NATURE OF DEVELOPMENT ECONOMICS

Unlike traditional neoclassical economics and political economy, development economics covers
a wider scope. Neoclassical economics is concerned primarily with the efficient, least-cost
allocation of scarce productive resources and with the optimal growth of these resources over
time so as to produce an ever-expanding range of goods and services. Traditional neoclassical
economics deals with an advanced capitalist world of perfect markets, consumer sovereignty,
automatic price adjustments, decisions made on the basis of marginal private-profit and utility
calculations and equilibrium outcomes in all goods and resource markets. It assumes economic
―rationality‖ and a purely materialistic, individualistic, self-interested orientation towards
economic decision making.

Political economy goes beyond the traditional neoclassical economics which consider, among
other things, the social and institutional processes through which certain groups of economic and
political elites influence the allocation of scarce productive resources now and in the future,
either for their own benefit exclusively or for the benefit of the masses or both. Political
economy therefore deals with the relationship between politics and economics, which lays a
special emphasis on the role of power in economic decision making.

However, development economics is concerned with the economies of contemporary

underdeveloped countries with varying ideological orientations, diverse cultural backgrounds
and complex but similar economic problems that require new ideas and novel approaches
(Todaro 2010). It recognizes the activities of non-governmental organizations at both national
and international levels that are rapidly contributing to proffering solutions to problems of
poverty and underdevelopment in the LDCs

Development Economics is that branch of economics that deals with economic aspects of the
development process in low-income countries. It considers how to promote economic growth in
such countries by improving factors like health, education, working conditions, domestic and
international policies and market conditions. Therefore, Development Economics is the study of
how economies are transformed from stagnation to growth and from low-income to high-income
status, and overcome problems of absolute poverty.

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The primary goal of development economics is to understand the economic problems of
developing nations in order to help improve the material lives of the majority of the world
population.

MEANING AND MEASURE OF ECONOMIC GROWTH

Economic Growth

Economic Growth is an increase in the capacity of an economy to produce goods and services,
compared from one period of time to another is termed economic growth. That is, how much
more the economy produces than it did in the prior period. According to Todaro, ―Economic
growth is a steady process by which the productive capacity of the economy is increased over
time to bring about rising levels of national output and income‖. Kuznets defined economic
growth as ―a long-term process wherein the substantial and sustained rise in real national
income, total population and real per capita income take place‖.

Economic growth can be measured in nominal terms, which measure income at current prices
with no adjustment to effect of inflation or in real terms, which accounts for the effect of
inflation or deflation. Economic growth is usually linked with technological changes. Discovery
of new or better economic resources, increase in the capital stock, increase in specialization,
advances in technology, and improvement in the quality and level of literacy are considered to be
the principal causes of economic growth. In recent years, the idea of sustainable development has
brought in additional factors such as environmentally sound processes that must be taken into
account in growing an economy.

The benefits of economic growth are manifold; they include among others, the capacity to raise
living standards of people and alleviate poverty. This will mean being generous towards it‘s less
fortunate citizens or neighbors than it is for a static economy. Sustainable increase in the rate of
economic growth is a source of national and international prestige.

Measure of Economic Growth

Different methods were used to measure the rate of economic growth of an economy. Real Gross
Domestic Product (or its related indicators such as Gross National Product or Gross National
Income) is the most common and the best way to measure economic growth. GDP is calculated

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from a country's national accounts which report annual data on incomes, expenditure and
investment for each sector of the economy. Using this data, it is possible to estimate the total
income earned in the country in any given year (GDP) or the total income earned by a country's
citizens (GNP or GNI). GDP is the total value of all goods and services produced in an
economy. GDP is the logical extension of measuring economic growth in terms of monetary
expenditures. GDP takes into account the country's entire economic output. It includes all goods
and services that businesses in the country produce for sale. It doesn't matter whether they are
sold domestically or overseas. GDP measures final production. It doesn't include the parts that
are manufactured to make a product. It includes exports because they are produced in the
country. Imports are subtracted from economic growth. Most countries measure economic
growth each quarter. They use real GDP to compensate for the effects of inflation.

However, some economists highlighted limitations and biases in GDP calculation. For instance,
François Lequiller sees GDP as a controversial indicator of growth because ―It measures income,
but not equality, it measures growth but not destruction, and it ignores values like social
cohesion and the environment‖. GNP is derived by adjusting GDP to include repatriated income
that was earned abroad, and exclude expatriated income that was earned domestically by
foreigners. In countries where inflows and outflows of this sort are significant, GNP may be a
more appropriate indicator of a nation's income than GDP.

There are three different ways of measuring GDP

 the income approach

 the output approach
 the expenditure approach

The income approach, as the name suggests measures people's incomes, the output approach
measures the value of the goods and services used to generate these incomes, and the expenditure
approach measures the expenditure on goods and services. In theory, each of these approaches
should lead to the same result, so if the output of the economy increases, incomes and
expenditures should increase by the same amount.

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Figures for economic growth are usually presented as the annual percentage increase in real
GDP. Real GDP is calculated by adjusting nominal GDP to take account of inflation which
would otherwise make growth rates appear much higher than they really are, especially during
periods of high inflation.

MEANING AND MEASURE OF ECONOMIC DEVELOPMENT

Economic development is perceived in different ways. In a traditional economic sense,

development refers to the capacity of a national economy, whose initial economic conditions
have been more or less static for a long time, to generate and sustain an annual increase in its
gross national income (GNI or GNP) at a rate of 5% and above (Todaro & Smith,2010). It was
also viewed as being indicated by increases in per capita income, in order to measure the rate of
increase in income compared to increase in population. That is, it takes into account the ability of
a nation to expand output at a rate faster than the rate of increase in its population. It indicates
how much of the goods and services the citizens enjoy an average in a period, usually one year.
The traditional view of development sees development in terms of economic phenomena.
However, the traditional view of development becomes inadequate in the context of later
experiences of the developing countries. They had in the 1950s and 1960s pursued programmes
to rapidly increase their Gross National Income and per capita income. The experiences were
disappointing. Although many of them met their growth targets, the level of poverty of the
masses was still increasing, even as income increased. It was understood then that the traditional
view of development was restrictive. Economists and policy makers reviewed their positions and
called for a more serious attack on absolute poverty, increasingly inequitable distribution of
income and rising unemployment.

The new economic concept of development viewed development as a multidisciplinary

phenomenon.
It is multidisciplinary because the views and strategies proffered by sociologists, economists,
political scientists, psychologists, chemists, physicist, anthropologists etc are all relevant in the
search for meaningful and sustainable development for mankind. Sustainable development
means that major improvements of social structures, popular attitudes and national institutions.

