The Marshall Plan (officially the European Recovery

Program, ERP) was the American initiative to aid Europe, in

which the United States gave economic support to help rebuild
European economies after the end of World War II in order to
prevent the spread of SovietCommunism.
[1]
The plan was in
operation for four years beginning in April 1948.
[2]
The goals of the
United States were to rebuild war-devastated regions,
remove trade barriers, modernize industry, and make Europe
prosperous again.
[3]
The phrase "equivalent of the Marshall Plan"
is often used to describe a proposed large-scale rescue program.
Paul Narcyz Rosenstein-Rodan (19021985) was an economist
of Jewish origin born in Krakw, who was trained in the Austrian
traditionunder Hans Mayer in Vienna. His early contributions
to economics were in pure economic theory on marginal utility,
complementarity, hierarchical structures of wants and the
pervasive Austrian School issue of time.


Rosenstein-Rodan emigrated to Britain in 1930, and taught
at University College London and then at London School of
Economics until 1947. He then moved to the World Bank, before
moving on to MIT, where he was a professor from 1953 to 1968.
He is the author of the 1943 article "Problems of Industrialisation
of Eastern and South-Eastern Europe" - origin of the Big Push
Model theory - in which he argued for planned large-scale
investment programmes in industrialisation in countries with a
large surplus workforce in agriculture, in order to take advantage
of network effects, viz economies of scale and scope, to escape
the low level equilibrium "trap". He thus developed a theme laid
out by Allyn Young in his 1928 article "Increasing Returns and
Economic Progress", in which the latter himself expanded a theme
formulated by Adam Smith in 1776.
The International Institute of Social Studies (ISS) awarded its
Honorary Fellowship to Paul Rosenstein-Rodan in 1962.
His sister was the Polish painter and poet Erna Rosenstein.
The big push model is a concept in development
economics or welfare economics that emphasizes that a firm's
decision whether to industrialize or not depends on its expectation
of what other firms will do. It assumes economies of
scale and oligopolistic market structure and explains when
industrialization would happen.
The originator of this theory was Paul Rosenstein-Rodan in 1943.
Further contributions were made later on by Murphy, Shleifer
and Robert W. Vishny in 1989. Analysis of this economic model
ordinarily involves using game theory.
The theory of the model emphasizes that underdeveloped
countries require large amounts of investments to embark on the
path ofeconomic development from their present state of
backwardness. This theory proposes that a 'bit by bit' investment
programme will not impact the process of growth as much as is
required for developing countries. In fact, injections of small
quantities of investments will merely lead to a wastage
of resources. Paul Rosenstein-Rodan, approvingly quotes
a Massachusetts Institute of Technology study in this regard,
"There is a minimum level of resources that must be devoted to...
a development programme if it is to have any chance of success.
Launching a country into self-sustaining growth is a little like
getting an airplane off the ground. There is a critical ground
speed which must be passed before the craft can become
airborne...."
[1]

Rosenstein-Rodan argued that the entire industry which is
intended to be created should be treated and planned as a
massive entity (a firmor trust). He supports this argument by
stating that the social marginal product of an investment is always
different from its private marginal product, so when a group
of industries are planned together according to their social
marginal products, the rate of growth of the economy is greater
than it would have otherwise been.
The three indivisibilities[edit]
According to Rosenstein-Rodan, there exist three indivisibilities
in underdeveloped countries. These indivisibilities are responsible
for external economies and thus justify the need for a big push.
The externalities are as follows-
1. Indivisibility in production function
2. Indivisibility of demand
3. Indivisibility in the supply of savings
Indivisibility in production function[edit]
Indivisibilities in the production function may be with respect to
any of the following:
Inputs
Processes
Outputs
These lead to increasing returns (i.e., economies of scale), and
may require a high optimum size of a firm. This can be achieved
even in developing countries since at least one optimum scale firm
can be established in many industries. But investment in social
overhead capital comprises investment in all basic industries
(like power, transport or communications) which must necessarily
come before directly productive investment activities. Investment
in social overhead capital is 'lumpy' in nature. Such capital
requirements cannot be imported from other nations. Therefore,
heavy initial investment necessarily needs to be made in social
overhead capital (this is approximated to be about 30 to 40
percent of the total investment undertaken by underdeveloped
countries). Social overhead capital is further characterized by four
indivisibilities:
1. Irreversibility in time: It must precede other directly
productive investments
2. Minimum durability of equipment:. Any lesser level
of durability is either impossible due to technical reasons
or much less efficient
3. Long gestation periods: The investment in social
overhead capital takes time to generate returns and its
impact in the economy is not immediately or directly visible
4. Irreducible minimum social overhead capitalindustry mix:
Investment needs to be of a certain minimum magnitude
and spread across a mix of industries, without which it will
not significantly impact the process of growth.
Indivisibility (or complementarity) of demand[edit]
Developing countries are characterized by low per-capita income
and purchasing power. Markets in these countries are therefore
small. In a closed economy, modernization and increased
efficiency in a single industry has no impact on the economy as a
whole since the output of that industry will fail to find a market. A
large number of industries need to be set up simultaneously so
that people employed in one industry consume the output of other
industries and thus create complementary demand.
To illustrate this, Rosenstein Rodan gives the example of a shoe
industry. If a country makes large investments in the shoe
industry, all the disguisedly employed labor from the other
industries find work and a source of income, leading to a rise in
production of shoes and their own incomes. This increased
income will not be expended only on buying shoes. It is
conceivable that the increased incomes will lead to increased
spending on other products too. However, there is no
corresponding supply of these products to satisfy this increased
demand for the other goods. Following the basic market forces of
demand and supply, the prices of these commodities will rise. To
avoid such a situation, investment must be spread out amongst
different industries.
The situation may be different in an open economy as the output
of the new industry may replace former imports or possibly find its
market by way of exports. But even if the world market acts as
a substitute for domestic demand, a big push is still needed
(though its required size may now be reduced due to the presence
of international trade).
Indivisibility in the supply of savings[edit]
High levels of investment require a corresponding high level of
savings. We cannot always rely on foreign aid as the huge levels
of investments in the different sectors need to be made not only
once, but multiple number of times. Hence domestic savings are a
must. But in an underdeveloped economy,this is a challenge due
to the low income levels.Marginal rate of savings needs to be
increased following the rise in incomes due to higher investment.
How the big push works[edit]


Fig.1
Consider a country whose economy is characterized by a large
number of sectors which are so small that any increase in the
productivity of one sector has no impact on the economy as a
whole. Each sector can either rely on traditional methods or switch
to modern methods of production which would increase its
efficiency. Let us assume that there are workers in the economy
and sectors. Each sector therefore has workers.
Using traditional technology, a sector would produce amount
of output, with each worker producing one unit of the commodity.
Using modern technology a sector would produce more as the
productivity would be greater than one unit per worker. However,
a modern sector would require some of the workers (say ) to
perform administrative tasks.
In figure 1, the x-axis represents the labor employed and the y-
axis represents the level of production. The production in the
traditional sector is given by the curve T and the production in the
modern sector is given by M. The curve M has a positive intercept
on the x-axis, implying that even with zero production, there is a
minimum level of workers who still remain employed for carrying
out administrative activities. With our assumption of workers
in the economy, the modern sector will have a higher level of
productivity than the traditional sector. The production function of
the modern sector is steeper than that of the traditional sector
because of the higher productivity of workers in the former. The
slope of both production functions is , where is the
marginal labor required to produce an additional unit of output.
This level of is lower for the modern sector than it is for the
traditional sector.


Fig.1
Assume that the traditional sector pays workers one unit of output
which is subsequently spent equally by them in all sectors. The
modern sector pays higher wages to workers. If all the workers
are employed by the traditional sector, then the demand
generated for the output of each sector is . We have
two possible cases:
Wages are low When low wages are prevalent in the
economy, say , a firm which faces demand will need to
employ workers if it wants to modernize. This will cost the
firm .
Now, wages are low. Therefore
.
This implies that costs (given by ) are lower than the
earnings (given by ). So the firm makes a profit and will
choose to modernize (even if other firms do not).
Wages are high When high wages are prevalent in
the economy, say , a firm which faces
demand will make losses if no other firms choose
to modernize.
This is because
.
This implies that costs (given by ) are higher than the
earnings (given by ).
However, if all the other firms have modernized, the firm
faces a higher demand , arising out of higher income
levels of workers of these modernized firms. The firm will
hence choose to modernize as well so that it makes profits:
.


Indivisibilities and external economies[edit]
The concept of externalities is relevant for the
Industrialization of underdeveloped countries,
where decisions are to be made regarding
distribution of savings among
alternativeinvestment opportunities. These
arise from the interdependence in market
economies.
[3]

Pecuniary economies are external
economies transmitted through the price
system, as prices are the signalling device
(under conditions of perfect competition in a
market economy). They arise in an industry
(say industry X) due to internal economies of
overcoming technical indivisibilities. This
reduces the price of its product, which will
benefit another industry (say industry Y) which
use this output as an input or a factor of
production.
[4]
Subsequently, the profits of
industry Y will rise, leading to its expansion
and generating demand for the output of
industry X. As a result, industry X's production
and profits also expand.
[5]

However in underdeveloped countries,
conditions of perfect competition are not
present due to the decentralized and
differentiated nature of the market. Prices fail
to act as a signalling system in the following
ways:
[3]

Prices express the situation as it is and do
not predict future economic situations
Prices can decide present productive
activities but cannot determine
investments which would be appropriate
for developing countries
The response of the private sector to price
signals is inadequate and imperfect due to
the differentiation and decentralisation in
developing countries
This justifies the need for centralized pan-
industry planning of investment in Developing
countries, as the private sector cannot
undertake such planning.
Enlargement of the market size is another
important externality which arises from the
complementarity of industries. There exists an
incentive to expand the scale of operations
because the employees of one industry
become the customers of another industry. In
terms of products too (as in the above
example of industries X and Y), one industry
generates demand for the output of the other
when the scale of operations increase.
[6]

Marshallian economies also accrue to a firm
within a growing industry, resulting from
agglomeration of industrial districts or clusters
in a particular area. These occur due to the
following advantages of agglomeration
identified by Alfred Marshall:
1. Spillover of information
2. Specialization and division of labor
3. Development of a market for skilled
labor.
[5]

Availability of skilled labour is an externality
which arises when industrialization occurs, as
workers acquire better training and skills. This
is not achievable by mere establishment of a
few industries, but requires a large program of
industrial growth. It is one of the most
important external economies because
absence of skilled labor is a strong
impediment to industrialization.
[7]

Role of the State[edit]
The large-scale programme of industrialization
advocated by this model requires huge
investments which are beyond the means of
the private sector. The investment in
infrastructure and basic industries (like power,
transport and communications) is 'lumpy' and
has long gestation periods. The role of the
state in this theory is therefore critical for
investment in social overhead capital. Even if
the private sector had the requisite resources
to invest in such a programme, it would not do
so since it is driven by profit motives.
[7]
Many
investments are profitable in terms of social
marginal net product but not in terms of private
marginal net product. Due to this there is no
incentive for individual entrepreneurs to invest
and take advantage of external economies.
[1]

Criticisms[edit]
The theory has been criticized by Hla
Myint and Celso Furtado, among others,
primarily on the grounds of the massive effort
required to be taken by underdeveloped
countries to move along the path of
industrialization. Some of the major criticisms
are as follows.
Difficulties in execution and
implementation: The execution of related
projects during the course of
industrialization may involve unexpected
or unavoidable changes due to revisions
of plans, delays and deviations from the
planned process. Hla Myint notes that the
various departments and agencies
involved in the process of development
need to coordinate closely and evaluate
and revise plans continuously. This is a
challenging task for the governments of
developing countries.
[4]

Lack of absorptive capacity: The
implementation of industrialization
programmes may be constrained by
ineffective disbursement,short-term
bottlenecks, macroeconomic problems
and volatility, loss of competitiveness and
weakening of institutions. Credit is often
utilized at low rates or after long time lags.
There is often a loss of competitiveness
due to theDutch disease effect.
[8]

Historical inaccuracy: When viewed in light
of historical experience of countries over
the last two centuries, no country
displayed any evidence of development
due to massive industrialization
programmes. Stationary economies do not
develop simply by making large-scale
investment in social overhead capital.
[9]

Problems in mixed economies: In a mixed
economy, where the private and public
sectors co-exist, the environment for
growth may not be a conducive one.
Unless there is acomplementarity between
the sectors, there is bound to arise
competition between them, with
the government departments keeping their
plans confidential out of fear of speculative
activities by the private sector. The private
sector's activities are simultaneously
inhibited due to lack of information of
government policies and the general
economic situation
[4]

Neglect of methods of production: Rather
than capital formation, it is productive
techniques which determine the success
of a country in economic development.
The big push model ignores productive
techniques in its support
for capital formation and industrialisation.
[9]

Shortage of resources in underdeveloped
countries: Eugenio Gudin criticizes the
theory of the big push on the grounds
that underdeveloped countries lack
the capital required to provide the big push
required for rapid development. If an
underdeveloped nation had
ample capital supply and scarce factors, it
would not be classified
as underdeveloped at all.
Limited resource availability is the first
impediment to such countries. Though this
problem may be overcome by foreign aids,
industrialization may not take off as
expected if the aid flows are volatile.
[8]

Ignores the agricultural sector: With its
heavy emphasis on industry, the model
finds no place for agriculture. This is a
gaping flaw in the theory, as in
most underdeveloped countriesit is this
sector which is large and has
labor surplus. Investments in agriculture
need to go hand-in-hand with those in
industry so as to stimulate the industrial
sector by providing a market for industrial
goods. If neglected, it would be difficult to
meet the food requirements of the nation
in the short run and to significantly expand
the size of the market in the long run.
Inflationary pressures: It follows from the
neglect of the agricultural sector that food
shortages are likely to occur with
industrialization. Though it would take time
for investments in social
overhead capital to yield returns,
the demand would increase immediately,
thus imposing inflationary pressures on
the economy. Cost escalations may even
cause projects to be postponed and
the development process in general to
slow down.
[1]

Dependence on indivisibilities: The
emphasis of this theory on indivisibility of
processes is too much, as investments
need not necessarily be on such a large
scale to be economic.Social reforms are
ignored, which are vital if a country is to
grow on the basis of its own resources and
initiatives. Development is bound to
intensify if social reform is a part of the
industrialization process.
[


Ragnar Nurkse (5 October [O.S. 22
September] 1907, Kru, Estonia 6 May 1959, near Lake
Geneva, Switzerland) was an Estonian
[1]
international economist
and policy maker mainly in the fields of international finance and
economic development.

