Chapter 3

Classic theories of
economic growth and

development
Chapter 3 Lecture 5
Classic theories of economic
development
THE CLASSIC POST–WORLD WAR II LITERATURE ON ECONOMIC DEVELOPMENT HAS BEEN
DOMINATED BY FOUR MAJOR AND SOMETIMES COMPETING STRANDS OF THOUGHT
Classic Theories
Theories and International Neo-classical,

The Linear Stages
patterns of Dependence free market
of growth model
structural change revolution counterrevolution
Development as growth and linear
stages theories
 Rostow’s Stages of Growth
 The most influential and outspoken advocate of the stages-of-growth model
of development
 According to Walt W. Rostow, transition from underdevelopment to
development can be described in terms of a series of steps or stages through
which all countries must proceed
 The traditional society
 The pre-conditions of take-off into self-sustaining growth
 The take-off
 The drive to maturity
 The age of high mass consumption
Development as growth and linear
stages theories
 Harrod-Domar growth model, A functional economic relationship in which the
growth rate of gross domestic product (g) depends directly on the national
net savings rate (s) and inversely on the national capital-output ratio (c).
 Capital-output ratio A ratio that shows the units of capital required to
produce a unit of output over a given period of time.
 Net savings ratio Savings expressed as a proportion of disposable income over
some period of time.
Structural Change models
 Structural change theory focuses on the mechanism by which underdeveloped

economies transform their domestic economic structures from a heavy
emphasis on traditional subsistence agriculture to a more modern, more
urbanized, and more industrially diverse manufacturing and service economy.
 The hypothesis that undevelopment is due to underutilization of resources
arising from structural or institutional factors that have their origins in both
domestic and international dualism. Development therefore requires more
than just accelerated capital formation.
The Lewis Theory of Development
 Structural transformation The process of transforming an economy in such a

way that the contribution to national income by the manufacturing sector
eventually surpasses the contribution by the agricultural sector. More
generally, a major alteration in the industrial composition of any economy.
 Lewis two-sector model A theory of development in which surplus labor from
the traditional agricultural sector is transferred to the modern industrial
sector, the growth of which absorbs the surplus labor, promotes
industrialization, and stimulates sustained development.
The Lewis Theory of Development
 Surplus labor The excess supply of labor over and above the quantity
demanded at the going free-market wage rate. In the Lewis two-sector model
of economic development, surplus labor refers to the portion of the rural
labor force whose marginal productivity is zero or negative
 Production function A technological or engineering relationship between the
quantity of a good produced and the quantity of inputs required to produce
it.
 Self-sustaining growth Economic growth that continues over the long run
based on saving, investment, and complementary private and public
activities.
Assignment 1
 Discuss what could be the obstacles and constraints of Harrod-Domar Model

 Write a note on The Lewis Theory of Development and analyze the theory
critically.
 What could be the critical points in The Lewis Theory of Development and
how do you think this theory explains current developing countries growth?
International dependence revolution
 Dependence The reliance of developing countries on developed-country

economic policies to stimulate their own economic growth. Dependence can
also mean that the developing countries adopt developed-country education
systems, technology, economic and political systems, attitudes, consumption
patterns, dress, etc
 Dominance In international affairs, a situation in which the developed
countries have much greater power than the less developed countries in
decisions affecting important international economic issues, such as the
prices of agricultural commodities and raw materials in world markets.
International dependence revolution
 Neocolonial dependence model A model whose main proposition is that

underdevelopment exists in developing countries because of continuing
exploitative economic, political, and cultural policies of former colonial rulers
toward less developed countries.
 Underdevelopment An economic situation characterized by persistent low
levels of living in conjunction with absolute poverty, low income per capita,
low rates of economic growth, low consumption levels, poor health services,
high death rates, high birth rates, dependence on foreign economies, and
limited freedom to choose among activities that satisfy human wants
The False-Paradigm Model
 False-paradigm model The proposition that developing countries have failed

to develop because their development strategies (usually given to them by
Western economists) have been based on an incorrect model of development,
one that, for example, overstressed capital accumulation or market
liberalization without giving due consideration to needed social and
institutional change.
Neo-classical counterrevolution
 Neoclassical counterrevolution The 1980s resurgence of neoclassical free-

market orientation toward development problems and policies, counter to the
interventionist dependence revolution of the 1970s.
 Free markets The system whereby prices of commodities or services freely
rise or fall when the buyer’s demand for them rises or falls or the seller’s
supply of them decreases or increases.
 Free-market analysis Theoretical analysis of the properties of an economic
system operating with free markets, often under the assumption that an
unregulated market performs better than one with government regulation
 Public-choice theory (new political economy approach) The theory that self-
interest guides all individual behavior and that governments are inefficient
and corrupt because people use government to pursue their own agendas.
Neo-classical counterrevolution
 Market-friendly approach The notion historically promulgated by the World

Bank that successful development policy requires governments to create an
environment in which markets can operate efficiently and to intervene only
selectively in the economy in areas where the market is inefficient
 Market failure A market’s inability to deliver its theoretical benefits due to
the existence of market imperfections such as monopoly power, lack of factor
mobility, significant externalities, or lack of knowledge.
Solow neoclassical growth model
 Traditional Neoclassical Growth Theory

 Growth model in which there are diminishing returns to each factor of
production but constant returns to scale. Exogenous technological change
generates long-term economic growth.

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Classic theories of

economic growth and

Theories and International Neo-classical,

 Structural change theory focuses on the mechanism by which underdeveloped

 Structural transformation The process of transforming an economy in such a

 Discuss what could be the obstacles and constraints of Harrod-Domar Model

 Dependence The reliance of developing countries on developed-country

 Neocolonial dependence model A model whose main proposition is that

 False-paradigm model The proposition that developing countries have failed

 Neoclassical counterrevolution The 1980s resurgence of neoclassical free-

 Market-friendly approach The notion historically promulgated by the World

 Traditional Neoclassical Growth Theory

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