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That is, the qualitative measure of the progress made in an economy by adoption of new
technologies, transition from agriculture-based to industry-based economy, and general
improvement in living standards. Economic development could mean growth plus positive
change in the entire social system.
The first step in defining economic development is distinguishing it from the concept of
economic growth. Economic growth has a strong theoretical grounding and is easily quantified
as an increase in aggregate output. In theorizing, economic growth, David Ricardo (1819), and
later Robert Solow (1956) and many others conceptualize an economy as a machine that
produces economic output as a function of inputs such as labor, land, and equipment. Growth
occurs when output increases. Output can increase either when we add more inputs or use
technology or innovation in order to enhance the efficiency with which we transform inputs into
outputs. In part because of this straightforwardness, economic growth, with its emphasis on
increases in population, employment or total output dominates the debate, despite the fact that
increases in any or all of these could be associated with both improvements and/or declines in
prosperity and quality of life.
Development also involves rapid increase in economic growth, reduction in extreme inequality,
eradication of poverty, removal of gender inequality and environmentally sustainable growth and
development. According to Todaro, economic development can be conceived as a multi-
dimensional process involving major change in social structures, popular attitudes and
national institutions as well as the acceleration of economic growth, the eradication of
poverty and reduction of inequality of wealth. In essence, development can be seen as the wide
phenomena of changes in entire social system in addition to improvements in provision for the
basic needs of people and their desires to be free from unsatisfactory and helpless conditions into
a better material, social, spiritual and mental existence.

Inspired by Sen, and building on the prior works, Feldman et al (2014) defined Economic
development as the expansion of capacities that contribute to the advancement of society through
the realization of individual, firm and community potential. Economic Development is measured
by a sustained increase in prosperity and quality of life through innovation, lowered transaction
costs, and the utilization of capabilities towards the responsible production and diffusion of
goods and services. Economic development requires effective institutions grounded in norms of
openness, tolerance for risk, appreciation for diversity, and confidence in the realization of
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 mutual gain for the public and the private sector. Economic development is essential to creating
the conditions for economic growth and ensuring our economic future.

According to Feldman et al (2014) while economic growth is simply an increase in aggregate

output, economic development is concerned with quality improvements, the introduction of new
goods and services, risk mitigation and the dynamics of innovation and entrepreneurship.
Economic development depends on education so that workers can more fully participate in the
economy, social and cultural patterns of behavior that encourage initiative and engagement, and
co-operation rather than adversarial relationship between government and business. Economic
development requires balance: increased education requires complementary efforts to support a
sophisticated economy that will provide jobs. Focusing on education without supporting the
development of industry creates a brain drain as skilled labor migrates to opportunity (Beine,
Docquier & Rapoport, 2001).

Structural Changes of Economic Development:

Economic development represents following structural changes in various sectors of the
country:
There is a change in the occupational structure. In economic development, there is decrease
in the share of labour force in primary sector (farming, fishing and mining etc.) and increase
in the share of labour force in secondary sector (industry etc).

i. There is a change in the structure of national output. The contribution of primary sector in
the national output falls and the share of secondary and tertiary (3 rd) sector slowly go up.

ii. There is a change in the structure of industrial production. There is an increase in the
production of capital goods and decrease in the production of consumer goods.

iii. There is a change in the structure of foreign trade. The share of primary goods in exports
decreases and the share of capital goods in imports increase. Accordingly, in economic
development there is an increase in exports of manufactured and final goods. Similarly, there
is decrease in the imports of consumer items.
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iv. There is a change in the structure of technology. In the economic development modern and
advanced techniques are used in all the sectors of economy.

v. There is a change in the social and institutional sector. Due to economic development there is
an increase in the self-esteem and living standard of the population.

Measure of Economic Development

It is difficult to get a single measure of economic development that completely captures the
process. One of the earliest and also a popular measure of economic development is per capita
income. Some economists have emphasized on certain social indicators as a measure of
development which should account for all such components that determine welfare of the
common masses such as levels of literacy, health and employment, while others have
emphasized on reduction in poverty as an important indicator of development. It has now
become a common practice to measure development in terms of composite indices such as HDI
(Human Development Index).
The United Nations was the first to develop the Human Development Index in the year 1990.
The HDI attempts to rank all countries on a scale of 0 (lowest human development) to 1 (highest
human development) based on three goals or end products of development as follows:

(I) Longevity or Life Expectancy Index (LEI): This index deals with life expectancy
at birth. That is, the number of years a newly born baby is expected to live. Life
expectancy in Nigeria (published in the International Medical Journal, 2017)
cited in This Day Live (December, 2017) shows that a Nigerian male born in
2016 will live approximately 55.5 years in good health, while a female will live a
healthy life of approximately 57.2 years.
(II) Educational Attainment (EAI): This index refers to education attained by the
people of the country on an average basis.

This index is articulated through the following two variables:

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 (a) Adult Literacy Rate (ALR): This variable measures the proportion of people aged 15 and
above who can understand, read and write a short and simple statement in their everyday
life are known as literate. It implies that every literate must be capable of reading and
writing certain sentences. Literacy is the symbol of the quality of the people. ALR
measured two-third of the weighted average of adult literacy
(b) Gross Enrolment Ratio (GER): Gross Enrolment Ratio refers to the percentage of
population of different age groups enrolled at different levels of education. The education
level consists of primary, secondary and tertiary level. Basic elements of education are
provided at primary level. General enrolment ratio shows the percentage population
enrolled at primary, secondary and university level. GER measured one third of the
weighted average of gross enrolment.

(III) Standard of Living or Real Per Capita GDP (SLI): It is considered as a measure
of the standard of living of the people of a country. It is measured by real per
capita gross domestic product adjusted for the differing purchasing power parity
of each country‘s currency.

In order to calculate human development index we are required to study and analyze longevity,
educational attainment and real GDP per capita. Using these three measures of development, the
HDI ranks countries into four groups: low human development (0.0 to 0.499), medium human
development (0.50 to 0.799), high human development (0.80 to 0.90), and very high human
development (0.90 to 1.0).

To find the income index, one should subtract the log of 100 from the log of current income (at
PPP), on the assumption that real per capita income cannot possibly be less than $100 at PPP
(lower goalpost). The difference gives the amount by which the country has exceeded this ―lower
goalpost.‖ To put this achievement in perspective, consider it in relation to the maximum that a
developing country might reasonably aspire to over the coming generation. The UNDP takes this
at $40,000 PPP (higher goalpost). So we then divide by the difference between the log of
$40,000 and the log of $100 to find the country‘s relative income achievement. This gives each
country an index number that ranges between 0 and 1.

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For example, assuming the Nigeria‘s GDP per capita (at PPP) in 2018 was $1,436, the income
index is calculated as follows:
( ) ( )
Income Index = ( )
= = 0.44
( )

To find the life expectancy index, the UNDP starts with a country‘s current life expectancy at
birth and subtracts 25 years. The latter is the lower goalpost, the lowest that life expectancy
could have been in any country over the previous generation. Then the divides the result by 85
years (higher goalpost) minus 25 years, which represents the range of life expectancies expected
over the previous and next generations. That is, it is anticipated that 85 years is a maximum
reasonable life expectancy for a country to try to achieve over the coming generation.
For example, assuming the life expectancy in Nigeria in 2018 was put at 56.4 years, the life
expectancy index is calculated as follows:
Life Expectancy Index = = = 0.523

The education index is made up of two parts, with two-thirds weight on adult literacy and one-
third weight on school enrollment. Because gross school enrollments can exceed 100% (because
of older students going back to school), this index is also capped at 100%. For instance, adult
literacy in Nigeria in 2018 was estimated at 52.5% and gross enrolment estimated at 50.7%, thus:
Adult Literacy Index = = 0.525