Life[edit]
Ragnar Nurkse was born in Kru village, Governorate of Livonia of
the Russian Empire (now in Kru Parish, Rapla County, Estonia),
son of an Estonian father who worked himself up from lumberjack
to estate manager, and an Estonian-Swedish mother. His parents
emigrated toCanada in 1928.
After a Russian-speaking primary school, Nurkse attended the
elite Cathedral School of Tallinn, the most prestigious, German-
language secondary school in the city, from where he graduated
with higher honors in 1928. He continued his education at the Law
School and the economics department of the University of
Tartu from 1926 to 1928, and then in economics at the University
of Edinburgh. He graduated with a first class degree in economics,
under professor Sir Frederick Ogilvie, in 1932. He earned
a Carnegie Fellowship to study at theUniversity of Vienna from
1932 to 193.
Nurkse served in the Financial Section and Economic Intelligence
Service of the League of Nations from 1934 to 1945. He was the
financial analyst and was largely responsible for the annual
Monetary Review. He was also involved with the publication of
The Review of World Trade, World Economic Surveys, and the
report of the Delegation on Economic Depressions entitled "The
Transition from War to Peace Economy".
In 1945, Nurkse accepted an appointment at the Columbia
University in New York City. He was a visiting lecturer at Columbia
from 1945 to 1946, was a member of the Institute for Advanced
Study in Princeton, New Jersey, from 1946 to 1947, and then
returned to Columbia as an Associate Professor of Economics in
1947. In 1949, he was promoted to Full Professor of Economics, a
position which he held almost until his death in 1959. Nurkse
spent a sabbatical (1954-1955) at the Nuffield College of
the University of Oxford, and in 1958-1959, another one studying
economic development in the University of Geneva, and lecturing
around the world.
In 1958, Ragnar Nurkse accepted a Professorship of Economics
and the Director of International Finance Section position
at Princeton University. However, before he could fully resume it,
when Nurkse returned to Geneva in the spring of 1959, he died
suddenly at the age of 52.
For his 100th anniversary on 5 October 2007, the Estonian Postal
Service commemorated Nurkse with an international letter stamp.
A large stone monument with a plaque will also be unveiled
across the house he was born in Kru. He was also honored
earlier in 2007 by the inauguration of a Lecture Series by the Bank
of Estonia and an international conference byTallinn University of
Technology's Technology Governance program. An
economics professorship at Columbia is named in his honor.

Work[edit]
Main article: Ragnar Nurkse's Balanced Growth Theory
Nurkse is one of the founding fathers of Classical Development
Economics. Together with Rosenstein-Rodan and Mandelbaum,
he promoted a 'theory of the big push', emphasized the role of
savings and capital formation in economic development, and
argued that poor nations remained poor because of a vicious
circle of poverty. Among his major works areInternational
Currency Experience: Lessons of the Interwar Period (1944), the
foundation of the Bretton Woods Agreement, Conditions of
International Monetary Equilibrium (1945), andProblems of Capital
Formation in Underdeveloped Countries (1953).
The balanced growth theory is an economic theory pioneered by
the economist Ragnar Nurkse (19071959). The theory
hypothesises that the government of any underdeveloped country
needs to make large investments in a number of industries
simultaneously.
[1][2]
This will enlarge the market size, increase
productivity, and provide an incentive for the private sector to
invest.
Nurkse was in favour of attaining balanced growth in both the
industrial and agricultural sectors of the economy.
[3]
He recognised
that the expansion and inter-sectoral balance between agriculture
and manufacturing is necessary so that each of these sectors
provides a market for the products of the other and in turn,
supplies the necessary raw materials for the development and
growth of the other.
Nurkse and Paul Rosenstein-Rodan were the pioneers of
balanced growth theory and much of how it is understood today
dates back to their work.
[4]

Nurkse's theory discusses how the poor size of the market in
underdeveloped countries perpetuates its underdeveloped
state.
[5][6]
Nurkse has also clarified the various determinants of the
market size and puts primary focus on productivity.
[3][7]
According
to him, if the productivity levels rise in a less developed country,
its market size will expand and thus it can eventually become a
developed economy. Apart from this, Nurkse has been nicknamed
an export pessimist, as he feels that the finances to make
investments in underdeveloped countries must arise from their
own domestic territory.
[1]
No importance should be given to
promoting exports.
Size of market and inducement to invest[edit]
The size of a market assumes primary importance in the study of
what induces investment in a country. Ragnar Nurkse referenced
the work of Allyn A. Young to assert that inducement to invest is
limited by the size of the market.
[9]
The original idea behind this
was put forward by Adam Smith, who stated that division of
labour (as against inducement to invest) is limited by the extent of
the market.
[7]

According to Nurkse, underdeveloped countries lack
adequate purchasing power.
[7]
Low purchasing power means that
the real income of the people is low, although in monetary terms it
may be high. If the money income were low, the problem could
easily be overcome by expanding the money supply; however,
since the meaning in this context is real income, expanding the
supply of money will only generate inflationary pressure. Neither
real output nor real investment will rise. It is to be noted that a low
purchasing power means that domestic demand for commodities
is low. Apart from encompassing consumer goods and services,
this includes the demand for capital as well.
The size of the market determines the incentive to invest
irrespective of the nature of the economy.
[6]
This is because
entrepreneurs invariably take their production decisions by taking
into consideration the demand for the concerned product. For
example, if an automobile manufacturer is trying to decide which
countries to set up plants in, he will naturally only invest in those
countries where the demand is high.
[7]
He would prefer to invest in
a developed country, where though the population is lesser than
in underdeveloped countries, the people are prosperous and there
is a definite demand.
Private entrepreneurs sometimes resort to heavy advertising as a
means of attracting buyers for their products. Although this may
lead to a rise in demand for that entrepreneur's good or service, it
does not actually raise the aggregate demand in the economy.
The demand merely shifts from one provider to another.
[5]
Clearly,
this is not a long-term solution.
Ragnar Nurkse concluded,
"The limited size of the domestic market in a low income country
can thus constitute an obstacle to the application of capital by any
individual firm or industry working for the market. In this sense the
small domestic market is an obstacle to development generally.

The process of economic development as per Ragnar Nurkse's
Balanced Growth Theory


Determinants of size of market[edit]
According to Nurkse, expanding the size of the market is crucial to
increasing the inducement to invest. Only then can the vicious
circle of poverty be broken. He mentioned the following pertinent
points about how the size of the market is determined:


Determinants of size of market
Money supply[edit]
Main article: Money supply
Nurkse emphasised that Keynesian theory shouldn't be applied to
underdeveloped countries because they don't face a lack
of effective demand in the way that developed
countries do.
[7]
Their problem is to do with a lack of
real purchasing power due to low productivity levels. Thus, merely
increasing the supply of money will not expand the market but will
in fact cause inflationary pressure.
Population[edit]
Nurkse argued against the notion that a large population implies a
large market.
[5]
Though underdeveloped countries have a large
population, their levels of productivity are low. This results in low
levels of per capita real income. Thus, consumption expenditure is
low, and savings are either very low or completely absent. On the
other hand, developed countries have smaller populations than
underdeveloped countries but by virtue of high levels of
productivity, their per capita real incomes are higher and thus they
create a large market for goods and services.
Geographical area[edit]
Nurkse also refuted the claim that if a country's geographical area
is large, the size of its market also ought to be large.
[1]
A country
may be extremely small in area but still have a large effective
demand. For example, Japan. In contrast, a country may cover a
huge geographical area but its market may still be small. This may
occur if a large part of the country is uninhabitable, or if the
country suffers from low productivity levels and thus has a
low National Income.
Transport cost and trade barriers[edit]
The notion that transport costs and trade barriers hinder the
expansion of the market is age-old. Nurkse emphasised
that tariff duties, exchange controls, import quotas and other non-
tariff barriers to trade are major obstacles to promoting
international cooperation in exporting and importing.
[7]
More
specifically, due to high transport costs between nations,
producers do not have an incentive to export their commodities.
As a result, the amount of capital accumulation remains small. To
address this problem, the United Nations produced a report in
1951
[10]
with solutions for underdeveloped countries. They
suggested that they can expand their markets by forming customs
unions with neighbouring countries. Also, they can adopt the
system of preferential taxation or even abolish customs duties
altogether. The logic was that once customs duties are removed,
transport costs will fall. Consequently, prices will fall and thus the
demand will rise. However, Nurkse, as an export pessimist, did
not agree with this view.
[8]
Export pessimism is a trade theory
which is governed by the idea of "inward looking growth" as
opposed to "outward looking growth". (See Import substitution
industrialization)
Sales promotion[edit]
Often, it is true that a company's private endeavour to increase the
demand for its products succeeds due to the extensive use of
advertisement and other sales promotion technique. However,
Nurkse argues that such activities cannot succeed at the macro
level to increase a country's aggregate demand level.
[7]
He calls
this the "macroeconomic paradox".
[7]

Productivity[edit]
Main article: Productivity
Nurkse stressed productivity as the primary determinant of the
size of the market. An increase in productivity (defined as the
output per unit input) increases the flow of goods and services in
the economy. As a response, consumption also rises. Hence,
underdeveloped economies should aim to raise their productivity
levels in all sectors of the economy, in particular agriculture and
industry.
[3]



The process of how increased productivity leads to economic
development and growth
For example, in most underdeveloped economies,
the technology used to carry out agricultural activities is backward.
There is a low degree of mechanisation coupled with rain
dependence. So while a large proportion of the population (70-
80%) may be actively employed in the agriculture sector, the
contribution to the Gross Domestic Product may be as low as
40%.
[7]
This points to the need to increase output per unit input
and output per head. This can be done if the government provides
irrigation facilities, high-yielding variety seeds, pesticides,
fertilisers, tractors etc. The positive outcome of this is that farmers
earn more income and have a higher purchasing power (real
income). Their demand for other products in the economy will rise
and this will provide industrialists an incentive to invest in that
country. Thus, the size of the market expands and improves the
condition of the underdeveloped country.
Nurkse is of the opinion that Say's Law of markets operates in
underdeveloped countries. Thus, if the money incomes of the
people rise while the price level in the economy stays the same,
the size of the market will still not expand till the real income and
productivity levels rise. To quote Nurkse,
"In underdeveloped areas there is generally no 'deflationary gap'
through excessive savings. Production creates its own demand,
and the size of the market depends on the volume of production.
In the last analysis, the market can be enlarged only through all-
round increase in productivity. Capacity to buy means capacity to
produce."
[3]



Export pessimism[edit]
Citing the limited size of the market as the main impediment in
economic growth, Nurkse reasons that an increase in productivity
can create a virtuous circle of growth.
[7]
Thus, a large scale
investment programme in a wide array of industries
simultaneously is the answer. The increase in demand for one
industry will lead to an increase in demand for another industry
due to complementarity of demands. As Say's Law states, supply
creates its own demand.
[11]

However, Nurkse clarified that the finance for this development
must arise to as large an extent as possible from the
underdeveloped country itself i.e. domestically.
[12]
He stated that
financing through increased trade or foreign investments was a
strategy used in the past - the 19th century - and its success was
limited to the case of the United States of America. In reality, the
so-called "new countries" of the United States of America (which
separated from the British empire) were high income countries to
begin with.
[8]
They were already endowed with efficient producers,
effective markets and a high purchasing power. The point Nurkse
was trying to make was that USA was rich in resource endowment
as well as labour force. The labour force had merely migrated
from Britain to USA, and thus their level of skills were advanced to
begin with. This situation of outward led growth was therefore
unique and not replicable by underdeveloped countries.
In fact, if such a strategy of financing development from outside
the home country is undertaken, it creates a number of
problems.
[12]
For example, the foreign investors may carelessly
misuse the resources of the underdeveloped country. This would
in turn limit that economy's ability to diversify, especially if natural
resources were plundered. This may also create a distorted social
structure.
[8]
Apart from this, there is also a risk that the foreign
investments may be used to finance private luxury consumption.
People would try to imitate Western consumption habits and thus
a balance of payments crisis may develop, along with economic
inequality within the population.
Another reason exports cannot be promoted is because in all
likelihood, an underdeveloped country may only be skilled enough
to promote the export of primary goods, say agricultural
goods.
[7]
However, since such commodities face inelastic demand,
the extent to which they will sell in the market is limited.
[7]
Although
when population is at a rise, additional demand for exports may be
created, Nurkse implicitly assumed that developed countries are
operating at the replacement rate of population growth. For
Nurkse, then, exports as a means of economic development are
completely ruled out.
[1]

Thus, for a large-scale development to be feasible, the requisite
capital must be generated from within the country itself, and not
through export surplus or foreign investment.
[6][12]
Only then can
productivity increase and lead to increasing returns to scale and
eventually create virtuous circles of growth.
[8][12]

Role of state[edit]
After World War II, a debate about whether a country should
introduce financial planning to develop itself or rely on private
entrepreneurs emerged. Nurkse believed that the subject of
who should promote development does not concern economists. It
is an administrative problem.
[7]
The crucial idea was that a large
amount of well dispersed investment should be made in the
economy, so that the market size expands and leads to higher
productivity levels, increasing returns to scale and eventually the
development of the country in question.
[7]
However, it should be
noted that most economists who favoured the balanced growth
hypothesis believed that only the state has the capacity to take on
the kind of heavy investments the theory propagates. Further, the
gestation period of such lumpy investments is usually long and
private sector entrepreneurs do not normally undertake such high
risks.
[5]

