Download Classic theories of Economic development : A comparative analysis

Classic theories of Economic development: A comparative analysis
“How and why development does or does not take place in an economy? These questions
widely discussed among the economists world over in the past two decades. If only we
can understand how development occurs, strategies can be adopted to help countries to
develop. There are four major and often competing theories on this matter. They are
I) The stages of growth model (II) Theories and pattern of structural change (III) The
international dependence revolution (IV) The neo classical free market counter
revolution.
I ) Stage theory
In the 1950’s and early 1960’s the process of development was viewed as a series of
successive stages through which all countries must pass. The most influential and
outspoken advocate of the stages of growth model was the American economic historian
Walt W. Rostow. In his work “The stages of Economic Growth” (subtitled a Noncommunist manifesto) published in 1960 Rostow has described the transition from under
development to development in terms of a series of five stages through which all
countries must proceed. Accordingly countries can be placed in one of the five
categories in terms of its stage of growth:
Stage 1: The traditional society: The traditional society is characterised by the existence
of a subsistence economy where output is not traded or recorded and exchange is mainly
through barter. Economy is basically agrarian in nature with most people engaged in the
labour intensive agricultural sector. Lack of adequate scientific and technological
knowledge and backward frame of human mind were obstacles to development. Any
increase in output was the result of increased quantity of resources used and not due to
their improvement in quality.
Stage 2: The preconditions for takeoff: In this stage societies are in the process of
transition building up conditions that enable them to take off. Economic and technical
changes occur in the economy and the methods of production become more scientific.
The agrarian economy is transformed into a predominantly industrialised society. Trade
and commerce are no longer localised. Even in agriculture there is an increase in the
capital used in for which there arises the necessity of external funding. Savings and
investment increases gradually. Social overhead capital is build up. Along with economic
change there also occur changes in the social and political structure. Development of
mining industries and growth in savings and investment begins in this stage.
Stage 3: The takeoff: This is a decisive stage in which growth becomes a normal
condition of the society. A sharp stimulus for this may come from a political revolution, a
technological innovation, or even a favorable international environment. Increasing
industrialisation with the development of one or more manufacturing sectors marks the
stage of take off. The number of people employed in agriculture declines. One of the
main strategies necessary for take off is the mobilisation of domestic and foreign savings.
This is needed to generate further growth in the rate of investment to accelerate economic
growth. Countries that are able to save 15% to 20% of GNP can develop at a much faster
rate than those that save less. The growth would then be self sustaining. The mechanism
of growth then simply becomes a matter of increasing national savings and investment.
The political, social and institutional framework conducive for growth emerges quickly.
Stage 4: The drive to maturity: In this stage growth becomes self-sustaining and the
wealth generation enables further investment in value adding industry and development
Industry gets more diversified and there is increase in the levels of technology utilised. It
can be defined as a “period when society has effectively applied a range of modern
technology to the bulk of its resources”. The economy has both the technological and
entrepreneurial skills to produce not every thing but anything it want to produce.
Stage 5: The age of high mass consumption: Economic abundance is taken for granted
and the nation wishes to take the consumption levels of the people beyond the basic
needs of food, shelter and clothing. Thus high output levels and mass consumption of
consumer durables are the features of this stage. High proportion of employment in
service sector is also seen. The country aspires for external power and influence and
allocates substantial resources to military pursuits. Welfare measures are adopted to
develop an egalitarian society.
The advanced economies it was argued had all passed the stage of takeoff into self
sustained growth. The underdeveloped countries were still supposed to be either in the
stage of traditional society or the preconditions stage. They 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 being the mobilisation of domestic and foreign savings in
order to generate sufficient investment to accelerate economic development.
Criticisms
The mechanisms of development as envisaged in the stage theory did not always work.
For instance in the Rostows stage theory more investments just lead to more growth.
Though investments and savings are necessary conditions of growth they are not
sufficient conditions. There is the need for a strong financial infrastructure to canalise any
savings that are made into investment. Again such investments may not necessarily yield
growth as growth also necessitates other requirements to convert new capital into higher
levels of output. They include well integrated money and capital markets, highly
developed transport facilities, well trained and educated work force, the motivation to
succeed, an efficient government bureaucracy etc. In most LDCs these complementary
factors are lacking. Again efficiency of use of investment is also important. If the
resources invested are in unproductive activities growth may not occur. Lastly Rostow’s
argument that economies would learn from one another and reduce the time taken to
develop has not yet actually happened.
II) Theories and pattern of structural change
Structural-change theory focuses on the mechanism by which underdeveloped economies
transform their domestic economic structures from traditional to an industrial economy.
Representative examples of this strand of thought are
A) The Lewis theory of development
B) Cheney’s patterns of development
The Lewis theory of development
Also known as the two-sector surplus labor model has the following features
1) Economy consists of two sectors- traditional and modern
2) Traditional sector has surplus of labor (MPL=0)
1) Model focuses on the process of transfer of surplus labor and the growth
of output in the modern sector
2) The process of self-sustaining growth and employment expansion
continues in the modern sector until all of the surplus labor is absorbed.
3) Structural transformation of the economy has taken place with the growth
of the modern industry
Criticisms
Four of the key assumptions do not fit the realities of contemporary developing countries.
Reality is that:
1) Capitalist profits are invested in labor saving technology
2) Existence of capital flight
3) Little surplus labor in rural areas
4) Growing prevalence of urban surplus labor
5) Tendency for industrial sector wages to rise in the face of open
unemployment
Portion in the syllabus
Theories of economic growth and development: Classical – Marxian - Schumpeterian Stage theory – structuralist - dependency- and market-friendly approaches (concepts
only).
III)The international dependence revolution
There are three streams of thought in this theory. They are
1) Neoclassical dependence model - “Dependence is a conditioning situation in
which the economies of one group of countries are conditioned by the
development and expansion of others.” Dependence, then, is based upon an
international division of labor which allows industrial development to take place
in some countries, while restricting it in others, whose growth is conditioned by
and subjected to the power centers of the world.
2) False-paradigm model - Attributes under development to the faulty and
inappropriate advice provided by well-meaning but biased and ethnocentric
international “expert advisers”. Their policy prescriptions serve the vested
interests of existing power groups, both domestic and international.
3) Dualistic-development thesis - Dualism represents the existence and persistence
of increasing divergences between rich and poor nations and rich and poor
peoples at all levels. The concept embraces four key arguments:
a) Superior and inferior conditions can coexist in a given space at
given time
b) The coexistence is chronic and not transitional
c) The degrees of the conditions have an inherent tendency to
increase
d) Superior conditions serve to “develop under development”
Criticisms of IDR models
1) Do not offer any policy prescription for how poor countries can initiate and
sustain economic development.
2) Actual experience of developing countries that have pursued policy of
autarky/closed economy has been negative.
IV) The neo classical free market counter revolution.
Neoclassical counterrevolution in the 1980s called for freer markets, and the
dismantling of public ownership, and government regulations. There are mainly
four component approaches :
1) Free-market analysis- markets alone are efficient.
2) Public-choice theory- governments can do nothing right.
3) Market- friendly approach- governments have a key role to play in
facilitating operations of markets through nonselective interventions.
4) New institutionalism- success or failure of developmental efforts depend
upon the nature, existence, and functioning of a country’s fundamental
institutions.