Gross Enrolment Index = = 0.507

Then, to get the overall education index, the adult literacy index is multiplied by two-thirds and
the gross enrollment index is multiplied by one-third as follows:
Educational Attainment Index = (0.525) + (0.507) = 0.350 + 0.169 = 0.519

The final index (Human Development Index) gives each of the three components equal, or one-
third, weight. Thus:
HDI = (Income Index) + (Life Expectancy Index) + (Education Index)

HDI = (0.44) + (0.523) + (0.519) = 0.147 + 0.174 +0.173 = 0.494

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In the light of the above, it can be deduced that a country could do much better than it expects at
a low level of income and that substantial income gains can still accomplish relatively little in
human development. However, certain improvements were made to the indicators and functional
specifications of the HDI on the account that critiques pointed out some weaknesses of the above
HDI. Subsequently, New Human Development Index (NHDI) was introduced by the UNDP in
2010. The index is still based on the three dimensions of standard of living, education, and
health. But it has some notable changes as follows:
Standard of living index which was formerly measured by GDP per capita adjusted for PPP is
being replaced by Gross National Income (GNI) per capita adjusted for PPP. GNI better reflects
a country‘s economic welfare than previously used GDP. It includes some international transfers
and excludes profits generated in the country but repatriated abroad. It provides a more accurate
economic picture of many developing countries. This is in contrast to GDP which simply
accounts for the monetary value of goods and services produced in a country, irrespective of how
much is retained in the country. Another minor difference is that instead of using the common
logarithm (log), the NHDI now uses the natural log (ln) which reflects a more usual construction
of indexes. The minimum goalpost remained $100 while the maximum goalpost is capped at
$75,000.
The two components of the education index (adult literacy and gross enrollment) have been
replaced by two new components: the mean years of educational attainment (schooling) of the
whole population and the expected years of schooling of today‘s children given the current
enrolment rates. Gross enrollment in some cases overstates the amount of schooling because, in
many countries a student who begins primary school is counted as enrolled without considering
whether the student drops out at some stage. On the other hand, adult literacy has always been
badly and too infrequently measured and is inevitably defined more modestly in a less developed
country. Therefore, use of the new components is justified on the fact that estimates are regularly
updated and the statistic is easily compared quantitatively across countries. Moreover, equal
weights are now assigned to both indicators (one-half). This is different from the previous HDI,
which weighted the previous educational sub-indices differently, with adult literacy weighing
one-third and enrolment two-thirds. The minimum value for both education variables are still set
at 0 (since societies can survive without formal education). The maximum values for mean years
and expected years of schooling are currently fixed at 15 and 18 years, respectively

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One of the dimensions – Longevity remains the same which still uses life expectancy at birth as
its indicator. The minimum goalpost for life expectancy was set at 20 years, rather than 25 years.
Historical evidence indicates that 20 years as the minimum required for a society to subsist,
while the maximum value remains 85 years.

Another notable significant change in NHDI is shift from an arithmetic mean to a geometric
mean. When using an arithmetic mean (adding up the component indexes and dividing by three)
in the HDI, the effect is to assume perfect substitutability across income, health, and education.
For example, a higher value of the education index could compensate one for one, for a lower
value of the health index. In contrast, use of a geometric mean ensures that poor performance in
any dimension directly affects the overall index. Thus, allowing for imperfect substitutability is a
beneficial change.
To illustrate, the NHDI is computed using the formula:
NHDI = √ or L1/3 E1/3 I1/3
Where L stands for the life expectancy index, E stands for the education index, and I stands for
the income index.
For example, Table 1.1 presents the hypothetical values of Nigeria‘s indicators for the year 2018

Indicators Nigeria
Life expectancy at birth (years) 63.8
Mean years of schooling (years) 8.6
Expected years of schooling (years) 12.4
GNI per capita (PPP US$) 11,362

The component indexes of the NHDI are computed by the same method as for the HDI. Thus:
Life expectancy index = = = 0.67

For education index there are two sub-indices:

Mean years of schooling index = = 0.57

Expected years of schooling index = = 0.69

Now, the overall education index is obtained by computing the arithmetic mean of the two sub-
indices:

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Education index = = 0.63

[ ] [ ]
Income index = [ ] [ ]
= = = 0.71

NHDI = √ =

UNDERDEVELOPMENT

The world economies consist of wide range of variation to the degree of development. Some
economies are more developed and advanced than others which give room for their classification
into developed economies and underdeveloped economies. Before now, the undeveloped
economies were called backward economies and the developed economies were known as
advanced economies. However, these terms backward and advanced have been considered
unsatisfactory and misleading hence the use of the term developed and underdeveloped in place
of advanced and backward.

According to development experts, ―an underdeveloped country is one in which per capita real
income is low when compared with the per capita real income of the developed countries.
Although poverty is an important feature of underdevelopment, but it is not always an adequate
criterion to judge whether a country is developed or underdeveloped. For a country to be called
underdeveloped there must be unutilized or underutilized natural resources which may be used
for production to raise per capita income and standards of living of the people. If the resources of
a country are meagre and scanty, then even after having fully developed them, it will remain
poor.

According to Nurkse, lack of capital is not the only cause of underdevelopment and poverty but,
―Economic development has much to do with human endowments, social attitudes, political
conditions and historical accidents. Capital is necessary but not a sufficient condition of
progress.‖ A more satisfactory and adequate definition of an underdeveloped economy according
to Professor Viner, is that, ―an underdeveloped country is one which has good potential prospect
for using more capital or more labour or more available natural resources, or all of these to
support its present population on a higher level of living or if its per capita income level is
already fairly high to support a larger population on a not lower level of living.‖ According to

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him, an underdeveloped country is one which is characterized:(i) By mass poverty which is
chronic and not the result of some temporary misfortune and (ii) By obsolete methods of
production and social organization which means that poverty is not entirely due to poor natural
resources and hence could presumably be lessened by methods already proved in other
countries.‖

Characteristics of Underdeveloped Economies

There are certain important features that underdeveloped economies tend to have in common
with each other, on average, in comparison with the developed countries. But there are also very
substantial differences among developing countries in terms of culture, governance, geographical
location of the country etc. Some of the fundamental features of underdeveloped countries are
generally considered as follows:
1. Low per Capita Income: In an underdeveloped economy, low per capita income is
reflected in the low standards of living of the people. People live in extremely insanitary
conditions and without any proper medical care. A large proportion of the populace lived
below the poverty line, ill-fed, ill-clothed, ill-housed and ill- educated.
2. Inequitable Distribution of Wealth and Income: Under developed economies are
usually associated with inequitable distribution of income and wealth. The gap between
the haves and the have-nots are usually widened with concentration of wealth and
economic power in the hands of a few to the detriment of the common people.
3. Predominance of Agriculture: In an underdeveloped country majority of the people live
in rural areas and their main occupation is agriculture with little or no industrialization.
The heavy concentration in agriculture is a symptom of poverty. Agriculture is mainly
carried on in an old fashion way with obsolete methods of production with very low yield
in bare subsistence level
4. Deficiency of Capital: Underdeveloped economy is characterized by low ratio of capital
availability per head of population. Here the available stock of goods is not sufficient to
employ the total available labour force on the basis of modern technique of production.
Capital deficiency in such economies can be as a result of shortage of savings,
speculative investment rather than productive investment, high rate of population growth
and the tendency of the meager savings to go into conspicuous consumption.