Reactions[edit]
Ragnar Nurkse's balanced growth theory too has been criticised
on a number of grounds. His main critic was Albert O. Hirschman,
the pioneer of the strategy of unbalanced growth.Hans W.
Singer also criticised certain aspects of the theory.
Hirschman stressed the fact that underdeveloped economies are
called underdeveloped because they face a lack of resources,
maybe not natural resources, but resources such as skilled labour
and technology.
[7]
Thus, to hypothesise that an underdeveloped
nation can undertake large scale investment in many industries of
its economy simultaneously is unrealistic due to the paucity of
resources.
[13]
To quote Hirschman,
"If a country were ready to apply the doctrine of balanced growth,
then it would not be underdeveloped in the first place."
[13]

Hans Singer asserted that the balanced growth theory is more
applicable to cure an economy facing
a cyclical downswing.
[7]
Cyclical downswing is a feature of an
advanced stage of sustained growth rather than of the vicious
cycle of poverty. Hirschman also stated that during conditions of
slack activity in developed countries, the stock of resources,
machines and entrepreneurs are merely unemployed, and are
present as idle capacity. So in this situation, simultaneous
investment in a large number of sectors is a well-suited policy.
The various economic agents are temporarily unemployed and
once the inducement to invest starts operating, the slump will be
overcome. However, for an underdeveloped economy, where
such resources are absent, this principle doesn't fit.
[7]

Another contention was Nurkse's approval of Say's Law, which
theorises that there is no overproduction or glut in the
economy.
[11]
Supply (production of goods and services) creates a
matching demand for the output and this results in the entire
output being sold and consumed. However, Keynes stated that
Say's Law is not operational in any country because people do not
spend their entire income - a fraction of it is saved for future
consumption.
[11]
Thus, according to Nurkse's critics, his
assumption of Say's Law being operational in underdeveloped
countries needs greater justification.
[7]
Even if the section of
savers is few, the tenet of putting emphasis on supply rather than
demand has been widely discredited.
[11][14]

Nurkse states that if demand for the output of one sector rises,
due to the complementary nature of demand, the demand for the
output of other industries will also experience a rise.
[7]
Paul
Rosenstein-Rodan to spoke of a similar concept called
"indivisibility of demand" which hypothesises that if large
investments are made in a large number of industries
simultaneously, an underdeveloped economy can become
developed due to the phenomenon of complementary
demand.
[7]
However, both Nurkse and Rosenstein-Rodan only
took into consideration the situation of industries that
produce complementary goods.
[7]
There are substitute goods too,
which are in competition with each other. Thus if the state pumps
in large investments into the car industry, for example, it will
naturally lead to a rise in the demand for petrol. But if the state
makes large scale investments in the coffee sector of a country,
the tea sector will suffer.
Hans Singer suggested that Nurkse's theory makes dubious
assumptions about the underdeveloped economy.
[7]
For example,
Nurkse assumes that the economy starts with nothing at
hand.
[5]
However, an economy usually starts at a position which
reflects the previous investment decisions undertaken in the
country,
[7]
and at any given moment, an imbalance already exists.
So the logical step would be to take on those investment
programmes which compliment the existing imbalance in the
economy. Clearly, such an investment cannot be a balanced one.
If an economy makes the mistake of setting out to make a
balanced investment, a new imbalance is likely to appear which
will require still another "balancing investment" to bring
equilibrium, and so on and so forth.
[7]

Hirschman believed that Nurkse's balanced growth theory wasn't
in fact a theory of growth.
[1]
Growth implies the gradual
transformation of an economy from one stage to the
chronologically next stage. It entails the series of actions which
leads the economy from a stage of infancy to that of
maturity.
[7]
However, the balanced growth theory involves the
creation of a brand new, self-sufficient modern industrial economy
being laid over a stagnant, self-sufficient traditional economy.
Thus, there is no transformation.
[13]
In reality, a dual economy will
come into existence, where two separate economic sectors will
begin to coexist in one country. They will differ on levels of
development, technology and demand patterns. This may create
inequality in the country.

Albert Otto Hirschman (born Otto-Albert Hirschmann; April 7,
1915 December 10, 2012) was an influential economist and the
author of several books on political economy and political
ideology. His first major contribution was in the area
of development economics.
[1]
Here he emphasized the need
for unbalanced growth. Because developing countries are short of
decision making skills, disequilibria to stimulate these and help
mobilize resources should be encouraged. Key to this was
encouraging industries with a large number of linkages to other
firms.
His later work was in political economy and there he advanced
two simple but intellectually powerful schemata. The first
describes the three basic possible responses to decline in firms or
polities: Exit, Voice, and Loyalty. The second describes the basic
arguments made by conservatives: perversity, futility and
jeopardy, in The Rhetoric of Reaction.
In World War II, he played a key role in in rescuing refugees
in occupied France.

Life[edit]
Hirschman was born in Berlin, Germany, the son of Carl and
Hedwig Marcuse Hirschmann, and brother of Ursula
Hirschmann.
[2]
After he had started studying in 1932 at Friedrich-
Wilhelms-Universitt, he was educated at the Sorbonne,
the London School of Economics and the University of Trieste,
from which he received his doctorate in economics in 1938.
[2]

Soon thereafter, Hirschman volunteered to fight on behalf of
the Spanish Republic in the Spanish Civil War. After France
surrendered to the Nazis, he worked with Varian Fry to helpmany
of Europe's leading artists and intellectuals to escape to the
United States; Hirschman helped to lead them from occupied
France to Spain through paths in the Pyrenees Mountains and
then to Portugal.
A Rockefeller Fellow at the University of California,
Berkeley (19411943), he served in the United States
Army (19431946) where he worked in the Office of Strategic
Services,
[3]
was appointed Chief of the Western European and
British Commonwealth Section of the Federal Reserve
Board (19461952), served as a financial advisor to the National
Planning Board of Colombia (19521954) and then became a
private economic counselor in Bogot (19541956).
Following that he held a succession of academic appointments in
economics at Yale University (19561958), Columbia
University (19581964), Harvard University (19641974) and
theInstitute for Advanced Study (19742012).
Hirschman helped develop the Hiding hand principle in his 1967
essay 'The principle of the hiding hand'.
In 2003, he won the Benjamin E. Lippincott Award from
the American Political Science Association to recognize a work of
exceptional quality by a living political theorist for his bookThe
Passions and the Interests: Political Arguments for Capitalism
before Its Triumph.
In 2007, the Social Science Research Council established an
annual prize in honor of Hirschman.
[4]

He died at the age of 97 on December 10, 2012.
The Passions and the Interests[edit]
This is a history of the ideas laying the intellectual groundwork for
capitalism. Hirschman describes how thinkers in the seventeenth
and eighteenth centuries embraced the sin of avarice as an
important counterweight to humankind's destructive passions.
Capitalism was promoted by thinkers including Montesquieu, Sir
James Steuart, and Adam Smith as repressing the passions for
"harmless" commercial activities. Hirschman noted that words
including "vice" and "passion" gave way to "such bland terms" as
"advantage" and "interest."
Hirschman described The Passions and the Interests as the book
he most enjoyed writing. According to Hirschman biographer
Jeremy Adelman, the book reflected Hirschman's political
moderation, a challenge to reductive accounts of human nature by
economists as a "utility-maximizing machine" as well as Marxian
or communitarian "nostalgia for a world that was lost to consumer
avarice."

Unbalanced growth is a natural path of economic
development. Undeveloped countries start from a position that
reflects their previous investment decisions and development.
Accordingly, at any point in time desirable investment programs
that are not in themselves balanced investment packages may still
advance welfare. Unbalanced investment can complement or
correct existing imbalances. Once such an investment is made, a
new imbalance is likely to appear, requiring further compensating
investments. Therefore, growth need not take place in a balanced
way. Supporters of the unbalanced growth doctrine include Albert
O. Hirschman, Hans Singer, Paul Streeten and Marcus Fleming.
Introduction[edit]
The theory is generally associated with Hirschman. He presented
a complete theoretical formulation of the strategy.
Underdeveloped countries display common characteristics: low
levels of GNI per capita and slow GNI per capita growth, large
income inequalities and widespread poverty, low levels
of productivity, great dependence on agriculture, a backward
industrial structure, a high proportion of consumption and low
savings, high rates of population growth and dependency
burdens, high unemployment and underemployment,
technological backwardness and dualism. In a less-developed
country, these characteristics lead to scarce resources or
inadequate infrastructure to exploit these resources. With a lack of
investors and entrepreneurs, cash flows cannot be directed into
various sectors that influence balanced economic growth.
Hirschman contends that deliberate unbalancing of the economy
according to the strategy is the best method of development and if
the economy is to be kept moving ahead, the task of development
policy is to maintain tension, disproportions and disequilibrium.
Balanced growth should not be the goal, but rather the
maintenance of existing imbalances, which can be seen from
profit and losses. Therefore, the sequence that leads away from
equilibrium is precisely an ideal pattern for development. Unequal
development of various sectors often generates conditions for
rapid development. More-developed industries provide
undeveloped industries an incentive to grow. Hence, development
of underdeveloped countries should be based on this strategy.
The path of unbalanced growth is described by three phases:
1. Complementarity
2. Induced investment
3. External economies
Singer believed that desirable investment programs always exist
within a country that represent unbalanced investment to
complement the existing imbalance. These investments create a
new imbalance, requiring another balancing investment. One
sector will always grow faster than another, so the need for
unbalanced growth will continue as investments must complement
existing imbalance. Hirschman states If the economy is to be kept
moving ahead, the task of development policy is to maintain
tensions, disproportions and disequilibria.
[citation needed]
This
situation exists for all societies, developed or underdeveloped.
Complementarity[edit]
Complementarity is a situation where increased production of one
good or service builds up demand for the second good or service.
When the second product is privately produced, this demand will
lead to imports or higher domestic production of the second
product, as it will be in the interests of the producers to do so.
Otherwise, the increased demand takes the form of political
pressure. This is the case for such public services such as law
and order, education, water and electricity that cannot reasonably
be imported.
Induced investment[edit]
Complementarity allows investment in one industry or sector to
encourage investment in others. This concept of induced
investment is like a multiplier, because each investment triggers a
series of subsequent events. Convergence occurs as the output of
external economies diminishes at each step. Growth sequences
tend to move towards convergence ordivergence and the policy is
usually concerned with preventing rapid convergence and
promoting the possibility of divergence.
[clarification needed]

External economies[edit]
New projects often appropriate external economies
[clarification
needed]
created by preceding ventures and create external
economies that may be utilized by subsequent ones. Sometimes
the project undertaken creates external economies, causing
private profit to fall short of what is socially desirable. The reverse
is also possible. Some ventures have a larger input of external
economies than the output. Therefore Hirschman says, "the
projects that fall into this category must be net beneficiaries of
external economies".
[citation needed]

Social Overhead Capital[edit]
Social Overhead Capital (SOC) is defined as basic services
without which primary, secondary and tertiary productive activities
cannot function. In a narrow sense, Social Overhead Capital is
defined to include transportation and electricity, while in a wider
sense, it includes all public services, including law and order and
education. Criteria for classifying an asset as Social Overhead
Capital include:
The services provided by the activity should facilitate a great
variety of economic activities.
The services provided should be subject to public control.
The services cannot be imported.
The investment needed to provide services should be
characterized by some unevenness as well as by high capital
output ratio.
Development via capital imbalances[edit]
The strategy of unbalanced growth has been discussed within the
frameworks of development through shortage of SOC and
development through excess of SOC.
In the first case, the country invests in direct productive activities
(DPA). Direct productive activity increases demand for SOC,
inducing investment. In the second case, SOC expands, which
reduces the cost of services, inducing investment in DPA.
[clarification
needed]

The cost of producing any unit of output of DPA is inversely
proportional to SOC.
[clarification needed]
The economy's major objective
is to attain increasing output of DPA.
One of the paradoxes of development is that poor countries
cannot afford to be economical.
[clarification needed]
According to
Hirschman, resources are not scarce per se, but the ability to
employ those resources may be lacking. To explain unbalanced
growth, Hirschman assumes that the country invests in either DPA
or SOC. Both paths set up incentives and an evaluation of their
respective efficiency depends on the strengths of entrepreneurial
motivations and the response to public pressure of the authorities
responsible for SOC.

