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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.