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 5. Unemployment and Underemployment: One important feature of underdeveloped
economy is widespread unemployment and underemployment. In such economies, the
supply of labour far exceeds the demand for labour owing to huge population.
Unemployment in this case can be attributed to the failure of the industrial sector to
expand at a fast-enough rate and the expansion of education which has created demand
for white collar jobs which the country‘s urban economy has failed to provide
6. A Dualistic Economy: All underdeveloped countries are characterized by a dualistic
economy comprising the market and the subsistence economy. The market is the
developed found in the urban areas and the subsistence is the undeveloped found in the
rural areas. The modern or the developed part contains mainly the large-scale industry,
mines and plantations. A large part of the credit is supplied by the traditional money-
lenders. Monetary and fiscal measures of regulation are not very effective. Income of the
people of this unorganized sector is very low.
7. Technical Backwardness: Underdeveloped countries are technologically backward. Due
to technological backwardness, these countries use old, outdated and primitive methods
of production discarded by the developed countries long ago. Deficiency of capital,
Illiteracy and absence of skilled labour are the major hurdles in the spread of techniques
in the backward economy.

Growth and Development Models

Classical Theories of Economic Development and Patterns of Growth
The classic literature on economic development has been dominated by four major theories:
(1) The linear stages of growth models
(2) The structural change models
(3) The international dependence revolution and
(4) The neoclassical counterrevolution: Market fundamentalism

The linear stages of growth model

This model uses relevant economic theory and statistical analysis in an attempt to portray the
internal process by which economies could be transformed from poor agricultural subsistence
societies to modern industrial countries. The most fundamental models that explained the linear

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stages of growth approach include: the Rostow‘s stages of growth model and the Harrod Domar
Growth Model.
Rostow’s stages of growth model
Walter W. Rostow, an American historian economist wrote that the transition from
underdevelopment to development can be described in terms of a series of steps or stages
through which all countries must pass. Rostow noted that any period in their economic
development, all countries must pass through one of five stages:
i. The traditional society

ii. The pre-conditions for take-off into self-sustaining growth

iii. The take-off

iv. The drive to maturity

v. Age of high mass consumption

These stages represent both a theory about economic growth and theory about modern economic
development history.

Traditional Society

o characterized by subsistence agriculture; almost wholly a "primary" sector economy

o limited and crude technology
o limited ability for economic growth because of the absence of modern technologies;
change seen negatively
o This is where society generally begins before progressing towards the next stages of
growth
o No centralized nations or political systems.
 Pre-conditions to "take-off"
o External demand for raw materials initiates economic change.
o Development of more productive, commercial agriculture and cash crops not consumed
by producers and/or largely exported.
o Widespread and enhanced investment in changes to the physical environment to expand
production (i.e. irrigation, canals, ports)

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 o Increasing spread of technology and advances in existing technologies
o Development of national identity and shared economic interests.
 Take-off
o Urbanization increases, industrialization proceeds, technological invention occurs.
o "Secondary" sector expands and ratio of secondary vs. primary sectors in the economy
shifts quickly towards secondary.
o Textiles and apparel are usually the first "take-off" industry
o An Example of the Take-off phase is the Agriculture (Green) Revolution in the 1960s.
 Drive to Maturity
o Diversification of the industrial base; multiple industries expand and new ones take root
quickly
o Manufacturing shifts from investment-driven (capital goods) towards consumer durables
and domestic consumption
o Rapid development of transportation infrastructure.
o Large-scale investment in social infrastructure (schools, universities, hospitals, etc.)
 Age of Mass Consumption
o the industrial base dominates the economy; the primary sector is of greatly diminished
weight in economy and society
o widespread and normative consumption of high-value consumer goods (e.g. automobiles)
o consumers typically (if not universally), have disposable income, beyond all basic needs,
for additional goods
o a society with high economic security and high consumption

According to Rostow, all the advanced countries had passed the stage of ―Takeoff into self-
sustaining growth‖, and the underdeveloped countries that were still in either the traditional
society or the preconditions‟ stage had only to follow a certain set of rules of development to
take off in their turn into self-sustaining economic growth.
One of the principal strategies of development necessary for any takeoff was the mobilization of
domestic and foreign saving in order to generate sufficient investment to accelerate economic
growth. This mechanism was further described by the Harrod-Domar growth model, often

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referred to as the AK model because it is based on a linear production function with output given
by the capital stock K times a constant, often labeled A.

Harrod-Domar Growth Model

The Harrod-Domar growth theory is based on the works of two people, R. F. Harrod and E. D
Domar during the periods 1930‘s and 1940‘s. The model suggests that, every economy must save
a certain proportion of its national income, if only to replace worn-out or impaired capital goods
(buildings, equipment, and materials). However, in order to grow, new investments representing
net additions to the capital stock are necessary. If we assume that there is some direct economic
relationship between the size of the total capital stock, K, and total GDP, Y—for example, if $3
of capital is always necessary to produce an annual $1 stream of GDP, it follows that any net
additions to the capital stock in the form of new investment will bring about corresponding
increases in the flow of national output, GDP.
Suppose that this relationship, known in economics as the capital-output ratio, is roughly 3:1. If
we define the capital-output ratio as k and assume further that the national net savings ratio, s, is
a fixed proportion of national output and that total new investment is determined by the level of
total savings, we can construct the following simple model of economic growth:
Net saving (S) is some proportion, s, of national income (Y) such that we have the simple
equation
S = SY ……………………………………… (1.1)
Net investment (I ) is defined as the change in the capital stock, K, and can be represented by ΔK
such that
I = ΔK…………………………………………….. (1.2)
But because the total capital stock, K, bears a direct relationship to total national income or
output, Y, as expressed by the capital-output ratio, it follows that

=c

or

=c

or,
ΔK = cΔY …………………………………….. (1.3)

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Because net national savings, S, must equal net investment, I, we can write this equality as
S = I ………………………………………… (1.4)
But from Equation 1.1 we know that S = sY, and from Equations 1.2 and
1.3 we know that
I = ΔK = cΔY
It therefore follows that we can write the ―identity‖ of saving equaling investment shown by
Equation 1.4 as
S = sY = cΔY = ΔK = I ……………………….. (1.5)
or simply as
sY = cΔY ……………………….. (1.6)

Dividing both sides of Equation 1.6 first by Y and then by c, we obtain the following expression:

= …………………………………… (1.7)

Note that the left-hand side of Equation 1.7, ΔY/Y, represents the rate of change or rate of growth
of GDP.
Equation 1.7, which is a simplified version of the famous equation in the Harrod-Domar theory
of economic growth, states simply that the rate of growth of GDP (ΔY/Y) is determined jointly by
the net national savings ratio, s, and the national capital-output ratio, c. More specifically, it says
that in the absence of government, the growth rate of national income will be directly or
positively related to the savings ratio (i.e., the more an economy is able to save and invest out of
a given GDP, the greater the growth of that GDP will be) and inversely or negatively related to
the economy‘s capital-output ratio (i.e., the higher c is, the lower the rate of GDP growth will
be). Equation 1.7 is also often expressed in terms of gross savings, in which case the growth rate
is given by

= – …………………………………….. (1.7‘)