The major characteristic of the two paths of development is that
they yield excess dividends. SOC built ahead of demand creates
this demand by making a country more attractive to DPA
investors. DPA that outpaces SOC development, creates demand
to expand SOC. Balanced growth of DPA and SOC is not
achievable in underdeveloped countries, nor it is not a desirable
policy, as it does not set up the incentives and the pressure that
make for this dividend of induced investment decisions.
[clarification
needed]

Backward and forward linkages[edit]
Hirschman introduces the concept of backward and forward
linkages. A forward linkage is created when investment in a
particular project encourages investment in subsequent stages of
production. A backward linkage is created when a project
encourages investment in facilities that enable the project to
succeed. Normally, projects create both forward and backward
linkages. Investment should be made in those projects that have
the greatest total number of linkages. Projects with many linkages
will vary from country to country; knowledge about project linkages
can be obtained through input and output studies.
Most underdeveloped economies are
primarily agrarian. Agriculture is typically at a primitive stage and
hence possesses few linkages, as most output goes for
consumption or exports. Therefore it is said
[who?]
that
underdeveloped countries are lacking in interdependence and
linkages.
An example of an industry that has excellent forward and
backward linkages is the steel industry. Backward linkages include
coal and iron ore mining. Forward linkages include items such as
canned goods. While this industry has strong linkages, it is not a
good leading sector. Any industry that has a high capital/output
ratio and causes significant costs to other businesses has the
potential to hurt the developing economy more than it helps it. A
better leading sector would be the beer industry.
[citation needed]

Linkages and last industries[edit]
The development of an economy using the unbalanced method
depends on the linkages between sectors. Hirschman suggests
that the best strategy is induced industrialization. This type of
development will create more backward and forward linkages and
should be the first step taken.
Industries that transform semi-manufactured goods into goods
needed by final demand are called "last industries" or "enclave
import industries".
In underdeveloped countries, industrialization takes place through
such industries, through plants that add final touches to unfinished
imported products. Examples are metal fabricating industries,
pharmaceutical laboratories and assembly and mixing plants.
Such industries have many advantages, as they often require the
smaller amounts of capital available in such economies and
without having to rely on unreliable domestic producers. Therefore
underdeveloped countries set up such "last industries" first. These
industries create long chains of backward
linkages. Colombia, Brazil and Mexico are examples of countries
that followed this path.
Protection and subsidy of import-replacing industries should
come, but at a later stage. The Last Industry Strategy has
disadvantages. It can slow the creation of domestic production.
Industrialists who have begun working with imports may not
accept domestic alternative products that reduce demand for their
output. Creating last industries first can create loyalty toward
foreign products and distrust of domestic products and their
quality. Banks may get used to extending credit for shorter,
smaller capital requirements.
Disadvantages[edit]
Disadvantages of the last industry strategy include inhibition of
domestic production as domestic demand grows. This is because
industrialists who work with imported material will often be hostile
to the establishment of domestic industries, because domestic
goods are of lower quality, the number of domestic suppliers is
small, downstream competition may intensify once inputs are
available domestically and competitors may be able to locate
closer to the upstream suppliers.
Last/first may accustom domestic consumers to imported goods,
making it harder for local producers to find customers. Further,
financing may be easier for import-based business.
Critical appraisal[edit]

This section possibly contains original
research. Please improve
it by verifying the claims made and
adding inline citations. Statements
consisting only of original research may
be removed. (March 2012)
The theory of unbalanced growth has generated positive and
negative reactions:
It pays insufficient attention to the question of the precise
composition, direction and timing of imbalances. What is the
optimum degree to which imbalance should be created in
order to accelerate growth? This theory leaves too much to
chance.
There is little discussion on how to overcome discrepancies
between private and social profitabilities of development
projects.
It neglects agriculture. In heavily populated countries with
agricultural economies, neglect of agriculture could be
suicidal. Shortage of agricultural goods can emerge as a
serious constraint to industrialization; unless income from
agricultural goods expands, the market for industrial products
remains limited. Unbalanced growth can also lead to
emergence of inflationary pressures in the economy, as a
shortage of agricultural commodities will push up commodity
prices.
This theory is useful in those countries where there is
significant state control. For instance in socialist countries, this
strategy is followed with some success. In a socialist society,
the consumption of all people is maintained at a modest level,
thus reducing demand for consumer goods.
Sir William Arthur Lewis (January 23, 1915 June 15, 1991)
was a Saint Lucian economist well known for his contributions in
the field ofeconomic development. In 1979 he won the Nobel
Memorial Prize in Economics.


The "Lewis Model"[edit]
Lewis published in 1954 what was to be his most influential
development economics article, "Economic Development with
Unlimited Supplies of Labour" (Manchester School). In this
publication, he introduced what came to be called the Dual Sector
model, or the "Lewis Model."
Lewis combined an analysis of the historical experience of
developed countries with the central ideas of the classical
economists to produce a broad picture of the development
process. In his theory, a "capitalist" sector develops by taking
labour from a non-capitalist backward "subsistence" sector. At an
early stage of development, the "unlimited" supply of labour from
the subsistence economy means that the capitalist sector can
expand for some time without the need to raise wages. This
results in higher returns to capital, which are reinvested in capital
accumulation. In turn, the increase in the capital stock leads the
"capitalists" to expand employment by drawing further labor from
the subsistence sector. Given the assumptions of the model (for
example, that the profits are reinvested and that capital
accumulation does not substitute for skilled labor in production),
the process becomes self-sustaining and leads to modernization
and economic development.
[6][7]

The point at which the excess labor in the subsistence sector is
fully absorbed into the modern sector, and where further capital
accumulation begins to increase wages, is sometimes called the
"Lewisian turning point" . It has recently been widely discussed in
the context of economic development in China.
[8]

The Theory of Economic Growth[edit]
Lewis published The Theory of Economic Growth in 1955 in which
he sought to provide an appropriate framework for studying
economic development, driven by a combination of curiosity and
of practical need.
[7]


Lewis model of development with surplus labour
The dual-sector model is a model in developmental economics.
It is commonly known as the Lewis model after its inventor Sir
William Arthur Lewis, winner of the Nobel Memorial Prize in
Economics in 1979. It explains the growth of a developing
economy in terms of a labour transition between two sectors, the
capitalist sector and the subsistence sector.
History
Initially the dual-sector model as given by W.A Lewis was
enumerated in his article entitled "Economic Development with
Unlimited Supplies of Labor" written in 1954 by Sir Arthur Lewis,
the model itself was named in Lewis's honor. First published
in The Manchester School in May 1954, the article and the
subsequent model were instrumental in laying the foundation for
the field of Developmental economics. The article itself has been
characterized by some as the most influential contribution to the
establishment of the discipline.
Assumptions
1. The model assumes that a developing economy has a surplus
of unproductive labor in the agricultural sector.
2. These workers are attracted to the growing manufacturing
sector where higher wages are offered.
3. It also assumes that the wages in the manufacturing sector are
more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit because
they charge a price above the fixed wage rate.
5. The model assumes that these profits will be reinvested in the
business in the form of fixed capital.
6. An advanced manufacturing sector means an economy has
moved from a traditional to an industrialized one.

Theory
W.A Lewis divided the economy of an underdeveloped country
into 2 sectors:
The capitalist sector
Lewis defined this sector as "that part of the economy which uses
reproducible capital and pays capitalists thereof". The use of
capital is controlled by the capitalists, who hire the services of
labor. It includes manufacturing, plantations, mines etc. The
capitalist sector may be private or public.
The Subsistence Sector
This sector was defined by him as "that part of the economy which
is not using reproducible capital. It can also be adjusted as the
indigenous traditional sector or the "self employed sector". The per
head output is comparatively lower in this sector and this is
because it is not fructified with capital. The "Dual Sector Model" is
a theory of development in which surplus labor from traditional
agricultural sector is transferred to the modern industrial sector
whose growth over time absorbs the surplus labor, promotes
industrialization and stimulates sustained development. In the
model, the subsistence agricultural sector is typically
characterized by low wages, an abundance of labour, and
low productivitythrough a labour intensive production process. In
contrast, the capitalist manufacturing sector is defined by higher
wage rates as compared to the subsistence sector, higher
marginal productivity, and a demand for more workers. Also, the
capitalist sector is assumed to use a production process that
is capital intensive, so investment and capital formation in the
manufacturing sector are possible over time as capitalists' profits
are reinvested in the capital stock. Improvement in the marginal
productivity of labour in the agricultural sector is assumed to be a
low priority as the hypothetical developing nation's investment is
going towards the physical capital stock in the manufacturing
sector.
Relationship between the two sectors
The primary relationship between the two sectors is that when the
capitalist sector expands, it extracts or draws labor from the
subsistence sector. This causes the output per head of laborers
who move from the subsistence sector to the capitalist sector to
increase. Since Lewis in his model considers overpopulated labor
surplus economies he assumes that the supply of unskilled labor
to the capitalist sector is unlimited. This gives rise to the possibility
of creating new industries and expanding existing ones at
the existing wage rate. A large portion of the unlimited supply of
labor consists of those who are in disguised unemployment in
agriculture and in other over-manned occupations such as
domestic services casual jobs, petty retail trading. Lewis also
accounts for two other factors that cause an increase in the supply
of unskilled labor, they are women in the household and
population growth.

The agricultural sector has a limited amount of land to cultivate,
the marginal product of an additional farmer is assumed to be zero
as the law of diminishing marginal returns has run its course due
to the fixed input, land. As a result, the agricultural sector has a
quantity of farm workers that are not contributing to agricultural
output since their marginal productivities are zero. This group of
farmers that is not producing any output is termed surplus labour
since this cohort could be moved to another sector with no effect
on agricultural output. (The term surplus labour here is not being
used in a Marxist context and only refers to the unproductive
workers in the agricultural sector.) Therefore, due to the wage
differential between the capitalist and subsistence sector, workers
will tend to transition from the agricultural to the manufacturing
sector over time to reap the reward of higher wages. However
even though the marginal product of labor is zero, it still shares a
part in the total product and receives approximately the average
product.

If a quantity of workers moves from the subsistence to the
capitalist sector equal to the quantity of surplus labour in the
subsistence sector, regardless of who actually transfers, general
welfare and productivity will improve. Total agricultural product will
remain unchanged while total industrial product increases due to
the addition of labour, but the additional labour also drives down
marginal productivity and wages in the manufacturing sector. Over
time as this transition continues to take place and investment
results in increases in the capital stock, the marginal productivity
of workers in the manufacturing will be driven up by capital
formation and driven down by additional workers entering the
manufacturing sector. Eventually, the wage rates of the
agricultural and manufacturing sectors will equalize as workers
leave the agriculture sector for the manufacturing sector,
increasing marginal productivity and wages in agriculture whilst
driving down productivity and wages in manufacturing.

The end result of this transition process is that the agricultural
wage equals the manufacturing wage, the agricultural marginal
product of labour equals the manufacturing marginal product of
labour, and no further manufacturing sector enlargement takes
place as workers no longer have a monetary incentive to
transition.
Surplus labor and the growth of the economy
Surplus labor can be used instead of capital in the creation of new
industrial investment projects, or it can be channeled into nascent
industries, which are labor intensive in their early stages. Such
growth does not raise the value of the subsistence wage, because
the supply of labor exceeds the demand at that wage, and rising
production via improved labor techniques has the effect of
lowering the capital coefficient. Although labor is assumed to be in
surplus, it is mainly unskilled. This inhibits growth since technical
progress necessary for growth requires skilled labor. But should
there be a labor surplus and a modest capital, this bottleneck can
be broken through the provision of training and education facilities.
The utility of unlimited supplies of labor to growth objectives
depends upon the amount of capital available at the same time.
Should there be surplus labor, agriculture will derive no productive
use from it, so a transfer to a non agriculture sector will be of
mutual benefit. It provides jobs to the agrarian population and
reduces the burden of population from land. Industry now obtains
its labor. Labor must be encouraged to move to increase
productivity in agriculture. To start such a movement, the capitalist
sector will have to pay a compensatory payment determined by
the wage rate which people can earn outside their present sector,
plus a set of other which include the cost of living in the new
sector and changes in the level of profits in the existing sector.
The margin capitalists may have to pay is as much as 30 per cent
above the average subsistence wage, WW1 in figure which
represents the capitalist sector is shown by N; OW is the industrial
wage. Given the profit maximization assumption, employment of
labor within the industrial sector is given by the point where
marginal product is equal to the rate of wages, i.e. OM.


Since the wages in the capitalist sector depend on the earnings of
the subsistence sector, capitalists would like to keep down
productivity/wages in the subsistence sector, so that the capitalist
sector may expand at a fixed wage. In the capitalist sector labor is
employed up to the point where its marginal product equals wage,
since a capitalist employer would be reducing his surplus if he
paid labor more than he received for what is produced. But this
need not be true in subsistence agriculture as wages could be
equal to average product or the level of subsistence. The total
product labor ONPM is divided between the payments to labor in
the form of wages, OWPM, and the capitalist surplus, NPW. The
growth of the capitalist sector and the rate of labor absorption from
the subsistence sector depends on the use made of capitalist
surplus. When the surplus is reinvested, the total product of labor
will rise. The marginal product line shifts upwards tot the right, that
is to N1. Assuming wages are constant, the industrial sector now
provides more employment. Hence employment rises by MM1.
The amount of capitalist surplus goes up from WNP to WN1P'.
This amount can now be reinvested and the process will be
repeated and all the surplus labor would eventually be exhausted.
When all the surplus labor in the subsistence sector has been
attracted into the capitalist sector, wages in the subsistence sector
will begin to rise, shifting the terms of trade in favor of agriculture,
and causing wages in the capitalist sector to rise. Capital
accumulation has caught up with the population and there is no
longer scope for development from the initial source, i.e. unlimited
supplies of labor. When all the surplus labor is exhausted, the
supply of labor to the industrial sector becomes less than perfectly
elastic. It is now in the interests of producers in the subsistence
sector to compete for labor as the agricultural sector has become
fully commercialized. It is the increase in the share of profits in the
capitalist sector which ensures that labor surplus is continuously
utilized and eventually exhausted. Real wages will tend to rise
along with increases in productivity and the economy will enter
into a stage of self-sustaining growth with a consistent nature.
Capital accumulation
The process of economic growth is inextricably linked to the
growth of capitalist surplus, that is as long as the capitalist surplus
increases, the national income also increases raising the growth
of the economy. The increase in capitalist surplus is linked to the
use of more and more labor which is assumed to be in surplus in
case of this model. This process of capital accumulation does
come to an end at some point. This point is where capital
accumulation catches up with population so that there is no longer
any surplus labor left. Lewis says that it the point where capital
accumulation comes to a stop can come before also that is if real
wages rise so high so as to reduce capitalists' profits to the level
at which profits are all consumed and there is no net investment.
This can take place in the following ways:
1. If the capital accumulation is proceeding faster than population
growth growth which causes a decline in the number of people in
the agricultural or subsistence sector.
2. The increase in the size of the capitalist or industrial sector in
comparison to the subsistence sector may turn theterms of
trade against the capitalist sector and therefore force the
capitalists to pay the workers/laborers a higher percentage of their
product in order to keep their real income constant.
3. The subsistence sector may adopt new and improved methods
and techniques of production, this will raise the level of
subsistence wages in turn forcing an increase in the capitalist
wages. Thus both the surplus of the capitalists and the rate of
capital accumulation will then decline.
4. Even though the productivity of capitalist sector remains
unchanged, the workers in the capitalist sector may begin to
imitate the capitalist style and way of life and therefore may need
more to live on, this will raise the subsistence wage and also the
capitalist wage and in turn the capitalist surplus and the rate of
capital accumulation will decline.
Criticism
The Lewis model has attracted attention of underdeveloped
countries because it brings out some basic relationships in
dualistic development. However it has been criticized on the
following grounds:

