1.

Classic Theories of Economic Development: Four Approaches

In the study of classical theories of economic development, four approaches have been
differentiated. Those are: Linear stages of growth model, Theories and Patterns of structural
change, International-dependence revolution and Neoclassical, free market counterrevolution.

 Linear stages of growth model have appeared during the 1950s and 1960s, when the
field of macroeconomics and the analysis of economic growth was getting back to
relevance. These theories were explaining the development capital. Process as a series of
successive phases of economic growth through which all countries must pass. Savings,
investment, and foreign assistance are needed to advance in this process. Thus, the
development was synonymous with economic growth. Rostow Stages of Growth and
Harrod – Domar Model are the most famous representatives of this approach. To invest
in the economy, it was necessary to stimulate savings in order to have greater capital
accumulation, which led to further increase of GDP. GDP growth would again lead to
higher savings and thus the development process continued.
 Theories and Patterns of structural change is an approach that developed parallel with
the theory of International-dependence revolution in the 1970s. This approach is using
modern economic theory and statistical analysis in an attempt to explain the development
process of each country. Arthur Lewis two sector model and Chenery’s Patterns of
development are well known representatives of these theories.
 International-dependence revolution theory can be considered as a spin-off of Marxist
theory and its basic ideas are still promoted by the supporters of the globalist movement.
One of the earliest supporters of the theory was Raul Prebisch who has introduced the
idea of relations center periphery. When we talk about the theory of dependence in the
context of rich and poor countries and regions, we cannot resist thinking that actually, in
the context of education, young people who leave developing countries in order to
complete a certain level of education in developed countries acquire the skills that are
not applicable in the countries they come from, and are thus forced to remain in the
(developed) countries on the one hand, while on the other, the gap between the two
groups of countries increases.
 The fourth approach or Neoclassical, free market counterrevolution in the study of the
classical theory of economic growth appeared during the 1980s, stressing the advantages
of the developed countries, macroeconomic policies, the need to increase the efficiency of
public enterprises through privatization, etc. In the case of developing countries, this
approach calls for free markets, the elimination of state intervention in economic policy
and state ownership, financial and trade liberalization, etc. The absence of state
interference in the functioning of markets and the establishment of private property rights
are a key to development in this approach.
2. Development as Growth and the Linear-Stages Theories
a. Rostow’s Stages of Growth
One of the key thinkers in twentieth-century Development Studies was W.W. Rostow, an
American economist, and government official. Prior to Rostow, approaches to development had
been based on the assumption that "modernization" was characterized by the Western world
(wealthier, more powerful countries at the time), which were able to advance from the initial
stages of underdevelopment. Accordingly, other countries should model themselves after the
West, aspiring to a "modern" state of capitalism and a liberal democracy. Using these ideas,
Rostow penned his classic Stages of Economic Growth in 1960, which presented five steps
through which all countries must pass to become developed: 1) traditional society, 2)
preconditions to take-off, 3) take-off, 4) drive to maturity and 5) age of high mass consumption.
The model asserted that all countries exist somewhere on this linear spectrum, and climb upward
through each stage in the development process:

 Traditional Society: This stage is characterized by a subsistent, agricultural based

economy, with intensive labor and low levels of trading, and a population that does
not have a scientific perspective on the world and technology.
 Preconditions to Take-off: Here, a society begins to develop manufacturing, and a
more national/international, as opposed to regional, outlook.
 Take-off: Rostow describes this stage as a short period of intensive growth, in which
industrialization begins to occur, and workers and institutions become concentrated
around a new industry.
 Drive to Maturity: This stage takes place over a long period of time, as standards of
living rise, use of technology increases, and the national economy grows and
diversifies.
 Age of High Mass Consumption: At the time of writing, Rostow believed that
Western countries, most notably the United States, occupied this last "developed"
stage. Here, a country's economy flourishes in a capitalist system, characterized by
mass production and consumerism.

b. The Harrod-Domar Growth Model

A growth model, named after its originators, which considers the consequences of fixed
capital–labour ratios and saving propensities. In this model, the labour force, measured in
efficiency units to allow for technical progress, grows at an exogenously fixed natural growth
rate, n. There is a fixed capital–output ratio, v, and a fixed propensity to save, s. If national
income is Y, savings are sY. The desired capital stock is vY, and if this grows at a constant
proportional rate g, desired investment is gvY. Ex ante savings and investment are equal only
if sY = gvY, or g = s/v. The only growth rate which makes this possible is w = s/v, the
warranted growth rate. If w = n, growth is possible with a constant percentage of the labour
force employed. If w < n, that is, the warranted growth rate is less than the natural rate,
equilibrium growth of national income involves steadily increasing unemployment. If w > n,
equilibrium growth becomes impossible once full employment is reached, and the resulting
slowdown in growth produces a slump. The Harrod–Domar growth model is a special case of
the Solow growth model, in which v adjusts to accommodate any combination of s and n.

c. Obstacles and Constraints

1. Overlooking Individual Differences
- Linear-stages theories often overlook the diversity among individuals in
terms of development. Not everyone progresses through stages at the
same pace or in the same manner.

2. Ignoring Contextual Factors

- These theories may fail to consider the impact of external factors such
as culture, environment, and personal experiences on development.
Development is not just a result of internal growth but also influenced by
external factors.