Where:
is the rate of capital depreciation.
Considering the simple Harrod-Domar growth model (Equation 1.7), which says that one of the
most fundamental strategies of economic growth is simply to increase the proportion of national
income saved (i.e., not consumed). If we can raise s in Equation 1.7, we can increase the rate of

18
GDP growth (ΔY/Y). For example, if we assume that the national capital-output ratio in Nigeria
is, say, 3 and the aggregate net saving ratio is 9% of GDP, it follows from Equation 1.7 that
Nigeria can grow at a rate of 3% per year because

= = = 3%

Now if the national net savings rate can be increased from 9% to, say, 15% through some
combination of increased taxes, foreign aid, and general consumption sacrifices, GDP growth
can be increased from 3% to 5% because now

= = = 5%

Rostow and others recommended that for a country to takeoff and to be able maintains self-
sustaining growth, the country must be able to save at least 15% to 20% of its GDP. The
mechanisms of economic growth and development, therefore, are simply a matter of increasing
national savings and investment.
The structural change models
Structural-change theory emphasised on the mechanism by which underdeveloped economies
transform their domestic economic structures from traditional subsistence agriculture to a more
modern, more urbanized, and more industrially diverse manufacturing and service economy. It
employs the tools of neoclassical price and resource allocation theory and modern econometrics
to describe how this transformation process takes place. Two well-known representative
examples of the structural-change approach are the ―two-sector surplus labour‖ theoretical model
of W. Arthur Lewis and the ―patterns of development‖ empirical analysis of Hollis B. Chenery
and his coauthors.
The Lewis Theory of Development

This theory was formulated by a Nobel laureate W. Arthur Lewis in the mid- 1950s.The Lewis
two-sector model became the general theory of the development process in surplus-labor
developing nations during most of the 1960s and early 1970s, and it is sometimes still applied,
particularly to labour markets in some developing countries.

According to Lewis, the underdeveloped economy consists of two sectors: a traditional,

overpopulated rural subsistence sector characterized by zero marginal labour productivity (a
situation that permits Lewis to classify this as surplus labour in the sense that it can be

19
withdrawn from the traditional agricultural sector without any loss of output) and a high-
productivity modern urban industrial sector into which labour from the subsistence sector is
gradually transferred. The primary focus of the model is on both the process of labour transfer
and the growth of output and employment in the modern sector. Both labour transfer and
modern-sector employment growth are brought about by output expansion in that sector. The
speed with which this expansion occurs is determined by the rate of industrial investment and
capital accumulation in the modern sector. Such investment is made possible by the excess of
modern-sector profits over wages on the assumption that capitalists reinvest all their profits. The
model assumed that the level of wages in the urban industrial sector was constant, determined as
a given premium over a fixed average subsistence level of wages in the traditional agricultural
sector. At the constant urban wage, the supply curve of rural labour to the modern sector is
considered to be perfectly elastic.
To illustrate, consider first the traditional agricultural sector portrayed in the two right-side
diagrams of Figure 1.1b (see Figure 1.1). The upper diagram shows how subsistence food
production varies with increases in labour inputs. It is a typical agricultural production function
in which the total output or product (TPA) of food is determined by changes in the amount of the
only variable input, labour (LA), given a fixed quantity of capital, ̅̅̅, and unchanging traditional
technology, ̅

20
Fig 1.1: The Lewis Model of Modern Sector Growth in a Two Sector Surplus Labour Economy

In the lower-right diagram, we have the average and marginal product of labour curves, APLA and
MPLA, which are derived from the total product curve shown immediately above. The quantity of
agricultural labour (QLA) available is expressed in millions of workers.

Lewis makes two assumptions about the traditional sector. First, there is surplus labour in the
sense that MPLA is zero, and second, all rural workers share equally in the output so that the rural
real wage is determined by the average and not the marginal product of labour (as will be the
case in the modern sector). Assume that there are LA agricultural workers producing TPA food,
which is shared equally as WA food per person (this is the average product, which is equal to
TPA/LA). The marginal product of these LA workers is zero, as shown in the bottom diagram of

21
Figure 31.1b; hence the surplus-labour assumption applies to all workers in excess of LA (note
the horizontal TPA curve beyond LA workers in the upper-right diagram).

The upper-left diagram of Figure 1.1a portrays the total product (production function) curves for
the modern industrial sector. Once again, output of, say, manufactured goods (TPM) is a function
of a variable labour input, LM, for a given capital stock ̅̅̅̅ and technology ̅̅̅. On the horizontal
axes, the quantity of labour employed to produce an output of, say, TPM1, with capital stock KM1,
is expressed in thousands of urban workers, L1. In the Lewis model, the modern-sector capital
stock is allowed to increase from KM1 to KM2 to KM3 as a result of the reinvestment of profits by
industrial capitalists. This will cause the total product curves in Figure 1.1a to shift upward from
TPM (KM1) to TPM (KM2) to TPM (KM3). The process that will generate these capitalist profits for
reinvestment and growth is illustrated in the lower-left diagram of Figure 1.1a. Here we have
modern-sector marginal labour product curves derived from the TPM curves of the upper
diagram. Under the assumption of perfectly competitive labour markets in the modern sector,
these marginal products of labour curves are in fact the actual demand curves for labour.

WA in the lower diagrams of Figures 1.1a and 1.1b represents the average level of real
subsistence income in the traditional rural sector. WM in Figure 1.1a is therefore the real wage in
the modern capitalist sector. At this wage, the supply of rural labour is assumed to be unlimited
or perfectly elastic, as shown by the horizontal labour supply curve WM SL. In other words, Lewis
assumes that at urban wage WM above rural average income WA, modern-sector employers can
hire as many surplus rural workers as they want without fear of rising wages. (Note again that the
quantity of labour in the rural sector, Figure 1.1b, is expressed in millions whereas in the modern
urban sector, Figure 1.1a, units of labour are expressed in thousands.) Given a fixed supply of
capital KM1 in the initial stage of modern-sector growth, the demand curve for labour is
determined by labour‘s declining marginal product and is shown by the negatively sloped curve
D1(KM1) in the lower-left diagram. Modern sector is a profit-maximizing sector, as such,
employers are assumed to hire labourers to the point where their marginal product is equal to the
real wage (i.e., the point F of intersection between the labour demand and supply curves), and
total modern sector employment will be equal to L1. Total modern sector output, TPM1, would be
given by the area bounded by points 0D1FL1. The share of this total output paid to workers in the

22
form of wages would be equal, therefore, to the area of the rectangle 0WM FL1. The balance of
the output shown by the area WM D1 F would be the total profits that accrue to the capitalists.
Because Lewis assumes that all of these profits are reinvested, the total capital stock in the
modern sector will rise from KM1 to KM2. This larger capital stock causes the total product curve
of the modern sector to shift to TPM (KM2), which in turn induces a rise in the marginal product
demand curve for labour. This outward shift in the labour demand curve is shown by line D2
(KM2). A new equilibrium modern-sector employment level will be established at point G with L2
workers now employed. Total output rises to 0D2G L2 while total wages and profits increase to
0WM G L2 and WM D2 G, respectively. Once again, these larger (WM D2G) profits are reinvested,
increasing the total capital stock to KM3, shifting the total product and labour demand curves to
TPM (KM3) and to D3(KM3), respectively, and raising the level of modern sector employment to L3.
This process of modern sector self-sustaining growth and employment expansion is assumed to
continue until all surplus rural labour is absorbed in the new industrial sector. Thereafter,
additional workers can be withdrawn from the agricultural sector only at a higher cost of lost
food production because the declining labour to land ratio means that the marginal product of
rural labour is no longer zero.