1. Economic development takes place via the absorption of labor
from the subsistence sector where opportunity costs of labor are
very low. However, if there positive opportunity costs, e.g. loss of
crops in times of peak harvesting season, labor transfer will
reduce agricultural output.
2. Absorption of surplus labor itself may end prematurely because
competitors may raise wage rates and lower the share of profit. It
has been shown that rural-urban migration in the Egyptian
economy was accompanied by an increase in wage rates of 15
per cent and a fall in profits of 12 per cent. Wages in the industrial
sector were forced up directly by unions and indirectly through
demands for increased wages in the subsistence sector, as
payment for increased productivity. In fact, given the urban-rural
wage differential in most poor countries, large scale
unemployment is now seen in both the urban and rural sectors.
3. The Lewis model underestimates the full impact on the poor
economy of a rapidly growing population, i.e. its effects on
agriculture surplus, the capitalist profit share, wage rates and
overall employment opportunities. Similarly, Lewis assumed that
the rate of growth in manufacturing would be identical to that in
agriculture, but if industrial development involves more intensive
use of capital than labor, then the flow of labor from agriculture to
industry will simply create more unemployment.
4. Lewis seems to have ignored the balanced growth between
agriculture and industry. Given the linkages between agricultural
growth and industrial expansion in poor countries,if a section of
the profit made by the capitalists is not devoted to agricultural
development, the process of industrialization would be
jeopardized.
5. Possible leakages from the economy seem to have been ignored
by Lewis. He assumes boldly that a capitalist's marginal
propensity to save is close to one, but a certain increase in
consumption always accompanies an increase in profits, so the
total increment of savings will be somewhat less than increments
in profit. Whether or not capitalist surplus will be used
constructively will depend on the consumption- saving patterns of
the top 10 percent of the population. But capitalists alone are not
the only productive agents of society. Small farmers producing
cash crops in Egypt have shown themselves to be quite capable
of saving the required capital. The world's largestcocoa industry
in Ghana is entirely the creation of small enterprise capital
formation.
6. The transfer of unskilled workers from agriculture to industry is
regarded as almost smooth and costless, but this does not occur
in practice because industry requires different types of labor. The
problem can be solved by investment in education and skill
formation, but the process is neither smooth nor inexpensive.
The model assumes rationality, perfect information and unlimited
capital formation in industry. These do not exist in practical
situations and so the full extent of the model is rarely realised.
However, the model does provide a good general theory on labour
transitioning in developing economies.
Empirical tests and practical application of the Lewis model
1. Empirical evidence does not always provide much support for the
Lewis model. Theodore Schultz in an empirical study of a village
in India during the influenza epidemic of 191819 showed that
agricultural output declined, although his study does not prove
whether output would have declined had a comparable proportion
of the agricultural population left for other occupations in response
to economic incentive. Again disguised unemployment may be
present in one sector of the economy but not in others. Further,
empirically it is important to know not only whether the marginal
productivity is equal to zero, but also the amount of surplus labor
and the effect of its withdrawal on output.
2. The Lewis model was applied to the Egyptian economy by Mabro
in 1967 and despite the proximity of Lewis's assumptions to the
realities if the Egyptian situation during the period of study, the
model failed firstly because Lewis seriously underestimated the
rate of population growth and secondly because the choice of
capital intensiveness in Egyptian industries did not show much
labor using bias and as such, the level of unemployment did not
show any tendency to register significant decline.
3. The validity of the Lewis model was again called into question
when it was applied to Taiwan. It was observed that, despite the
impressive rate of growth of the economy of Taiwan,
unemployment did not fall appreciably and this is explained again
in reference to the choice of capital intensity in industries in
Taiwan. This raised the important issue whether surplus labor is a
necessary condition for growth.

Lewis Model Of Unlimited Supply Of Labor
Initially the dual-sector model as given by W.A Lewis was
enumerated in his article entitled Economic Development with
Unlimited Supplies of Labor written in 1954 by Sir Arthur Lewis,
the model itself was named in Lewiss honor. First published in
The Manchester School in May 1954, the article and the
subsequent model were instrumental in laying the foundation for
the field of Developmental economics. The article itself has been
characterized by some as the most influential contribution to the
establishment of the discipline.
The Nobel Laureate, W. Arthur Lewis in the mid 1950s presented
his model of unlimited supply of labor or of surplus labor
economy. By surplus labor it means that part of manpower which
even if is withdrawn from the process of production there will be
no fall in the amount of output. Lewis model makes the following
assumptions :
1. There is a dual economy i.e., the economy is characterized by a
traditional, over-populated rural subsistence sector furnished
with zero MPL, and the high productivity
-
modern urban
industrial sector.
2. The subsistence sector does not make the use of Reproducible
capital, while the modern sector uses the produced means of
capital.
1. The production in the advanced sector is higher than the
production in traditional and backward sector.
2. According to Lewis, the supply of labor is perfectly elastic. In
other words, the supply of labor is greater than demand for
labor. The following are the sources of unlimited supply of
labor in UDCs.
3. Because of severe increase in population more than required
number of laborers are working
-
with lands the so called
disguised unemployed.
4. (ii) In UDCs so many people are having temporary and part
time jobs, as the shoeshines, loaders, porters and waiters etc.
There will be no fall in the production even their numbers are
one halved.(iii) The landlords and feudals are having an
army of tenants for the. sake of their influence, power and
prestige. They do not make any contribution towards
production, and they are prepared to work even at less than
subsistence wages.
(iv) The women in UDCs do not work, as they just perform
household duties. Thus they also represent unemployment.
5. The high birth rate in UDCs leads to grow unemployment.

Walt Whitman Rostow (also known as Walt Rostow or W.W.
Rostow) (October 7, 1916 February 13, 2003) was a United
Stateseconomist and political theorist who served as Special
Assistant for National Security Affairs to U.S. President Lyndon B.
Johnson in 1964-8.
Prominent for his role in the shaping of US foreign
policy in Southeast Asia during the 1960s, he was a staunch anti-
communist, noted for a belief in the efficacy of capitalism and free
enterprise, strongly supporting US involvement in the Vietnam
War. Rostow is known for his bookThe Stages of Economic
Growth: A Non-Communist Manifesto (1960), which was used in
several fields of social science.
His older brother Eugene Rostow also held a number of high
government foreign policy posts.

The Stages of Economic Growth[edit]
In 1960 Rostow published The Stages of Economic Growth: A
Non-Communist Manifesto, which proposed the Rostovian take-off
model of economic growth, one of the major historical models of
economic growth, which argues that economic modernization
occurs in five basic stages of varying length: traditional society,
preconditions for take-off, take-off, drive to maturity, and
high mass consumption. This became one of the important
concepts in the theory of modernization in social evolutionism.
Rostow's thesis was criticized at the time and subsequently as
universalizing a model of Western development that could not be
replicated in places like Latin America or sub-Saharan Africa.
The book impressed presidential candidate John F. Kennedy, who
appointed Rostow as one of his political advisers, and gave
advice. When Kennedy became president in 1961, he appointed
Rostow as deputy to his national security assistant McGeorge
Bundy. Later that year Rostow became chairman of the U.S. State
Department's policy planning council. After Kennedy's
assassination, his successor Lyndon B. Johnson promoted
Rostow to Bundy's job after he wrote Johnson's first state of the
union speech. As national security adviser Rostow was
responsible for developing the government's policy in Vietnam,
and was convinced that the war could be won, becoming
Johnson's main war hawk and playing an important role in
bringing Johnson's presidency to an end.
When Richard Nixon became president, Rostow left office, and
over the next thirty years taught economics at the Lyndon B.
Johnson School of Public Affairs at the University of Texas at
Austin with his wife Elspeth Rostow, who later became dean of the
school. He wrote extensively in defense of free enterprise
economics, particularly in developing nations.
The Rostow's Stages of Growth model is one of the major
historical models of economic growth. It was published by
American economistWalt Whitman Rostow in 1960. The model
postulates that economic growth occurs in five basic stages, of
varying length:
[1]

1. Traditional society
2. Preconditions for take-off
3. Take-off
4. Drive to maturity
5. Age of High mass consumption
Rostow's model is one of the more structuralist models of
economic growth, particularly in comparison with the
'backwardness' model developed by Alexander Gerschenkron,
although the two models are not mutually exclusive.
Rostow argued that economic take-off must initially be led by a
few individual sectors. This belief echoes David
Ricardo's comparative advantage thesis and
criticizes Marxist revolutionaries' push for economic self-reliance
in that it pushes for the 'initial' development of only one or two
sectors over the development of all sectors equally. This became
one of the important concepts in the theory of
modernization insocial evolutionism.
Overview[edit]
Below is a detailed outline of Rostow's 5 Stages:
Traditional society
characterized by subsistence agriculture or hunting &
gathering; almost wholly a "primary" sector economy
limited technology;
A static or 'rigid' society: lack of class or individual
economic mobility, with stability prioritized and change
seen negatively
Pre-conditions to "take-off"
external demand for raw materials initiates economic
change;
development of more productive, commercial agriculture &
cash crops not consumed by producers and/or largely
exported
widespread and enhanced investment in changes to the
physical environment to expand production (i.e. irrigation,
canals, ports)
increasing spread of technology & advances in existing
technologies
changing social structure, with previous social equilibrium
now in flux
individual social mobility begins
development of national identity and shared economic
interests
Take off
manufacturing begins to rationalize and scale increases in
a few leading industries, as goods are made both for
export and domestic consumption
the "secondary" (goods-producing) sector expands and
ratio of secondary vs. primary sectors in the economy
shifts quickly towards secondary
textiles & apparel are usually the first "take-off" industry,
as happened in Great Britain's classic "Industrial
Revolution"
Drive to maturity
diversification of the industrial base; multiple industries
expand & new ones take root quickly
manufacturing shifts from investment-driven (capital
goods) towards consumer durables & domestic
consumption
rapid development of transportation infrastructure
large-scale investment in social infrastructure (schools,
universities, hospitals, etc.)
Age of mass consumption
the industrial base dominates the economy; the primary
sector is of greatly diminished weight in economy &
society
widespread and normative consumption of high-value
consumer goods (e.g. automobiles)
consumers typically (if not universally), have disposable
income, beyond all basic needs, for additional goods
Rostow claimed that these stages of growth were designed to
tackle a number of issues, some of which he identified himself;
and wrote, "Under what impulses did traditional, agricultural
societies begin the process of their modernization? When and
how did regular growth become a built-in feature of each society?
What forces drove the process of sustained growth along and
determined its contours? What common social and political
features of the growth process may be discerned at each stage?
What forces have determined relations between the more
developed and less developed areas; and what relation if any did
the relative sequence of growth bear to outbreak of war? And
finally where is compound interest taking us? Is it taking us to
communism; or to the affluent suburbs , nicely rounded out with
social overhead capital; to destruction; to the moon; or where?"
[2][3]

Rostow asserts that countries go through each of these stages
fairly linearly, and set out a number of conditions that were likely
to occur in investment, consumption and social trends at each
state. Not all of the conditions were certain to occur at each stage,
however, and the stages and transition periods may occur at
varying lengths from country to country, and even from region to
region.
[4]

Theoretical framework[edit]
Rostow's model is a part of the liberal school of economics, laying
emphasis on the efficacy of modern concepts of free trade and the
ideas of Adam Smith. It disagrees with Friedrich List's argument
which states that economies which rely on exports of raw
materials may get "locked in", and would not be able to diversify,
regarding this Rostow's model states that economies may need to
depend on raw material exports to finance the development of
industrial sector which has not yet of achieved superior level of
competitiveness in the early stages of take-off. Rostow's model
does not disagree with John Maynard Keynes regarding the
importance of government control over domestic development
which is not generally accepted by some ardent free trade
advocates. The basic assumption given by Rostow is that
countries want to modernize and grow and that society will agree
to the materialisticnorms of economic growth.
[5]

Stages[edit]
Traditional societies[edit]
An economy in this stage has a limited production function which
barely attains the minimum level of potential output. This does not
entirely mean that the economy's production level is static. The
output level can still be increased, as there was often a surplus of
uncultivated land which can be used for increasing agricultural
production. States and individuals utilize irrigation systems in
many instances, but most farming is still purely for subsistence.
There have been technological innovations, but only on ad hoc
basis. All this can result in increases in output, but never beyond
an upper limit which cannot be crossed. Lacking modern science
and technology, such innovation as occurs spreads slowly and
inconsistently and is sometimes reversed or lost. Trade is
predominantly regional and local, largely done through barter, and
the monetary system is not well developed. Investment's share
never exceeds 5% of total economic production.
Wars, famines and epidemics like plague cause initially expanding
populations to halt or shrink, limiting the single greatest factor of
production: human manual labor. Volume fluctuations in trade due
to political instability are frequent; historically, trading was subject
to great risk and transport of goods and raw materials was
expensive, difficult, slow and unreliable. The manufacturing sector
and other industries have a tendency to grow but are limited by
inadequate scientific knowledge and a "backward" or highly
traditionalist frame of mind which contributes to low labour
productivity. In this stage, some regions are entirely self-sufficient.
In settled agricultural societies before the Industrial Revolution, a
hierarchical social structure relied on near-absolute reverence for
tradition, and an insistence on obedience & submission. This
resulted in concentration of political power in the hands of
landowners in most cases; everywhere, family & lineage, and
marriage ties, constituted the primary social organization, along
with religious customs, and the state only rarely interacted with
local populations and in limited spheres of life. This social
structure was generally feudalistic in nature. Under modern
conditions, these characteristics have been modified by outside
influences, but the least developed regions and societies fit this
description quite accurately.
Pre-conditions to take-off[edit]
In the second stage of economic growth the economy undergoes
a process of change for building up of conditions for growth and
take off. Rostow said that these changes in society and the
economy had to be of fundamental nature in the socio-political
structure and production techniques.
[3]
This pattern was followed
in Europe, parts of Asia, the Middle East and Africa. There is also
a second pattern in which he said that there was no need for
change in socio-political structure because these economies were
not deeply caught up in older, traditional social and political
structures. The only changes required were in economic and
technical dimensions. The nations which followed this pattern
were in North America and Oceania (New Zealand & Australia).
There are three important dimensions to this transition: firstly, the
shift from an agrarian to an industrial or manufacturing society
begins, albeit slowly. Secondly, trade and other commercial
activities of the nation broaden the market's reach not only to
neighboring areas but also to far-flung regions, creating
international markets. Lastly, the surplus attained should not be
wasted on the conspicuous consumption of the land owners or the
state, but should be spent on the development of industries,
infrastructure and thereby prepare for self-sustained growth of the
economy later on. Furthermore, agriculture becomes
commercialized and mechanized via technological advancement;
shifts increasingly towards cash or export-oriented crops; and
there is a growth of agricultural entrepreneurship.
[6]

