Theories of Development
Linear-stages-of-growth model

An early theory of development economics, the linear-stages-of-growth model was first

formulated in the 1950s by W. W. Rostow in The Stages of Growth: A Non-Communist
Manifesto, following work of Marx and List. Professor Rostow has described the five
stages of economic growth through all the developing countries passes are following;

1. The Traditional Society: It is basic stage of economic development. It is society

where production is limited. The level of per capita income is so low that it can
hardly meet the minimum level of consumption. The labour force depends upon
agriculture. The methods of production are old. There is less mobility of factors of
production. There is unequal distribution of wealth in the country. Social change
is regarded a sin. There is complete hold of landlords on political power. The
people are the slaves of the customs and traditions. In the present age, there is
hardly any country which can be called traditional.
2. The Pre-conditions for take off: In this stage people look to economic progress
as a healthy sign. They show the desire and willingness to participate the
productive activity. The stagnation in various sectors is broken. People begin to
apply new techniques of production in various sectors. People accept the
importance of education. Banking system always begins to develop. The domestic
and foreign trade increases. In this stage savings, income, investment, production
and purchasing power increases.

3. The Take off: In third stage, all the obstacles are controlled, the rate of economic
development increases. New markets are found. Discoveries and inventions take
place. New industries are stabilized. The latest technology is used in the various
sectors. Rate of employment increases. According to Rostow take off period is
normally 20 to 30 years. This stage has three important characteristics; i) The rate
of saving and investment increases from 12 to 15 percent of GNP ii) The growth
of one and more than one sector increases more swiftly. iii) There is a resolution
in the social, political and economic structure. The country has increases the rate
if economic growth. Pakistan is now in the take off stage, because we have
achieved the target of saving and investment which is required for this stage. The
drive to maturity: In this stage more refined technology is used in the economy.
The rate of investment increases from 12 percent to 20 percent of the national
income. The substitutes of imports are produced inside the country. Exports
quantity increases and balance of payment improves. The rate of economic
growth increases than the rate of population growth. There is increase in per
capita income.

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 4. The age of high mass consumption: In this stage of economic growth, prosperity
is being found in the country. The per capita income is very high and people can
save easily after meeting the basic necessities. Rural population moves to urban
areas. Durable goods like cars and machines are produced in the country.
Government prepares the social welfare plans. Colleges and universities are
available in large numbers. College education is within the reach of more than
half of the population. Russia is struggling hard to achieve this stage of economic
growth. But America, Canada, England, Australia, Japan and Germany have
achieved this stage. New people and economies are willing to participate in the
economic struggle and they want to increase the rate of development.

Structural-change theory:

Structural-change theory deals with policies focused on changing the economic structures
of developing countries from being composed primarily of subsistence agricultural
practices to being a "more modern, more urbanized, and more industrially diverse
manufacturing and service economy." There are two major forms of structural-change
theory; W. Lewis' two-sector surplus model, which views agrarian societies as consisting
of large amounts of surplus labor which can be utilized to spur the development of an
urbanized industrial sector, and Hollis Chenery's patterns of development approach,
which holds that different countries become wealthy via different trajectories. The pattern
that a particular country will follow, in this framework, depends on its size and resources,
and potentially other factors including its current income level and comparative
advantages relative to other nations. Empirical analysis in this framework studies the
"sequential process through which the economic, industrial and institutional structure of
an underdeveloped economy is transformed over time to permit new industries to replace
traditional agriculture as the engine of economic growth."

Structural-change approaches to development economics have faced criticism for their

emphasis on urban development at the expense of rural development which can lead to a
substantial rise in inequality between internal regions of a country. The two-sector surplus
model, which was developed in the 1950s, has been further criticized for its underlying
assumption that predominantly agrarian societies suffer from a surplus of labor. Actual
empirical studies have shown that such labor surpluses are only seasonal and drawing
such labor to urban areas can result in a collapse of the agricultural sector. The patterns of
development approach has been criticized for lacking a theoretical framework.

International dependence theory

International dependence theories gained prominence in the 1970s as a reaction to the

failure of earlier theories to lead to widespread successes in international development.
Unlike earlier theories, international dependence theories have their origins in developing
countries and view obstacles to development as being primarily external in nature, rather
than internal. These theories view developing countries as being economically and
politically dependent on more powerful, developed countries which have an interest in
maintaining their dominant position. There are three different, major formulations of

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international dependence theory: neocolonial dependence theory, the false-paradigm
model and the dualistic-dependence model. The first formulation of international
dependence theory, neocolonial dependence theory has its origins in Marxism and views
the failure of many developing nations to undergo successful development as being the
result of the historical development of the international capitalist system.

Neoclassical theory

First gaining prominence with the rise of several conservative governments in the
developed world during the 1980s, neoclassical theories represent a radical shift away
from International Dependence Theories. Neoclassical theories argue that governments
should not intervene in the economy; in other words, these theories are claiming that an
unobstructed free market is the best means of inducing rapid and successful development.
Competitive free markets unrestrained by excessive government regulation are seen as
being able to naturally ensure that the allocation of resources occurs with the greatest
efficiency possible and the economic growth is raised and stabilized.

It is important to note that there are several different approaches within the realm of
neoclassical theory, each with subtle, but important, differences in their views regarding
the extent to which the market should be left unregulated. These different takes on
neoclassical theory are the free market approach, public-choice theory, and the market-
friendly approach. Of the three, both the free-market approach and public-choice theory
contend that the market should be totally free, meaning that any intervention by the
government is necessarily bad. Public-choice theory is arguably the more radical of the
two with its view, closely associated with libertarianism, that governments themselves are
rarely good and therefore should be as minimal as possible.

Academic economists have given varied policy advice to governments of developing

countries. See for example, Economy of Chile (Arnold Harberger), Economic history of
Taiwan (Sho-Chieh Tsiang). Anne Krueger noted in 1996 that success and failure of
policy recommendations worldwide had not consistently been incorporated into
prevailing academic writings on trade and development.

The market-friendly approach, unlike the other two, is a more recent development and is
often associated with the World Bank. This approach still advocates free markets but
recognizes that there are many imperfections in the markets of many developing nations
and thus argues that some government intervention is an effective means of fixing such
imperfections.

Definition of 'New Growth Theory'

An economic growth theory that posits humans' desires and unlimited wants foster ever-
increasing productivity and economic growth. The new growth theory argues that real
GDP per person will perpetually increase because of people's pursuit of profits. As
competition lowers the profit in one area, people have to constantly seek better ways to

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do things or invent new products in order to garner a higher profit. This main idea is one
of the central tenets of the theory.

Investopedia explains 'New Growth Theory'

The theory also argues that innovation and new technologies don't occur simply by
random chance. Rather, it depends of the number of people seeking out new innovations
or technologies and how hard they are looking for them. In addition, people also have
control over their knowledge capital, ie: what to study, how hard to study. If the profit
incentive is great enough, people will choose to grow human capital and look harder for
new innovations.

Modern Economic Theory

Deals with the nature of economic definition, scope and method, partial equilibrium and
analysis, indifference curve techniques, utility analysis of demand, revealed reference
theory, social accounting, determinants of income and employment, and the nature and
function of money.