The Patterns of Development

This theory change focuses on 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. However, in
contrast to the Lewis model and the original stages view of development, increased savings and
investment are perceived by patterns of development analysts as necessary but not sufficient
conditions for economic growth. In addition to the accumulation of capital, both physical and
human, a set of interrelated changes in the economic structure of a country are required for the
transition from a traditional economic system to a modern one. These structural changes involve
virtually all economic functions, including the transformation of production and changes in the
composition of consumer demand, international trade, and resource use as well as changes in
socioeconomic factors such as urbanization and the growth and distribution of a country‘s
population.

23
Empirical structural-change analysts emphasize both domestic and international constraints on
development. The domestic ones include economic constraints such as a country‘s resource
endowment and its physical and population size as well as institutional constraints such as
government policies and objectives. International constraints on development include access to
external capital, technology, and international trade. Differences in development level among
developing countries are largely ascribed to these domestic and international constraints.
However, it is the international constraints that make the transition of currently developing
countries differ from that of now industrialized countries. To the extent that developing countries
have access to the opportunities presented by the industrial countries as sources of capital,
technology, and manufactured imports as well as markets for exports, they can make the
transition at an even faster rate than that achieved by the industrial countries during the early
periods of their economic development. Thus, unlike the earlier stages model, the structural-
change model recognizes the fact that developing countries are part of an integrated international
system that can promote (as well as hinder) their development. The best known model of
structural change is the one based largely on the empirical work of Harvard economist, Hollis B.
Chenery and his colleagues.

The international dependence revolution

Basically, international dependence models view developing countries as beset by institutional,
political, and economic rigidities, both domestic and international, and caught up in a
dependence and dominance relationship with rich countries. Within this general approach are
three major streams of thought: the neocolonial dependence model, the false paradigm model,
and the dualistic-development thesis.
The Neocolonial Dependence Model
The neocolonial dependence model is an indirect outgrowth of Marxist thinking. It attributes the
existence and continuance of underdevelopment primarily to the historical evolution of a highly
unequal international capitalist system of rich country–poor country relationships.
Whether because rich nations are intentionally exploitative or unintentionally neglectful, the
coexistence of rich and poor nations in an international system dominated by such unequal power
relationships between the center (the developed countries) and the periphery (the developing
countries) renders attempts by poor nations to be self-reliant and independent difficult and

24
sometimes even impossible. Certain groups in the developing countries (including landlords,
entrepreneurs, military rulers, merchants, salaried public officials, and trade union leaders) who
enjoy high incomes, social status, and political power constitute a small elite ruling class whose
principal interest, knowingly or not, is in the perpetuation of the international capitalist system of
inequality and conformity in which they are rewarded. Directly and indirectly, they serve
(are dominated by) and are rewarded by (are dependent on) international special interest power
groups, including multinational corporations, national bilateral aid agencies, and multilateral
assistance organizations like the World Bank or the International Monetary Fund (IMF), which
are tied by allegiance or funding to the wealthy capitalist countries. The elites‘ activities and
viewpoints often serve to inhibit any genuine reform efforts that might benefit the wider
population and in some cases actually lead to even lower levels of living and to the perpetuation
of underdevelopment. In short, the neocolonial view of underdevelopment attributes a large part
of the developing world‘s continuing poverty to the existence and policies of the industrial
capitalist countries and their extensions in the form of small but powerful elite or comprador
groups (local elites who act as fronts for foreign investors) in the less developed countries.
Underdevelopment is thus seen as an externally induced phenomenon, in contrast to the linear
stages and structural-change theories‘ stress on internal constraints such as insufficient savings
and investment. Revolutionary struggles or at least major restructuring of the world capitalist
system is therefore required to free dependent developing nations from the direct and indirect
economic control of their developed world and domestic oppressors.

The False-Paradigm Model

This model attributes underdevelopment to faulty and inappropriate advice provided by well-
meaning but often uninformed, biased, and ethnocentric international ―expert‖ advisers from
developed country assistance agencies and multinational donor organizations.
These experts are said to offer complex but ultimately misleading models of development that
often lead to inappropriate or incorrect policies. The neoclassical (or perhaps Lewis-type surplus-
labour or Chenery-type structural-change) models, in many cases merely serve the vested
interests of existing power groups, both domestic and international.
In addition, leading university intellectuals, trade unionists, high level government economists,
and other civil servants all get their training in developed country institutions where they are

25
unwittingly served an unhealthy dose of alien concepts and elegant but inapplicable and faulty
theoretical models. Having little or no really useful knowledge to enable them to come to grips in
an effective way with real development problems, they often tend to become unknowing or
reluctant allies of the existing system of elitist policies and institutional structures. In university
economics courses, for example, this typically entails the perpetuation of the teaching of many
―irrelevant‖ Western concepts and models, while in government policy discussions, too much
emphasis is placed on attempts to measure capital-output ratios, increase savings and investment
ratios, privatize and deregulate the economy, or maximize GDP growth rates. As a result,
proponents argue that desirable institutional and structural reforms, many of which we have
discussed, are neglected or given only little attention.

The Dualistic Development Thesis

Dualism is a concept that portrays the existence and persistence of substantial and even
increasing divergences between rich and poor nations and rich and poor peoples on various
levels. The implicit in structural change theories and explicit in international dependence theories
is the notion of a world of dual societies, of rich nations and poor nations and, in the developing
countries, pockets of wealth within broad areas of poverty. Specifically, (although research
continues) the traditional concept of dualism embraces four key arguments:
1. Different sets of conditions, of which some are ―superior‖ and others ―inferior,‖ can
coexist in a given space. Examples of this element of dualism include Lewis‘s notion of
the coexistence of modern and traditional methods of production in urban and rural
sectors; the coexistence of wealthy, highly educated elites with masses of illiterate poor
people; and the dependence notion of the coexistence of powerful and wealthy
industrialized nations with weak, impoverished peasant societies in the international
economy.
2. This coexistence is chronic and not merely transitional. It is not due to a temporary
phenomenon, in which case time could eliminate the discrepancy between superior and
inferior elements. In other words, the international coexistence of wealth and poverty is
not simply a historical phenomenon that will be rectified in time. Although both the
stages-of-growth theory and the structural-change models implicitly make such an

26
 assumption, to proponents of the dualistic development thesis, the facts of growing
international inequalities seem to refute it.
3. Not only do the degrees of superiority or inferiority fail to show any signs of diminishing,
but they even have an inherent tendency to increase. For example, the productivity gap
between workers in developed countries and their counterparts in most developing
countries seems to widen over time.
4. The interrelations between the superior and inferior elements are such that the existence
of the superior elements does little or nothing to pull up the inferior element, let alone
―trickle down‖ to it. In fact, it may actually serve to push it down to ―develop its
underdevelopment.‖