The strategic factor is that investment level should be above 5% of
the national income. This rise in investment rate depends on many
sectors of the economy. According to Rostowcapital formation
depends on the productivity of agriculture and the creation of
social overhead capital. Agriculture plays a very important role in
this transition process as the surplus quantity of the produce is to
be utilized to support an increasing urban population of workers
and also becomes a major exporting sector, earning foreign
exchange for continued development and capital formation.
Increases in agricultural productivity also lead to expansion of the
domestic markets for manufactured goods and processed
commodities, which adds to the growth of investment in the
industrial sector.
Social overhead capital creation can only be undertaken by
government, in Rostow's view. Government plays the driving role
in development of social overhead capital as it is rarely profitable,
it has a long gestation period, and the pay-offs accrue to all
economic sectors, not primarily to the investing entity; thus the
private sector is not interested in playing a major role in its
development.
All these changes effectively prepare the way for "take-off" only if
there is basic change in attitude of society towards risk taking,
changes in working environment, and openness to change in
social and political organisations and structures. The pre-
conditions of take-off closely track the historic stages of the
(initially) British Industrial Revolution.
[7]

Referring to the graph of savings and investment, notably, there is
a steep increase in the rate of savings and investment from the
stage of "Pre Take-off" till "Drive to Maturity:" then, following that
stage, the growing rate of savings and investment moderates.
This initial & accelerating steep increase in savings and
investment is a pre-condition for the economy to reach the "Take-
off" stage and far beyond.
Take-off[edit]
This stage is characterized by dynamic economic growth. As
Rostow suggests, all is premised on a sharp stimulus (or multiple
stimuli) that is/are any or all of economic, political and
technological change. The main feature of this stage is rapid, self-
sustained growth.
[3][7]
Take-off occurs when sector led growth
becomes common and society is driven more by economic
processes than traditions. At this point, the norms of economic
growth are well established and growth becomes a nation's
"second nature" and a shared goal.
[1]
In discussing the take-off,
Rostow is noted to have adopted the term "transition", which
describes the process of a traditional economy becoming a
modern one. After take-off, a country will generally take as long as
fifty to one hundred years to reach the mature stage according to
the model, as occurred in countries that participated in the
Industrial Revolution and were established as such when Rostow
developed his ideas in the 1950s.
Per Rostow there are three main requirements for take-off:
1. "The rate of productive investment should rise from
approximately 5% to over 10% of national income or net
national product (this happened in Canada before the
1890s and Argentina before 1914.
[1]
)
2. The development of one or more substantial manufacturing
sectors, with a high rate of growth;
3. The existence or quick emergence of a political, social and
institutional framework which exploits the impulses to
expansion in the modern sector and the potential external
economy effects of the take-off" .
[2]
I.e., the needed capital
is mobilized from domestic resources and is steered into
the economy and not into domestic or state consumption.
Industrialization becomes a crucial phenomenon as it helps to
prepare the basic structure for structural changes on a massive
scale. Rostow says that this transition does not follow a set trend
as there are a variety of different motivations or stimulus which
began this growth process. Take off requires a large and sufficient
amount of loanable funds for expansion of the industrial sector
which generally come from two sources which are:
1. Shifts in income flows by way of taxation, implementation
of land reforms and various other fiscal measures.
2. Re-investment of profits earned from foreign trade as has
been observed in many East Asian countries. While there
are other examples of "Take-off" based on rapidly
increasing demand for domestically produced goods for
sale in domestic markets, more countries have followed
the export-based model, overall and in the recent past.
The US, Canada, Russia and Sweden are examples of
domestically based "take-off"; all of them, however, were
characterized by massive capital imports and rapid
adoption of their trading partners' technological
advances.
[3][8]
This entire process of expansion of the
industrial sector yields an increase in rate of return to
some individuals who save at high rates and invest their
savings in the industrial sector activities. The economy
exploit their underutilized natural resources to increase
their production.
[1]



Tentative take-off dates.
[2]

The take-off also needs a group of entrepreneurs in the society
who pursue innovation and accelerate the rate of growth in the
economy. For such an entrepreneurial class to develop, firstly, an
ethos of "delayed gratification", a preference for capital
accumulation over expenditure, and high tolerance of risk must be
present. Secondly, entrepreneurial groups typically develop
because they can not secure prestige and power in their society
via marriage, via participating in well-established industries, or
through government or military service (among other routes to
prominence) because of some disqualifying social or legal
attribute; and lastly, their rapidly changing society must tolerate
unorthodox paths to economic and political power.
A country's making it through this stage depends on the following
major factors:
Existence of enlarged, sustained effective demand for the
product of key sectors.
Introduction of new productive technologies and techniques in
these sectors.
The society's increasing capacity to generate or earn enough
capital to complete the take-off transition.
Activities in the key sector should induce a chain of growth in
other sectors of the economy, that also develop rapidly.
In the table note that Take-off periods of different countries are the
same as the industrial revolution in those countries.
Drive to maturity[edit]
After take-off there follows a long interval of sustained growth
known as the stage of drive to maturity. Rostow defines it "as the
period when has effectively applied the range of modern
technology to the bulk of its resources."
[2][3]
Now regularly growing
economy drives to extend modern technology over the whole front
of its economic activity. Some 10-20% of the national income is
steadily invested, permitting output regularly to outstrip the
increase in population. The make-up of the economy changes
unceasingly as technique improves, new industries accelerate,
older industries level off. The economy finds its place in the
international economy: goods formerly imported are produced at
home; new import requirements develop, and new export
commodities to match them. The leading sectors will in an
economy be determined by the nature of resource endowments
and not only by technology.


Tentative drive to maturity dates.
[2]

On comparing the dates of take-off and drive to maturity these
countries reached the stage of maturity in approximately 60 years.
The structural changes in the society during this stage are in three
ways:
Project Pat
Work force composition in the agriculture shifts from 75% of
the working population to 20%.The workers acquire greater
skill and their wages increase in real terms.
The character of leadership changes significantly in the
industries and a high degree of professionalism is introduced
Environmental and health cost of industrialization is
recognized and policy changes are thus made.
During this stage a country has to decide whether the industrial
power and technology it has generated is to be used for the
welfare of its people or to gain supremacy over others, or the
world in toto.
This diversity leads to reduction in poverty rate and increasing
standards of living, as the society no longer needs to sacrifice its
comfort in order to build up certain sectors.
[9]

Age of high mass consumption[edit]
The age of high mass consumption refers to the period of
contemporary comfort afforded many western nations, wherein
consumers concentrate on durable goods, and hardly remember
the subsistence concerns of previous stages. Rostow uses the
Buddenbrooks dynamics metaphor to describe this change in
attitude. In Thomas Mann's novel, Buddenbrooks, a family is
chronicled for three generations. The first generation is interested
in economic development, the second in its position in society.
The third, already having money and prestige, concerns itself with
the arts and music, worrying little about those previous, earthly
concerns. So too, in the age of high mass consumption, a society
is able to choose between concentrating
on military and security issues, on equality and welfare issues, or
on developing great luxuries for its upper class. Each country in
this position chooses its own balance between these three goals.
There is a desire to develop an egalitarian society and measures
are taken to reach this goal. According to Rostow, a country tries
to determine its uniqueness and factors affecting it are its political,
geographical and cultural structure and also values present in its
society.
[9]

Historically, the United States is said to have reached this stage
first, followed by other western European nations, and then Japan
in the 1950s.
[3]

Criticism of the model[edit]
1. Rostow is historical in the sense that the end result is
known at the outset and is derived from the historical
geography of a developed, bureaucratic society.
2. Rostow is mechanical in the sense that the underlying
motor of change is not disclosed and therefore the stages
become little more than a classificatory system based on
data from developed countries.
3. His model is based on American and European history and
defines the American norm of high mass consumption as
integral to the economic development process of all
industrialized societies.
4. His model assumes the inevitable adoption
of Neoliberal trade policies which allow the manufacturing
base of a given advanced polity to be relocated to lower-
wage regions.
5. Rostows Model does not apply to the Asian and the
African countries as events in these countries are not
justified in any stage of his model.
6. The stages are not identifiable properly as the conditions
of the take-off and pre take-off stage are every similar and
also overlap.
7. According to Rostow growth becomes automatic by the
time it reaches the maturity stage but Kuznets asserts that
no growth can be automatic there is need for push always.
8. There are two unrelated theories of take off one is that
take is a sectoral and a non-linear notion and other is that
it is highly aggregative.
[10]