3. Inflexibility
- The rigid structure of linear-stages theories can be limiting. Individuals
may not neatly fit into predefined stages, leading to oversimplification of
the complex process of development.

d. Necessary versus Sufficient Conditions: Some Criticisms of the Stages Model

1. Overemphasis on Necessary Conditions
- The stages model often focuses on identifying necessary conditions for
development to occur. However, it may neglect other factors that are
equally important but not deemed necessary in the theory.

2. Neglect of Sufficient Conditions

- Critics argue that the stages model may overlook sufficient conditions
that are essential for development. Merely fulfilling necessary conditions
may not guarantee successful development if sufficient conditions are
not met.

3. Limited Explanation of Variation

- The stages model may struggle to explain the variations in development
observed among individuals. It tends to generalize the developmental
process without accounting for the unique characteristics and
experiences of each person.
3. Structural-Change Models
a. The Lewis Theory of Development
Arthur Lewis put forward a development model of a dualistic economy, consisting of rural
agricultural and urban manufacturing sectors. Initially, the majority of labour is employed
upon the land, which is a fixed resource. Labour is a variable resource and, as more labour
is put to work on the land, diminishing marginal returns eventually set in: there may be
insufficient tasks for the marginal worker to undertake, resulting in reduced marginal
product (output produced by an additional worker) and underemployment. Urban workers,
engaged in manufacturing, tend to produce a higher value of output than their agricultural
counterparts. The resultant higher urban wages (Lewis stated that a 30% premium was
required) might therefore tempt surplus agricultural workers to migrate to cities and engage
in manufacturing activity. High urban profits would encourage firms to expand and hence
result in further rural-urban migration. The Lewis model is a model of STRUCTURAL
CHANGE since it outlines the development from a traditional economy to an industrialized
one.

b. Structural Change and Patterns of Development Conclusions and Implications

In Structural Change and Pattern of Development, in addition to the accumulation of capital,
both physical and human, a set of interrelated changes in the economic structure of the
country are required for the transition from a traditional economic system to a modern one.
These structural changes involve 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. Development shows certain patterns – for
instance, a shift away from agriculture to industrial production, the steady accumulation of
physical and human capital, the change in consumer demands from emphasis on food and
basic necessities to manufactured goods and services. This leads to the growth of cities and
urban industries as people migrate from the rural to the urban regions with a decline in
overall family size and rate of population growth.

4. The International-Dependence Revolution

a. The Neocolonial Dependence Model
The first major stream, which we call 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.
b. The False-Paradigm Model
A second and less radical international-dependence approach to development, which we
might call the false-paradigm 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.
c. The Dualistic-Development Thesis Conclusions and Implications
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. Dualism is the existence and
persistence of substantial and even increasing divergences between rich and poor nations
and rich and poor peoples on various levels.

5. The Neoclassical Counterrevolution: Market Fundamentalism

a. Challenging the Statist Model: Free Markets, Public Choice, and Market-
Friendly Approaches

In the 1980s, the political ascendancy of conservative governments in the United

States, Canada, Britain, and West Germany came with a neoclassical
counterrevolution in economic theory and policy. In developed nations, this
counterrevolution favored supply-side macroeconomic policies, rational
expectations theories, and the privatization of public corporations. In developing
countries, it called for freer markets and the dismantling of public ownership,
statist planning, and government regulation of economic activities. Neoclassicists
obtained controlling votes on the boards of the world’s two most powerful
international financial agencies-the World Bank and the International Monetary
Fund. In conjunction and with the simultaneous erosion of influence of
organizations such as the International Labor Organization (ILO), the United
Nations Development Programme (UNDP), and the United Nations Conference
on Trade and Development (UNCTAD), which more fully represent the views of
delegates from developing countries, it was inevitable that the neoconservative,
free-market challenge to the interventionist arguments of dependence theorists
would gather momentum.

b. Traditional Neoclassical Growth Theory Conclusions and Implications

  Output as a function of growth: The neoclassical growth model explicates that
total output is a function of economic growth in factor inputs, capital, labor, and
technological progress.
 Growth rate of output in a steady-state equilibrium: The growth rate of total
output in a steady-state equilibrium is equal to the growth rate of the population
or labor force and is never influenced by the rate of savings.
 Increased steady-state per capita income level: While the rate of savings does not
influence the steady-state economy growth rate of total output, it does result in an
increase in the steady-state level of per capita income and, therefore, total income
as well, as it raises the total capital per head.
 Long-term growth rate: The long-term growth rate of an economy is solely
determined by technological progress or regress.

6. Classic Theories of Development: Reconciling the Differences

1. Although there is no theory of economic growth and/or development that can claim universal
application, each of the approaches to understanding development has something to offer.
2. There is no question that no economic development can take place without economic growth
which, in turn, depends on the ability of the country to save and invest. This goes to demonstrate
the centrality of capital accumulation.
3. Capital accumulation is necessary but not sufficient. Structural economic, social, political,
and institutional changes are necessary too.
4. Although conventional neoclassical economic theory needs to be modified to fit the unique
social, institutional, and structural circumstances of developing nations, there is no doubt that
promoting efficient production and distribution through a proper, functioning price system is an
integral part of any successful development process.

Reference:
Economic Review –Journal of Economics an Business, Vol. IX, Issue 1, June 2011
https://www.e-education.psu.edu/geog128/node/719
https://www.oxfordreference.com/display/10.1093/oi/authority.20110803095922775
https://www.tutor2u.net/economics/reference/lewis-model-of-structural-economic-growth-and-
development
https://erikkrantz.wordpress.com/2011/01/12/structural-changes-models/
https://corporatefinanceinstitute.com/resources/economics/theories-of-growth/
stodocu.com, coursehero.com