The neoclassical counterrevolution: Market fundamentalism

The central argument of the neoclassical counterrevolution is that underdevelopment results from
poor resource allocation due to incorrect pricing policies and too much state intervention by
excessively active developing nation governments. According to the advocates of the
counterrevolution school, it is this very state intervention in economic activity that slows the
pace of economic growth. That the developing world is underdeveloped not because of the
predatory activities of the developed world and the international agencies that it controls but
rather because of the heavy hand of the state and the corruption, inefficiency, and lack of
economic incentives that permeate the economies of developing nations. What is needed,
therefore, is not a reform of the international economic system, a restructuring of dualistic
developing economies, rather, it is simply a matter of promoting free markets and laissez-faire
economics within the context of permissive governments that allow the ―magic of the
marketplace‖ and the ―invisible hand‖ of market prices to guide resource allocation and stimulate
economic development.
The neoclassical counterrevolution can be divided into three component approaches: the free-
market approach, the public-choice (or ―new political economy‖) approach, and the ―market-
friendly‖ approach.
Free-market approach argues that markets alone are efficient. Product markets provide the best
signals for investments in new activities; labour markets respond to these new industries in
appropriate ways; producers know best what to produce and how to produce it efficiently; and

27
product and factor prices reflect accurate scarcity values of goods and resources now and in the
future. Competition is effective, if not perfect; technology is freely available and nearly costless
to absorb; information is also perfect and nearly costless to obtain. Under these circumstances,
any government intervention in the economy is by definition distortionary and
counterproductive.
Public-choice theory, also known as the new political economy approach, goes even further to
argue that governments can do (virtually) nothing right. This is because public-choice theory
assumes that politicians, bureaucrats, citizens, and states act solely from a self-interested
perspective, using their power and the authority of government for their own selfish ends.
Bureaucrats and public officials use their positions to extract bribes from rent-seeking citizens
and to operate protected businesses on the side. States use their power to confiscate private
property from individuals. The net result is not only a misallocation of resources but also a
general reduction in individual freedoms. The conclusion, therefore, is that minimal government
is the best government.
The market-friendly approach is a variant on the neoclassical counterrevolution associated
principally with the 1990s writings of the World Bank and its economists, many of whom were
more in the free-market and public-choice camps during the 1980s. This approach recognizes
that there are many imperfections in developing country product and factor markets and that,
governments do have a key role to play in facilitating the operation of markets through
―nonselective‖ (market-friendly) interventions. For instance, government should invest in
physical and social infrastructure, health care facilities, and educational institutions and in
providing a suitable climate for private enterprise. The market-friendly approach also differs
from the free-market and public-choice schools of thought by accepting the notion that market
failures are more widespread in developing.

Another cornerstone of the neoclassical free-market argument is the assertion that liberalization
(opening up) of national markets draws additional domestic and foreign investment and thus
increases the rate of capital accumulation. In terms of GDP growth, this is equivalent to raising
domestic savings rates, which enhances capital-labour ratios and per capita incomes in capital-
poor developing countries.

28
The Solow neoclassical growth model in particular represented the seminal contribution to the
neoclassical theory of growth and later earned Robert Solow the Nobel Prize in economics.
Solow built his model of economic growth as an alternative to the Harrrod-Domar by adding a
second factor, labour, and introducing a third independent variable, technology, to the growth
equation. Solow postulates a continuous production function linking output to the inputs of
capital and labour which are substitutable.

ASSUMPTIONS
1. One composite commodity is produced
2. Output is regarded as net output after making allowance for the depreciation of capital.
3. Price and wages are flexible
4. There is perpetual full employment of labour
5. Labour and capital are substitutable for each other
6. There is neutral technical progress
7. The saving ratio is constant
8. The two factors of production, labour and capital, are paid according to their marginal
physical productivities.

Following the assumptions, Solow model shows that with the variable technical coefficient there
would be a tendency for capital labour ratio to adjust itself through time in the direction of
equilibrium ratio. If the initial capital to labour is more, capital and output would grow more
slowly than labour force. On the other hand, if the initial labour to capital is more, labour and
output would grow more slowly than capital. The Solow‘s analysis is convergent to equilibrium
path.
Solow takes output as a whole, the only commodity, in the economy. Its annual rate of
production is designated as Y(t) which represents the real income of the community, part of it is
consumed and the rest is saved and invested. That which is saved is a constant s, and the rate of
savings is sY(t). K(t) is the stock of capital. Thus net investment is the rate of increase of this
stock of capital, i.e., dk/dt or K. so the basic identity is

29
 K=sY ………………………… (2.1)
Since output is produced with capital and labour, technological possibilities are represented by
the production function
Y= F (K, L)………………………. (2.2)
That shows constant returns to scale.
Inserting equation 1 and 2 we have
K= sF (K, L)…………………….. (2.3)
In equation, (2.3) L represent total employment.
Unlike the fixed-coefficient, constant-returns-to-scale assumption of the Harrod-Domar model,
Solow‘s neoclassical growth model assumed diminishing returns to labour and capital, and
constant returns to both factors jointly. Technological progress is regarded as the residual factor
explaining long-term growth, and its level was assumed by Solow and other neoclassical growth
theorists to be determined exogenously, that is, independently of all other factors.
More formally, the standard exposition of the Solow neoclassical growth model uses an
aggregate production function in which

Y= ( ) …………………………….. (2.4)

Where Y is gross domestic product, K is the stock of capital (which may include human capital
as well as physical capital), L is labour, and A represent the productivity of labour, which grows
at an exogenous rate. For developed countries, this rate has been estimated at about 2% per year.
It may be smaller or larger for developing countries, depending on whether they are stagnating or
catching up with the developed countries. Because the rate of technological progress is given
exogenously (at 2% per year), the Solow neoclassical model is sometimes called an exogenous‖
growth model. In Equation 2.4, represents the elasticity of output with respect to capital (the
percentage increase in GDP resulting from a 1% increase in human and physical capital). Since
is assumed to be less than 1 and private capital is assumed to be paid its marginal product so
that there are no external economies, this formulation of neoclassical growth theory yields
diminishing returns both to capital and to labour.
According to traditional neoclassical growth theory, output growth results from one or more of
three factors: increases in labour quantity and quality (through population growth and education),

30
increases in capital (through saving and investment), and improvements in technology (new
ways of accomplishing tasks). Closed economies (those with no external activities) with lower
savings rates (other things being equal) grow more slowly in the short run than those with high
savings rates and tend to converge to lower per capita income levels. Open economies (those
with trade, foreign investment, etc.), however, experience income convergence at higher levels
as capital flows from rich countries to poor countries where capital-labour ratios are lower and
thus returns on investments are higher. Consequently, by impeding the inflow of foreign
investment, the heavy handedness of many developing countries‘ governments, according to
neoclassical growth theory will retard growth in the economies of the developing world. In
addition, openness is said to encourage greater access to foreign production ideas that can raise
the rate of technological progress.