Rostow's thesis is biased towards a western model of
modernization, but at the time of Rostow the world's only mature
economies were in the west, and no controlled economies were in
the "era of high mass consumption." The model de-emphasizes
differences between sectors in capitalistic vs. communistic
societies, but seems to innately recognize that modernization can
be achieved in different ways in different types of economies.
The most disabling assumption that Rostow has taken is of trying
to fit economic progress into a linear system. This assumption is
false as due to empirical evidence of many countries making false
starts then reaching a degree of progress and change and then
slipping back. E.g.: In the case of contemporary Russia slipping
back from high mass consumption to a country in transition the
main cause being political change and environment and also Cold
War.
Another problem that Rostow's work has is that it considered large
countries with a large population (Japan), with natural resources
available at just the right time in its history (Coal inNorthern
European countries), or with a large land mass (Argentina). He
has little to say and indeed offers little hope for small countries,
such as Rwanda, which do not have such advantages. Neo-liberal
economic theory to Rostow, and many others, does offer hope to
much of the world that economic maturity is coming and the age of
high mass consumption is nigh. But that does leave a sort of 'grim
meathook future' for the outliers, which do not have the resources,
political will, or external backing to
become competitive.
[11]
(See Dependency theory)
THE FIVE STAGES-OF-GROWTH--A SUMMARY
It is possible to identify all societies, in their economic dimensions, as
lying within one of five categories: the traditional society, the
preconditions for take-off, the take-off, the drive to maturity, and the age
of high mass-consumption.
THE TRADITIONAL SOCIETY
First, the traditional society. A traditional society is one whose structure
is developed within limited production functions, based on pre-
Newtonian science and technology, and on pre-Newtonian attitudes
towards the physical world. Newton is here used as a symbol for that
watershed in history when men came widely to believe that the external
world was subject to a few knowable laws, and was systematically
capable of productive manipulation.
The conception of the traditional society is, however, in no sense static;
and it would not exclude increases in output. Acreage could be
expanded; some ad hoc technical innovations, often highly productive
innovations, could be introduced in trade, industry and agriculture;
productivity could rise with, for example, the improvement of irrigation
works or the discovery and diffusion of a new crop. But the central fact
about the traditional society was that a ceiling existed on the level of
attainable output per head. This ceiling resulted from the fact that the
potentialities which flow from modern science and technology were
either not available or not regularly and systematically applied.
Both in the longer past and in recent times the story of traditional
societies was thus a story of endless change. The area and volume of
trade within them and between them fluctuated, for example, with the
degree of political and social turbulence, the efficiency of central rule,
the upkeep of the roads. Population--and, within limits, the level of life--
rose and fell not only with the sequence of the harvests, but with the
incidence of war and of plague. Varying degrees of manufacture
developed; but, as in agriculture, the level of productivity was limited by
the inaccessibility of modern science, its applications, and its frame of
mind.
Generally speaking, these societies, because of the limitation on
productivity, had to devote a very high proportion of their resources to
agriculture; and flowing from the agricultural system there was an
hierarchical social structure, with relatively narrow scope--but some
scope--for vertical mobility. Family and clan connexions played a large
role in social organization. The value system of these societies was
generally geared to what might be called a long-run fatalism; that is, the
assumption that the range of possibilities open to one's grandchildren
would be just about what it had been for one's grandparents. But this
long-run fatalism by no means excluded the short-run option that, within
a considerable range, it was possible and legitimate for the individual to
strive to improve his lot, within his lifetime. In Chinese villages, for
example, there was an endless struggle to acquire or to avoid losing land,
yielding a situation where land rarely remained within the same family
for a century.
Although central political rule--in one form or another--often existed in
traditional societies, transcending the relatively self-sufficient regions,
the centre of gravity of political power generally lay in the regions, in the
hands of those who owned or controlled the land. The landowner
maintained fluctuating but usually profound influence over such central
political power as existed, backed by its entourage of civil servants and
soldiers, imbued with attitudes and controlled by interests transcending
the regions.
In terms of history then, with the phrase 'traditional society' we are
grouping the whole pre-Newtonian world : the dynasties in China; the
civilization of the Middle East and the Mediterranean; the world of
medieval Europe. And to them we add the post-Newtonian societies
which, for a time, remained untouched or unmoved by man's new
capability for regularly manipulating his environment to his economic
advantage.
To place these infinitely various, changing societies in a single category,
on the ground that they all shared a ceiling on the productivity of their
economic techniques, is to say very little indeed. But we are, after all,
merely clearing the way in order to get at the subject of this book; that is,
the post-traditional societies, in which each of the major characteristics
of the traditional society was altered in such ways as to permit regular
growth: its politics, social structure, and (to a degree) its values, as well
as its economy.
THE PRECONDITIONS FOR TAKE-OFF
The second stage of growth embraces societies in the process of
transition; that is, the period when the preconditions for take-off are
developed; for it takes time to transform a traditional society in the ways
necessary for it to exploit the fruits of modern science, to fend off
diminishing returns, and thus to enjoy the blessings and choices opened
up by the march of compound interest.
The preconditions for take-off were initially developed, in a clearly
marked way, in Western Europe of the late seventeenth and early
eighteenth centuries as the insights of modern science began to be
translated into new production functions in both agriculture and industry,
in a setting given dynamism by the lateral expansion of world markets
and the international competition for them. But all that lies behind the
break-up of the Middle Ages is relevant to the creation of the
preconditions for take-off in Western Europe. Among the Western
European states, Britain, favoured by geography, natural resources,
trading possibilities, social and political structure, was the first to
develop fully the preconditions for take-off.
The more general case in modern history, however, saw the stage of
preconditions arise not endogenously but from some external intrusion
by more advanced societies. These invasions-literal or figurative-shocked
the traditional society and began or hastened its undoing; but they also
set in motion ideas and sentiments which initiated the process by which a
modern alternative to the traditional society was constructed out of the
old culture.
The idea spreads not merely that economic progress is possible, hut that
economic progress is a necessary condition for some other purpose,
judged to be good: be it national dignity, private profit, the general
welfare, or a better life for the children. Education, for some at least,
broadens and changes to suit the needs of modern economic activity.
New types of enterprising men come forward--in the private economy, in
government, or both--willing to mobilize savings and to take risks in
pursuit of profit or modernization. Banks and other institutions for
mobilizing capital appear. Investment increases, notably in transport,
communications, and in raw materials in which other nations may have
an economic interest. The scope of commerce, internal and external,
widens. And, here and there, modern manufacturing enterprise appears,
using the new methods. But all this activity proceeds at a limited pace
within an economy and a society still mainly characterized by traditional
low-productivity methods, by the old social structure and values, and by
the regionally based political institutions that developed in conjunction
with them.
In many recent cases, for example, the traditional society persisted side
by side with modern economic activities, conducted for limited economic
purposes by a colonial or quasi-colonial power.
Although the period of transition--between the traditional society and the
take-off--saw major changes in both the economy itself and in the
balance of social values, a decisive feature was often political.
Politically, the building of an effective centralized national state--on the
basis of coalitions touched with a new nationalism, in opposition to the
traditional landed regional interests, the colonial power, or both, was a
decisive aspect of the preconditions period; and it was, almost
universally, a necessary condition for take-off.
There is a great deal more that needs to be said about the preconditions
period, but we shall leave it for chapter 3, where the anatomy of the
transition from a traditional to a modern society is examined.
THE TAKE-OFF
We come now to the great watershed in the life of modern societies: the
third stage in this sequence, the take-off. The take-off is the interval
when the old blocks and resistances to steady growth are finally
overcome. The forces making for economic progress, which yielded
limited bursts and enclaves of modern activity, expand and come to
dominate the society. Growth becomes its normal condition. Compound
interest becomes built, as it were, into its habits and institutional
structure.
In Britain and the well-endowed parts of the world populated
substantially from Britain (the United States, Canada etc.) the proximate
stimulus for take-off was mainly (but not wholly) technological. In the
more general case, the take-off awaited not only the build-up of social
overhead capital and a surge of technological development in industry
and agriculture, but also the emergence to political power of a group
prepared to regard the modernization of the economy as serious, high-
order political business.
During the take-off, the rate of effective investment and savings may rise
from, say, 5 % of the national income to 10% or more; although where
heavy social overhead capital investment was required to create the
technical preconditions for take-off the investment rate in the
preconditions period could be higher than 5%, as, for example, in Canada
before the 1890's and Argentina before 1914. In such cases capital
imports usually formed a high proportion of total investment in the
preconditions period and sometimes even during the take-off itself, as in
Russia and Canada during their pre-1914 railway booms.
During the take-off new industries expand rapidly, yielding profits a
large proportion of which are reinvested in new plant; and these new
industries, in turn, stimulate, through their rapidly expanding
requirement for factory workers, the services to support them, and for
other manufactured goods, a further expansion in urban areas and in
other modern industrial plants. The whole process of expansion in the
modern sector yields an increase of income in the hands of those who not
only save at high rates but place their savings at the disposal of those
engaged in modern sector activities. The new class of entrepreneurs
expands; and it directs the enlarging flows of investment in the private
sector. The economy exploits hitherto unused natural resources and
methods of production.
New techniques spread in agriculture as well as industry, as agriculture is
commercialized, and increasing numbers of farmers are prepared to
accept the new methods and the deep changes they bring to ways of life.
The revolutionary changes in agricultural productivity are an essential
condition for successful take-off; for modernization of a society
increases radically its bill for agricultural products. In a decade or two
both the basic structure of the economy and the social and political
structure of the society are transformed in such a way that a steady rate
of growth can be, thereafter, regularly sustained.
As indicated in chapter 4, one can approximately allocate the take-off of
Britain to the two decades after 1783; France and the United States to the
several decades preceding 1860; Germany, the third quarter of the
nineteenth century; Japan, the fourth quarter of the nineteenth century;
Russia and Canada the quarter-century or so preceding 1914; while
during the 1950's India and China have, in quite different ways, launched
their respective take-offs.
THE DRIVE TO MATURITY
After take-off there follows a long interval of sustained if fluctuating
progress, as the now regularly growing economy drives to extend
modern technology over the whole front of its economic activity. Some
10-20% of the national income is steadily invested, permitting output
regularly to outstrip the increase in population. The make-up of the
economy changes unceasingly as technique improves, new industries
accelerate, older industries level off. The economy finds its place in the
international economy: goods formerly imported are produced at home;
new import requirements develop, and new export commodities to match
them. The society makes such terms as it will with the requirements of
modern efficient production, balancing off the new against the older
values and institutions, or revising the latter in such ways as to support
rather than to retard the growth process.
Some sixty years after take-off begins (say, forty years after the end of
take-off) what may be called maturity is generally attained. The
economy, focused during the take-off around a relatively narrow
complex of industry and technology, has extended its range into more
refined and technologically often more complex processes; for example,
there may be a shift in focus from the coal, iron, and heavy engineering
industries of the railway phase to machine-tools, chemicals, and
electrical equipment. This, for example, was the transition through which
Germany, Britain, France, and the United States had passed by the end of
the nineteenth century or shortly thereafter. But there are other sectoral
patterns which have been followed in the sequence from take-off to
maturity, which are considered in chapter 5.
Formally, we can define maturity as the stage in which an economy
demonstrates the capacity to move beyond the original industries which
powered its take-off and to absorb and to apply efficiently over a very
wide range of its resources--if not the whole range--the most advanced
fruits of (then) modern technology. This is the stage in which an
economy demonstrates that it has the technological and entrepreneurial
skills to produce not everything, but anything that it chooses to produce.
It may lack (like contemporary Sweden and Switzerland, for example)
the raw materials or other supply conditions required to produce a given
type of output economically; but its dependence is a matter of economic
choice or political priority rather than a technological or institutional
necessity.
Historically, it would appear that something like sixty years was required
to move a society from the beginning of take-off to maturity.
Analytically the explanation for some such interval may lie in the
powerful arithmetic of compound interest applied to the capital stock,
combined with the broader consequences for a society's ability to absorb
modern technology of three successive generations living under a regime
where growth is the normal condition. But, clearly, no dogmatism is
justified about the exact length of the interval from take-off to maturity.
THE AGE OF HIGH MASS-CONSUMPTION
We come now to the age of high mass-consumption, where, in time, the
leading sectors shift towards durable consumers' goods and services: a
phase from which Americans are beginning to emerge; whose not
unequivocal joys Western Europe and Japan are beginning energetically
to probe; and with which Soviet society is engaged in an uneasy
flirtation.
As societies achieved maturity in the twentieth century two things
happened: real income per head rose to a point where a large number of
persons gained a command over consumption which transcended basic
food, shelter, and clothing; and the structure of the working force
changed in ways which increased not only the proportion of urban to
total population, but also the proportion of the population working in
offices or in skilled factory jobs-aware of and anxious to acquire the
consumption fruits of a mature economy.
In addition to these economic changes, the society ceased to accept the
further extension of modern technology as an overriding objective. It is
in this post-maturity stage, for example, that, through the political
process, Western societies have chosen to allocate increased resources to
social welfare and security. The emergence of the welfare state is one
manifestation of a society's moving beyond technical maturity; but it is
also at this stage that resources tend increasingly to be directed to the
production of consumers' durables and to the diffusion of services on a
mass basis, if consumers' sovereignty reigns. The sewing-machine, the
bicycle, and then the various electric-powered household gadgets were
gradually diffused. Historically, however, the decisive element has been
the cheap mass automobile with its quite revolutionary effects--social as
well as economic--on the life and expectations of society.
For the United States, the turning point was, perhaps, Henry Ford's
moving assembly line of 1913-14; but it was in the 1920's, and again in
the post-war decade, 1946-56, that this stage of growth was pressed to,
virtually, its logical conclusion. In the 1950's Western Europe and Japan
appear to have fully entered this phase, accounting substantially for a
momentum in their economies quite unexpected in the immediate post-
war years. The Soviet Union is technically ready for this stage, and, by
every sign, its citizens hunger for it; but Communist leaders face difficult
political and social problems of adjustment if this stage is launched.

In 1960, the American Economic Historian, W. W.
Rostow, suggested that countries passed through
five stages of economic development.
Stage 1 -- Traditional Society
The economy is dominated by subsistence activity
where output is consumed by producers rather than
traded. Any trade is carried out by barter where
goods are exchanged directly for other goods.
Agriculture is the most important industry and
production is labor intensive using only limited
quantities of capital. Resource allocation is
determined very much by traditional methods of
production.
Stage 2 -- Transitional Stage (the preconditions for
takeoff)
Increased specialization generates surpluses for
trading. There is an emergence of a transport
infrastructure to support trade. As incomes, savings
and investment grow entrepreneurs emerge.
External trade also occurs concentrating on primary
products.
Stage 3 -- Take Off
Industrialization increases, with workers switching
from the agricultural sector to the manufacturing
sector. Growth is concentrated in a few regions of
the country and in one or two manufacturing
industries. The level of investment reaches over
10% of GNP.
The economic transitions are accompanied by the
evolution of new political and social institutions
that support the industrialization. The growth is
self-sustaining as investment leads to increasing
incomes in turn generating more savings to finance
further investment.
Stage 4 -- Drive to Maturity
The economy is diversifying into new areas.
Technological innovation is providing a diverse
range of investment opportunities. The economy is
producing a wide range of goods and services and
there is less reliance on imports.
Stage 5 -- High Mass Consumption
The economy is geared towards mass consumption.
The consumer durable industries flourish. The
service sector becomes increasingly dominant.
According to Rostow, development requires
substantial investment in capital. For the economies
of LDCs to grow, the right conditions for such
investment would have to be created. If aid is given
or foreign direct investment occurs at stage 3 the
economy needs to have reached stage 2. If the
stage 2 has been reached then injections of
investment may lead to rapid growth.
Limitations
Many development economists argue that
Rostows's model was developed with Western
cultures in mind and not applicable to LDCs. It
addition its generalized nature makes it somewhat
limited. It does not set down the detailed nature of
the pre-conditions for growth. In reality, policy
makers are unable to clearly identify stages as they
merge together. Thus as a predictive model it is not
very helpful. Perhaps its main use is to highlight the
need for investment. Like many of the other models
of economic developments it is essentially a growth
model and does not address the issue of
development in the wider context.

