Transcript Stages of Growth Theory

Theories of Development
and Underdevelopment
DEVELOPMENTALIST
THEORIES
Ch. 5 in Cypher & Dietz
DEVELOPMENTALIST THEORIES
of ECONOMIC DEVELOPMENT
BASIC CHARACTERISTICS:
 Post-WWII Pioneers of Development Economics
 Loose school of thought; less theoretical; more historical and practical
approach to the question of how to develop
 Optimistic, believe in the inevitability of development as a linear process that all
nations go through
 Emphasize large-scale industrialization as the key to the development process
 Profound respect for market forces yet support large-scale government
intervention to force economic growth
 Similar to Keynesians in regard to advocacy for government intervention and
also that poor economic performance reflects a lack of aggregate demand
LEADING THEORETICIANS:
 Theory of the Big Push: Rosenstein-Rodan
 Theory of balanced growth: Ragnar Nurkse
 Unbalanced Growth: Hirschman
 Growth with Unlimited Supply of Labor: Lewis
 Stages of Growth Theory: Rostow
Theory of the Big Push
Paul Rosenstein-Rodan
 hidden potential in developing economies
 large-scale industrialization and infrastructural
development is key
 more investment is needed in many places at one time
 but this cannot be left to the market due to information and
appropriation failures (“externalities”)
 the big push needs to come from the state to escape
the low-level equilibrium trap
Theory of balanced growth
Ragnar Nurkse
 export pessimism: exports cannot be depended upon as
the source of growth
 massive injection of new technology, machines, production
processes is the key to development
 hence need for domestic industrialization
 large scale industrial investments (i.e. expanded supply)
would also generate large scale demand, hence leading to:
BALANCED GROWTH
Industrial Linkages & Unbalanced Growth
Alfred Hirschman

Resource constraints in developing countries necessitate
prioritization as to where to invest first;

the big push should be only for a limited no of industries, hence
initially unbalanced growth;

this will initially result in unbalanced growth such that inducing
development in key sectors first will create overcapacity here;
cheapening their output due to economies of scale;

this will stimulate upstream investments:
eg. oversupply electric power; as electricity becomes cheaper this will
stimulate investments in those sectors that use electric power in big
amounts.

The key sectors for initial investment should be determined on the
basis of industrial backward and forward linkages.
Growth with unlimited supply of labor
Arthur Lewis

main difference between North and South: the relative weight of agricultural
versus industrial production and employment.
 Hidden potential of developing countries for growth lies in unlimited supplies
of rural labor inherent in their large agricultural sector ready to be pulled into
the modern urban sector.
 in the South, coexistence of the two sectors is dualistic such that:
– agricultural sector provides labor to industry; and industry buys food from them; but
there is little connection between them
– productivity in agricultural sector is so low that there is disguised unemployment; i.e.
surplus labor
 transformation dynamic lies in the attraction of this rural surplus labor into the
industry such that while industrial production increases, there is no change in
agricultural production.
The Labor Surplus Model
The Labor Surplus Model
The Labor Surplus Model
Growth with unlimited supply of labor
Arthur Lewis
Distribution of Income:
 Higher level of savings and investment in the
industrial sector is key to development; but
 only capitalist class is capable of savings and
investment.
 A limit will be imposed on this growth process as L
surplus is depleted and wages increase →
undesirable from Lewis’ perspective.
 Hence Lewis advocates income distribution in
favor of the capitalist class and against labor.
Critics of the Lewis Model
 Advocacy for pro-capital; anti-labor income
distribution; hence increasing inequality for the
sake of growth
 No consideration of Institutional Factors influential
in wage determination such as minimum wage
policies, labor unions and collective bargaining
practices
 Assumption about Capitalist Strata as a source of
investment and growth can be ill founded
Stages of Growth Theory
Walt Whitman Rostow
The Rostowian take-off model claims to be a universal
historical model of economic growth which was
developed on the basis of the economic history of
Britain.
The model claims that economic modernization
occurs in five basic stages, in changeable time
period.
1. Traditional society
2. Preconditions for take-off
3. Take-off
4. Drive to maturity
5. Age of high mass consumption
Rostow argues this is a universal historical
categorization of stages of growth that all
societies necessarily go through with similar
experiences.
Traditional Society
 output consumed by producers rather than traded
 trade carried out by barter; goods exchanged for other
goods
 agriculture → dominating sector; labor-intensive
 resource allocation determined by traditional
methods of production than scientific knowledge
 “pre-Newtonian” or “pre-scientific” society
dominated with a perspective of long-term fatalism
 landholders plays a dominant and important role in
the determination of political and economic power
Pre-conditions for Take-off
 destruction of traditional society through
outside forces such as colonialism
 emergence of entrepreneurial and managerial class
 development of a financial sector and increase in
investment
 infrastructural development
 modern business using new and sophisticated methods of
production
 emergence of “reactive nationalism”
Take-off into sustained growth
 increasing industrialization, production
and employment switches from agriculture to manufacturing
 growth concentrated in a few regions of the country and in
one or two manufacturing industries
 investment reaches over 10% of GNP
 evolution of new political and social institutions supporting
the industrialization
 growth becomes self-sustaining as investment leads to
increasing incomes in turn generating more savings to
finance further investment.
Drive to Maturity
 the economy starts spreading into new areas
 technological innovation provides expanded range
of investment opportunities.
 the economy starts producing a wide range of
goods and services and there is less reliance on
imports
 this diversity leads to greatly reduced rates of
poverty and rising standards of living, as the
society no longer needs to sacrifice its comfort in
order to make certain sectors more productive.
Age of High Mass Consumption
 the economy is oriented towards mass
consumption
 service sector becomes increasingly
dominant
 society is now devoted to the pleasures of
consumer choice, the pursuit of security,
and the enjoyments of the arts and leisure
Critics of the Stages of Growth Theory
by Rostow
 attempts to universalize the experience of a particular
country (Britain) in a specific period of time (16th to 20th
century)
 External factors such as colonization / imperialism can
hinder the process of development in the colonized nations
 descriptive; no analysis of how the pre-conditions for takeoff are to emerge
 empirically not validated
DEVELOPMENTALIST THEORIES
of ECONOMIC DEVELOPMENT
BASIC CHARACTERISTICS:
 Post-WWII Pioneers of Development Economics
 Loose school of thought; less theoretical; more historical and practical
approach to the question of how to develop
 Optimistic, believe in the inevitability of development as a linear process that all
nations go through
 Emphasize large-scale industrialization as the key to the development process
 Profound respect for market forces yet support large-scale government
intervention to force economic growth
 Similar to Keynesians in regard to advocacy for government intervention and
also that poor economic performance reflects a lack of aggregate demand
LEADING THEORETICIANS:
 Theory of the Big Push: Rosenstein-Rodan
 Theory of balanced growth: Ragnar Nurkse
 Unbalanced Growth: Hirschman
 Growth with Unlimited Supply of Labor: Lewis
 Stages of Growth Theory: Rostow