Key Development Requirement

The models of economic development highlighted many relationships between key economic
and social variables that shape a country‘s economic development. Some of those variables
include:

Human capital Development

Human capital is humans‘ acquired abilities. It is productive investments embodied in
human persons, including skills, abilities, ideals, health, and locations, often resulting
from expenditure on education, on the job training programmes, and medical care
(Todaro and Smith 2011). Some of the factors considered in education as a human capital
factor are: trends in education, gender and education, and convergence in educational
opportunities.
Developing countries are characterized by severe inequalities and inefficiencies in their
health and educational systems. This is because education and health are two human
capitals that are closely related and can be seen as a joint investment for development.
Therefore, improved health and education is a necessary factor that can help families to
escape the vicious circles of poverty. The importance relationship between health and
education as means to economic development cannot be emphasized. Studies have

31
proven that the better the education of a mother the better the health of her children. The
attainment of a sound health status also affects school performance. Better health and
nutrition leads to earlier and longer enrollment, better school attendance, and more
effective learning. Thus to improve the effectiveness of schooling then the health of
children in developing countries must also be improved. Another important spill over
benefit of investment in health or education is that an educated person provides benefits
to people around him or her. These benefits might come in the form of leading the way
by coming up with innovations that can be beneficial to the community thereby attracting
income and development.

Institutions
A country‘s political, legal, economic and social institutions will affect its rate of economic
growth. However, it is much more difficult to identify exactly which institutions matter and
exactly how they matter. These are ―humanly devised‖ constraints that shape interactions
(or ―rules of the game‖) in an economy, including formal rules embodied in constitutions,
laws, contracts, and market regulations, as well as informal rules reflected in norms of
behavior and conduct, values, customs, and generally accepted ways of doing things
(Todarao and Smith 2011). An institution is any generally accepted procedure that governs the
process of interaction between members of a society.

According to North, the ―rules of the game‖ of economic life means institutions that
provide the underpinning of a market economy by establishing the rules of property
rights and contract enforcement; improving coordination, restricting coercive, fraudulent,
and anti-competitive behaviour providing access to opportunities for broad population;
constraining the power of elites; and managing conflict more generally. An important
social and economic institution that is distinct from the legal system, yet closely related to it, is
that of corruption; corruption provides an important and accepted framework for economic
transactions in many countries, although is virtually absent from some others. It is believed that
countries with higher income can afford better institutions. For long term economic

32
growth to be realized, therefore complementary human capital, technological, social, and
institutional changes must take place.
Infrastructure
Infrastructure is widely acknowledged to be critical for economic success, and infrastructure
investments are promoted as leading to economic growth, either at the local or national level.
However, investments in telecommunications, transportation, energy, or other infrastructure do
not always yield the hoped for public benefit. The Challenge of development economics has
been; under what circumstances does infrastructure investment contribute to economic growth,
and how do we know?
Investments in modern infrastructure lay the foundations for economic development and growth.
Building roads, bridges, power transmission lines and making other improvements create jobs.
When completed, these projects help a society increase its wealth and its citizens‘ standard of
living. Efficient infrastructure reinforces a country‘s economic strength as it stimulates growth
and prosperity. Infrastructure investments can similarly accelerate economic development in less
developed nations and emerging markets. Nations that invest in infrastructure are better
positioned to attract direct foreign investment, stimulate commerce and support local businesses.
Sub-Saharan Africa is one region where infrastructure improvements can spark greater economic
development. Many countries in the sub-sahara Africa especially Nigeria suffer from
underdeveloped road and rail systems, rudimentary and unstable electric grids, bare-bones water-
supply and sanitation systems, and congested ports and airports.

According to African Development Bank (ADB) deficient infrastructure reduces sub-Saharan

Africa‘s output by about 40 percent. Therefore, to attain middle-income levels, Africa must
double its investment in infrastructure. The 2012 African Growth and Opportunity Act (AGOA)
Forum focused on infrastructure development that supports and promotes trade in Africa.

Balanced and Unbalanced growth

Currently, there are among the development economists two major schools of thought regarding
the best strategy of growth to be adopted. On the one side, (the balanced growth side) are
economists, like Ragnar Nurkse and Rosenstein-Rodan, who are of the view that the pattern of

33
investment should be so designed as to ensure a balanced development of the various sectors of
the economy. On the other side (the unbalanced growth) are economists like H.W. Dinger and
A.O. Hirschman who believe that rapid economic growth follows concentration of investment in
certain strategic industries rather than an even distribution of investment among the various
industries.

Balanced Growth

The balanced growth can be defined as the systematic and equal prioritization for all sectors and
regions of the economy. It focuses on balanced type of investment and capital mobilization to
make the growth more balanced and distributed. Thus, the main objectives of balanced growth
are to make the growth of all sectors in a balanced way at the same time. This approach has been
proposed by Ragnor Nurkse and Roseitein Radan.

According to Say‘s Law production, supply creates its own demand. If, in the under developed
countries, investment is made simultaneously in a large number of industries, incomes of a large
number of workers engaged in these industries will increase. This will create demand for goods
produced by one another and production will increase.

Also, it will provide work for a large number of people producing diverse commodities. It will
increase their income and they will be in a position to buy for consumption the goods made by
one another. Thus, the expansion of one industry helps in the expansion of others and there is all
round growth. This wave of capital investment in a number of different industries is called by
Nurkse ‗balanced growth‘.

But when investment is to be made in all such sectors and industries, then, in order to bring about
balanced economic growth, large quantities of resources will be required. It is doubtful if the
underdeveloped countries have the means to mobilize resources in such large quantities.

According to Ragnor Nurkse and Roseitein Radan(1943). There are two approaches of balanced
growth.

• Investment in all sectors.

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• Interdependency in the industry. ‗Big push‘ theory is the theory discovered by Roseitein Radan
for balanced growth to develop the developing countries. Ragnor Nurkse explained for

developing countries, why these countries are in backwardness?

• Balanced growth is like a balanced diet.

• Vicious circle of poverty.

• Focus on capital formation and enlargement of market. According to Ragnor Nurkse poverty is
explained, a country is poor because it is poor.

Unbalanced Growth

The unbalanced growth approaches seems to be the alternative of balanced growth approaches. It
is profounded or supported by Singer, Hirschman, Paul Streeten, Rostow etc.
The unbalanced growth strategy is tied to;

a) Philosophy of disequilibrium (unbalance): philosophy of disequilibrium which creates

equilibrium (balance).

b) Induced investment system: the induced investment should be made for only the high
potential (productive) and not for all sectors.

Hans Singer and Albert Hirschman‘ eminent American economists, have criticised Nurkse‘s
doctrine of balanced growth. They contend that what is needed is not balanced growth, but a
strategy of judiciously-planned unbalanced growth. Hirschman contends that deliberate
unbalancing of economy, in accordance with a pre-determined strategy, is the best way to
achieve economic growth. He prescribes big push in strategically selected industries or sectors of
the economy.

According to Singer, balanced growth cannot solve the problem of the under-developed
countries, nor do they have sufficient resources to achieve balanced growth. In the under-
developed countries, not only are the resources and the capabilities to bring about balanced
growth lacking but, according to Hirschman, balanced growth is not even desirable. His view is

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that if economic growth is to be accelerated, it will have to be brought about by unbalanced
growth.

Assumption:
• The best way of development to achieve in developing countries is the unbalanced growth. This
means the unbalancing the economy makes the growth faster and easier.
• The unbalance of economy is made by the unequal investment patterns. This means the
investment is concentrated at the potential and selective sector only.
• The developing countries do not have the adequate capital to invest in all sectors of economy.
So, if they invest in the sectors advantage. They can get the economy with better growth.
• The unbalance condition of economy creates the balanced condition which further makes the
economy unbalance and finally economy is balanced. It is an endless process.

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