1. Chapter 5 Developmentalist Theories of Economic
DevelopmentAuthors: James M. Cypher and James L. Dietz By
Dhattaluck Boondhammadheerawoot
2. Presentation Paths Introduction of developmentalist theories of
economic development Brief concept of 3 scholars in
developmentalist theories of economic development Summary
Discussion
3. Introdution: Objectives of this chapter Better understand
Theory of the big push by Paul Rosenstein-Rodan (the Austrian
economist) The concept of hidden development potential in less-
developed nations Theory of balanced growth by Ragnar Nurkse
(the Finnish economist) Export pessimism and the need for
domestic industrialization Unbalanced growth by Albert O.
Hirschman (the German-born economist)
4. Introduction Developmentalist theories of economic
development has been occurred after the Second World War with
Marshall Plan Marshall Plan (from its enactment, officially the
European Recovery Program, ERP) Marshall Plan was the
primary program, 194851, of the United States for rebuilding and
creating a stronger economic foundation for the countries of
Western Europe. Marshall Plan was the reconstruction plan,
developed at a meeting of the participating European states and
was established on June 5, 1947 as postwar economic
reconstruction of Europe.
5. Introduction Referral to 3 scholars, they formed a loose school
of thought on the issue of economic development Emphasize a
less theoretical and more historical and practical approach to the
question of How to develop, particularly in relation to the
applicability of neoclassical models, such as the Solow model (in
the last chapter) There were differences of emphasis and
interpretation between these theorists.
6. Introduction Concept behind of 3 theorists They preferred for
industrialization as the driving force of economic growth.
Industrialization would release a tide of prosperity lifting all other
sectors of the economy. Respect for market forces -> Not
hesitate to advocate large- scale, short-term governmental
intervention into the economy. In the long term, an economy
would achieve its best results with a competive market interacting
with a responsive and efficient governmental apparatus. Role of
government in development would be reduced to its stabilizing
function, as in the already-developed nations. (Markets are
perceived as a means to realizing the end of economic
development; they are not an end in themselves.)
7. Theory of the Big Push
8. The Theory of the Big Push by Paul Rosenstein-Rodan Much
of his work focused on the increasing returns from large-scale
planned industrialization projects Rosenstein-Rodan formulated
this theory on the basis of research he had conducted during the
Second World War. Hi-light >> Call attention to the hidden
potential for economic development in less-developed regions
because they possessed the hidden potential for greater progress;
the resources and talents of society simply needed to be
coordinated and released.
9. The Theory of the Big Push by Paul Rosenstein-Rodan Large-
scale investments (A big push) in several branches of industry
would lead to a favorable synergistic interaction between these
branches and across sectors. In less-developed nations, it would
have to come from a concerted and substantial push from
government to create, effectively, and entire industrial structure.
More investment was needed and in many places at one time in
order to shift the economy away from its low-level equilibrium trap
and toward rapid and sustainable growth.
10. The Theory of the Big Push by Paul Rosenstein-Rodan
Individual entrepreneurs would be not possible to invest enough to
push the less-developed economy forward at its maximum
potential rate << the profit-and-loss calculations of private
entrepreneurs and resources are limited. Social overhead capital
is important for the big push theory >> generate positive external
benefits to society as a whole (public investment).
11. The Theory of the Big Push by Paul Rosenstein-Rodan
Virtuous circle effect An expanding manufacturing sector that
raises productivity then stimulates income growth. In turn, it
leads to increasing demand for the products of the expanding
manufacturing sector. Increasing growth in this manufacturing
sector could lead to increasing demand for inputs (produce on a
larger scale) Result: Lower the costs of production for the
manufacturing sector which could lead to increasing demand for
the product and growth.
12. Summary of The Theory of the Big Push Big push >>
investment simultaneously in a number of branches of industry
and emphasis on social overhead as fundamental to the success
of the development project in less-developed nations. 4
innovations (Contribution in the area of development economics)
Disguised unemployment: Their labor could be tapped to create
the vast public works of social overhead capital without reducing
output in the economy. Complementarity and the external
economies of distinct investments >> Large-scale investments
could have an impact on overall economic growth greater than
calculations of individual entrepreneurs alone.
13. Summary of The Theory of the Big Push Social overhead
capital >> Endogenous growth methods (Chapter 8) Big push
results in technological external economies >> Large-scale
industrialization could contribute to a socially beneficial level of
labor training that would have spread effects to other sectors
throughout the economy.
14. The Theory of Balanced Growth by Ragnar Nurkse
15. The Theory of Balanced Growth by Ragnar Nurkse Hi-light
Increase in the amount of capital utilized in a wide range of
industries if industrialization has a chance of being achieved (like
Rossenstein-Rodan emphasized). Key for development process
in less-developed nations Massive injection of new technology,
new machines, and new production processes spread across a
broad range of industrial sectors.
16. The Theory of Balanced Growth by Ragnar Nurkse Nurkse
was branded an export pessimist He worked on assumption
based upon the weak pattern of prices for traditional primary
exports from the less-developed nations in twentieth century.
Export pessimism and the need of domestic industrialization
Contrast with doctrine in trade theory >> less- developed nations
should foster economic progress by increasing their exports of
tropical products and raw material products.
17. The Theory of Balanced Growth by Ragnar Nurkse 2 reasons
1. In future, those demands would be relatively limited and slow to
expand. An increase in supply under such conditions would
result in a decrease in the market price. The reduction in price
could be a magnitude that the total revenue received (= unit price
X quantity of the product sold on the world market). After an
increase in supply could be less than the export income. 2. In
orthodox trade theory, it was assumed that A less-developed
nation with the ability to export either tropical products and/ or raw
materials would use the income earned to import machinery,
equipment, and manufactured consumer goods for domestic
consumption. High income consumers would spend inordinately
on imported luxury products to keep up with the Joneses of the
richer nations.
18. Summary of The Theory of Balanced Growth by Ragnar
Nurkse In less-developed nations, small incremental increases in
capital formation would not solve the problem because an
individual business or a single industry alone attempted to raise its
output and risk of not finding a market for its product because of
the low level of overall average income (similar to Rosenstein-
Rodan). Solution: Balance investment program >> Large-scale
increases in supply across a large number of industrial sectors
would at the same time, be met by a large-scale increase in
demand created by the same expansion. This income would be
transposed into a further expansion of demand by other firms and
by workers in those firms buying the increased array of domestic
goods available. If supply increases were coordinated with
simultaneous demand increases across the economy. Fiscal
policies could have a very positive effect on the prospects for
development without large scale government involvement in
production decisions or large-scale planning projects.
19. Summary of The Theory of Balanced Growth by Ragnar
Nurkse Nurkse advocated forced savings through an increase in
taxes on upper-income recipients. The increased investment
funds generated could be allocated to the most promising
industrial sectors via government-operated development banks
designed to identify and promote industrialization in the private
sector or via private sector banks. This leads to an increase in
the supply of available domestic output via enhanced capital
formation. A market for domestically produced goods would be
created because potentially competing imports would be deflected
via tariffs to the purchase of lower-priced domestically produced
goods known as Import substitution industrialization (Chapters 9
and 1 0 )
20. Unbalanced Growthby Albert O. Hirschman
21. Unbalanced Growth by Albert O. Hirschman Hirschmans
work was to be interpreted as an attack on the theory of big-push
or balanced growth. He supported an industrialization and
believed that the key to rapid industrialization was to be found in
large-scale capital formation in several industries and sectors.
22. Unbalanced Growth by Albert O. Hirschman Hirschman
advocated the unbalancing of the economy, creating
disequilibrium situations, for 2 reasons. There were resource
limits in the less-developed regions and that this would
necessitate prioritizing some areas of industry over others for the
use of limited investment funds. Its impossible to move invest in
all industries at the same time as was envisioned in the big-push
and balanced growth theories. The pressure from unbalancing
the economy and in creating excess capacity in some areas and
intensifying shortages in other areas results in subsequent
reactions >> speed the development process by opening up
opportunities for profit for new entrepreneurs.
23. Unbalanced Growth by Albert O. Hirschman Backward and
forward linkages They were important in evaluating where to
locate the initial investment. Development strategies could be
built around the maximization of the estimated stimulus of
promoted industries in generating domestic backward and forward
linkages. Backward linkages: When one industry expands, it
requires inputs from other industries to be able to produce.
Forward linkages: When an industry sells and transports its
production to other firms and sectors in the economy. >> The
production of one firm in one industry has a multiplicity of
backward and forward linkages with firms in other industries.
24. Unbalanced Growth by Albert O. Hirschman Changing the
social organization of the labor process This is to advance for
promoting a capital-intensive, unbalanced industrialization
program in less-developed nations, according to exceedingly lax
standards in the workplace. He suggested that introduction of
more advanced machine- paced techniques, it would become
easier both to calculate reasonable work-norms and to evaluate
both success and failure in completing tasks. Workers and
managers would be created as a complementary effect of
industrialization, with positive and cumulative spin-off effects for
other industries. Attitudes toward efficiency and responsibility on
the job would also be transmitted to society at large. Note: Theres
study of the significance of achievement attitudes to deliver output
per worker in Mexico (Focus 5.2).
'Big-push' Theory
(ROSENSTEIN-RODAN 26)
This theory is an investment theory which stresses the conditions
of take-off. The argumentation is quite similar to the balanced
growth theory but emphasis is put on the need for a big push. The
investments should be of a relatively high minimum in order to
reap the benefits of external economies. Only investments in big
complexes will result in social benefits exceeding social costs.
High priority is given to infrastruc-tural development and industry,
and this emphasis will lead to governmental development planning
and influence.
Theory of Balanced Growth
(NURSKE 20)
This theory sees the main obstacles to development in the narrow
market and, thus, in the limited market opportunities. Under these
circumstances, only a bundle of complementary investments
realized at the same time has the chance of creating mutual
demand. The theory refers to Say's theorem and requests
investments in such sectors which have a high relation between
supply, purchasing power, and demand as in consumer goods
industry, food production, etc.
The real bottleneck in breaking the narrow market is seen here in
the shortage of capital, and, therefore, all potential sources have
to be mobilized. If capital is available, investments will be made.
However, in order to ensure the balanced growth, there is a need
for investment planning by the governments.
Development is seen here as expansion of market and an
increase of production including agriculture. The possibility of
structural hindrances is not included in the line of thinking, as are
market dependencies. The emphasis is on capital investment, not
on the ways and means of achieving capital formation. It is
assumed that, in a traditional society, there is ability and
willingness for rational investment decisions along the
requirements of the theory. As this will most likely be limited to
small sectors of the society, it is not unlikely that this approach will
lead to super-imposing a modern sector on the traditional
economy, i.e., to economic dualism.
Theory of Unbalanced Growth
(HIRSCHMAN 9)
Contrary to the theory of balanced growth, in Hirschman's opinion,
the real bottleneck is not the shortage of capital, but lack of
entrepreneurial abilities. Potential entrepreneurs are hindered in
their decision-making by institutional factors: either group
considerations play a -great role and hinder the potential
entrepreneur, or entrepreneurs aim at personal gains at the cost
of others and are thus equally detrimental to development. In view
of the lack of enterpreneurial abilities there is a need for a
mechanism of incentive and pressure which will automatically
result in the required decisions. According to Hirschman, not a
balanced growth should be aimed at, but rather existing
imbalances whose symptoms are profit and lossesmust be
maintained. Investments should not be spread evenly but
concentrated in such projects in which they cause additional
investments because of their backward and forward linkages
without being too demanding on entrepreneurial abilities.
Manufacturing industries and import substitutions are relevant
examples. These first investments initiate further investments
which are made by less qualified entrepreneurs. Thus, the
strategy overcomes the bottleneck of entrepreneurial ability. The
theory gives no hints as to how the attitude of entrepreneurs and
their institutional influence will be changed in time.
Theory of Stages of Growth
(ROSTOW 27)
This theory tries to explain the long-term processes of economic
development from the point of view of economic history by
describing five ideal types of stages through which all societies
pass:
The 'traditional society' has more than 75 per cent of the
population engaged in food production, and political power is in
the hands of landowners or of a central authority supported by the
army and the civil servants.
The 'transitional stage' creates the preconditions for take-off by
bringing about radical changes in the non-industrial sectors.
Export of raw material gains momentum; a new class of
businessmen emerges; and the idea of economic progress
coming from outside spreads through the elite.
The 'take-off stage' brings a sharp increase in the rate of
investment in the per capita output. This stage of industrial
revolution is accompanied by radical changes in the production
techniques. Expansion takes place in a small group of leading
sectors at first and, on the social side, is accompanied by the
domination of the modern section of society over the traditional
one.
The 'drive to maturity* brings a spread of growth from the leading
to the other sectors and a broader application of modern
technology followed by necessary changes in the society at large.
The 'stage of high mass consumption' can be reached after
attaining a certain level of national income and formulating an
economic policy giving priority to increased private consumption.
The critical phase for development is the 'take-off stage' during
which net investment rates have to increase from 5 to 10 per cent
of the national product and during which the political, social, and
institutional framework has to be built in order to reach a situation
of self-sustained growth. The financial resources must be
accumulated internally by higher saving rates. Income distribution
favouring classes and strata which are willing and able to use
capital more productively than others has the same effect.
While this theory became widely known, perhaps because of its
author's political post and the fact that it is a counter-position to
Marxian approaches, this "time-table of development" does little to
explain why some societies go ahead on this ladder and others
not. As well, its value for forecasting the results of development
activities is limited. The rather fixed stages hardly allow for
alternative goals and processes of development and incorporate a
high degree of ethnocen-trism.
Sustainable development is an organizing principle for human
life on a finite planet. It posits a desirable future state for human
societies in which living conditions and resource-use meet human
needs without undermining the sustainability of natural systems
and the environment, so that future generations may also have
their needs met.
Sustainable development ties together concern for the carrying
capacity of natural systems with the social and economic
challenges faced by humanity. As early as the 1970s,
'sustainability' was employed to describe an economy "in
equilibrium with basic ecological support systems."
[1]
Scientists in
many fields have highlighted The Limits to Growth,
[2]
and
economists have presented alternatives, for example a 'steady
state economy',
[3]
to address concerns over the impacts of
expanding human development on the planet.
The term 'sustainable development' rose to significance after it
was used by the Brundtland Commission in its 1987 report Our
Common Future. In the report, the commission coined what has
become the most often-quoted definition of sustainable
development: "development that meets the needs of the present
without compromising the ability of future generations to meet
their own needs."
[4][5]

The concept of sustainable development has in the past most
often been broken out into three constituent domains:
environmentalsustainability, economic
sustainability and social sustainability. However, many other
possible ways to delineate the concept have been suggested. For
example, the Circles of Sustainability approach distinguishes the
four domains of economic, ecological, political and cultural
sustainability. This accords with the United Cities and local
governments specifying of culture as the fourth domain of
sustainability.
[6]
Other important sources refer to the fourth domain
as 'institutional'
[7]
or as 'good governance.'
Sustainable development[edit]
Main article: Sustainable development
Sustainable development is economic development in such a way
that it meets the needs of the present without compromising the
ability of future generations to meet their own needs. (Brundtland
Commission) There exist more definitions of sustainable
development, but they have in common that they all have to do
with the carrying capacity of the earth and its natural systems and
the challenges faced by humanity. Sustainable development can
be broken up into environmental sustainability, economic
sustainability and sociopolitical sustainability. The book 'Limits to
Growth', commissioned by the Club of Rome, gave huge
momentum to the thinking about sustainability.
[21]
Global
warming issues are also problems which are emphasized by the
sustainable development movement. This led to the 1997 Kyoto
Accord, with the plan to cap greenhouse-gas emissions.
Opponents of the implications of sustainable development often
point to the environmental Kuznets curve. The idea behind this
curve is that, as an economy grows, it shifts towards more capital
and knowledge-intensive production. This means that as an
economy grows, its pollution output increases, but only until it
reaches a particular threshold where production becomes less
resource-intensive and more sustainable. This means that a pro-
growth, not an anti-growth policy is needed to solve the
environmental problem. But the evidence for the
environmental Kuznets curve is quite weak. Also, empirically
spoken, people tend to consume more products when their
income increases. Maybe those products have been produced in
a more environmentally friendly way, but on the whole the higher
consumption negates this effect. There are people like Julian
Simon however who argue that future technological developments
will resolve future problems.