Lesson 3 - Theories of Development

Theories of
Development
ECON 3.
E C O N O M I C D E V E LO P M E N T
Competing Perspectives of
Economic Development
1. Linear-stages-of-growth model
2. Theories and patterns of structural change
3. International-dependence revolution
4. Neoclassical theory
Modernization Theory
Dominated in the literature on development in the 1960s
An evolutionary theory predicting how societies develop
Argument: All societies naturally pass through certain stages of
development
Movement from one stage to the next is driven by things like
population growth and new technologies
Society becomes more complex; greater division of labor
Modernization theory was based on analyses of European
societies
Rostow’s Evolutionary Ladder of Development
(economic factors)
5 The age of high mass

consumption
4 The drive to maturity: economic and cultural factors
lead to increasing prosperity for all
2 Pre-conditions for take-off: the West 3 Take-off: high economic growth and
assists development through aid and investment in infrastructure begins
industrial investment
1 Traditional society: poverty, primary

production and traditional values
Related Model:
Harrod-Domar Growth Model
◦ Investments (building, equipment, materials) are necessary for
growth
◦ Higher investments need higher savings
◦ The higher the savings, the higher the investments, and the higher
the investments on capital goods, the higher the output
◦ In addition to investments, two other components needed are
labor force growth and technological progress
Related Model:
Harrod-Domar Growth Model
◦ Criticisms: savings and investment necessary but not sufficient
condition for growth
◦ Example: Marshall Plan – Prior, receiving European countries
possessed necessary structural, institutional, and attitudinal
conditions (e.g., commodity and money markets, transport
facilities, educated workforce, motivation to succeed, efficient
government bureaucracy)
Parsons’ Blocks to Development
(cultural factors)
Traditional values block a country from developing e.g. valuing the extended
family, blocks geographical mobility
Traditional values Modern values

Ascription (status attributed) Achievement
Particularism Universalism
Collectivism Individualism
Structural Change and Patterns of
Development
Focuses on the sequential process through which the economic,
industrial, and institutional structure of an underdeveloped
economy is transformed
◦ To permit new industries to replace traditional agriculture as the engine of

economic growth
Related Model:
Lewis Two-Sector Model
◦ Assumes an underdeveloped economy having traditional,
agriculture-based, rural sector with surplus labor, and a high-
productivity modern, industrial urban sector
◦ Focus of the model: labor transfer and the growth of output and
employment in the modern industrial sector
Related Model:
◦ Criticisms to the Lewis Two-Sector Model:
◦ (1) implicitly assumes that the rate of labor transfer and
employment creation in the modern sector is proportional to the
rate of modern-sector capital accumulation (as sometimes
capitalists invest in labor-saving capital);
◦ (2) has the notion that surplus labor exists in rural areas while
there is full employment in urban areas;
Related Model:
◦ Criticisms to the Lewis Two-Sector Model:
◦ (3) has a notion of a competitive modern-sector labor market that
guarantees the continued existence of constant real urban wages
up to the point whether the supply of rural surplus labor is
exhausted; and
◦ (4) assumes diminishing returns in the modern industrial sector
Development
Development requires not just:
◦ Increased savings and investment – necessary but not sufficient condition
◦ Accumulation of capital, physical and human
◦ But also a set of interrelated changes in the economic structure of a

country
◦ Transformation of production
◦ Changes in the composition of consumer demand
◦ International trade
◦ Resource use, urbanization, growth and distribution of the population
Development
Analysts emphasize both domestic and international constraints
on development
◦ Domestic constraints:
◦ Resource endowment, physical and population size, institutional
constraints such as government policies and objectives
◦ International constraints:
◦ Access to external capital, technology, and international trade
Development
Difference between the linear-stages-of-growth model and
structural change 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
◦ In this sense, the developing countries can make a transition at an even faster
rate than that achieved by the industrial countries during the early stages of their
economic development
International Dependence
Revolution
International dependence models gained increasing
support in the 70s
◦ Discontent with stages and structural-growth models

◦ The downsides of globalization became more evident
Its models essentially view developing countries as beset by

institutional, political, and economic rigidities, both domestic
and international caught up in a dependence and dominance
relationship with rich countries
Revolution
Models:
1. Neocolonial dependence model – dependency relationships
2. False paradigm model – faulty and inappropriate advice by
experts
Implicit assumption in both models:
◦ Dualistic-development thesis – or the notion of dual societies: the
rich and the poor
◦ Disparity or gap in the income and living conditions between the
rich and the pour countries
Revolution
Related theories:
1. World-system theory
2. Dependency theory
◦ Both Marxist theories on economic development
◦ Problem: Non-western countries weren’t modernizing as predicted
◦ Example: Many former colonies in Africa were stagnant, or becoming more

impoverished over time
In response to the modernization theory, world-system theory was

advanced
World-System Theory
World-System Theory
Explains the failure of many countries to develop
◦ Claim: Underdeveloped/peripheral countries are not just like

Europe, but at an earlier stage of development
◦ They have a very different history: colonization
◦ And, they must compete with highly developed countries

World-System Theory
Argument: Europe was able to prosper by exploiting resources
from other places
◦ The great success of Europe and the failures in the non-West weren’t just
a coincidence…
World-System Theory
◦ Europe became wealthy by maintaining economic & military dominance
over other nations
◦ Exploited nations will never “modernize” as long as they are oppressed by

Western nations
World-System Theory
There is a need to study the entire global economy as a world
system
◦ We can’t understand the fate of a single country, without understanding

how it fits into the overall system
World-System Theory
◦ Countries aren’t poor because of their own specific history or internal
characteristics
◦ Rather, they are poor because of their position relative to others in the
global capitalist system
World-System Theory
Key concepts:
Core: the rich, developed countries

◦ Also: west; metropolitan countries; developed world
Periphery: poor, dependent nations

◦ Also: underdeveloped countries; satellites; dependencies
World-System Theory
Semi-periphery: semi-industrialized countries
Dependency: The vulnerable state of being exploited by core

countries
◦ They depend on the core for trade, investment, loans, technology, etc. (related
term: underdevelopment).
Neoclassical Counterrevolution
Favors supply-side macroeconomic policies (liberalization),
rational expectations theories (deregulation), and the privatization
of public corporations (privatization)
Core of neo-liberal orthodoxy

◦ Liberalization, deregulation, and privatization
Neoclassical Counterrevolution
Calls for freer markets and the dismantling of public ownership,
statist planning, and government regulation of economic activities
Central argument: cause of underdevelopment is poor resource

allocation due to incorrect pricing policies and too much
intervention by overly active developing-nation government
◦ Price controls (floors and ceilings)

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Theories of

5 The age of high mass

1 Traditional society: poverty, primary

Traditional values Modern values

◦ To permit new industries to replace traditional agriculture as the engine of

◦ But also a set of interrelated changes in the economic structure of a

◦ Discontent with stages and structural-growth models

Its models essentially view developing countries as beset by

◦ Example: Many former colonies in Africa were stagnant, or becoming more

In response to the modernization theory, world-system theory was

◦ Claim: Underdeveloped/peripheral countries are not just like

◦ They have a very different history: colonization

◦ And, they must compete with highly developed countries

◦ Exploited nations will never “modernize” as long as they are oppressed by

◦ We can’t understand the fate of a single country, without understanding

Core: the rich, developed countries

Periphery: poor, dependent nations

Dependency: The vulnerable state of being exploited by core

Core of neo-liberal orthodoxy

Central argument: cause of underdevelopment is poor resource

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