Week - 8,9,10,11

Week – 8
Theories of under-development
Nurkse's Model of Vicious Circle of Poverty (VCP) and
Economic Development:
Definition and Explanation:
According to Prof. Nurkse:
"It is the vicious circle of poverty (VCP) which is responsible for backwardness of UDCs".
Vicious circle of poverty:
"Implies a circular constellation of forces tending to act and react in such a way as to keep a country
in the state of poverty".
In such state of affairs the process of capital formation remains obstructed and restricted. This VCP is
presented as:
We start with low real income which results in a meager savings which in turn will check investment.
Low level of investment would create deficiency of capital which in second round leads to low
productivity. This again results in low income. Here, the circle perpetuates the low level of
development.
From the supply side, there is low income, low savings, low investment, capital deficiency and low
productivity.
On the demand side, low income, low demand for goods, limited home market and low investment.
Diagram/Figure:
According to Nurkse, a break through on demand side can be brought about by dashing initiatives on
the part of entrepreneurs. On the supply side the disguised unemployment ranging between 20% to
30% of total agri. labor force can be mobilized for financing capital formation. And the parents of such
disguised unemployed will go on feeding them. It means that in Nurkse's model the hidden food
surplus will finance the process of economic growth.
Shortcomings/Flaws of the Model:

(i) Entrepreneurs Responsible For Breakthrough: According to Nurkse to break the VCP
entrepreneurs will play an important role. But he does not suggest the means for such funds. As in
poor countries the savings are low, hence for the supply of funds the credit creation will have to be
restored. But Nurkse rejects it.
(ii) Disguised Unemployment: According to Nurkse, the disguised unemployment will finance for
growth. But the domestic resources are not sufficient, they can partially meet the requirements of
growth.
(iii) Raw Material And Machines: Nurkse's theory fails to answer the question from where the
machines and raw material will be provided to the labor which will be utilized for capital formation.
Moreover, why the parents will continue providing food to their disguised unemployed offspring's once
they get employment.
(iv) Utilization Of Disguised is Not a New Idea: Nurkse says that the labor of Indo-Pak have much
more leisure. But it is not true. The labor perform so many works like repair of houses, digging of
canals, construction of small roads and cutting of forests etc. Therefore, it is not possible to withdraw
these people from lands.
(v) Misleading and Over Simplified: According to Bauer the idea of VCP is misleading and over-
simplified because the developed countries never passed through such situation when they where
UDCs.
Nelson's Low Level Equilibrium Trap and Economic
Development:
Nelson has presented the theory of low level equilibrium trap for the UDCs. This theory is based
upon 'Malthus' view that when per capita income of a country rises above the 'Minimum Subsistence
Wage', the population will tend to increase. Initially population grows rapidly with increase in per
capita. But when the growth rate of population reaches an upper physical level, it starts declining with
further increase in per capita.
In other words, in the beginning the increase in per capita income leads to increase the population.
Afterwards, the increase in the per capita income leads to decrease population.
According to Nelson, the UDCs have a stable equilibrium of per capita income which is close to
subsistence requirements. Hence, the savings and investment remain at very low level. Thus
whenever, the efforts are made to raise the level of NI, savings and investment they also resulted in
increase of the population. Accordingly, the per capita income remained at its stable equilibrium level.
All this means that UDCs are caught in low level equilibrium trap.
Factors of Nelson's Trap:

According to Nelson following factors are responsible for such trap:
(i) There is a high correlation between the level of per capita income and rate of population growth.
(ii) There is a little propensity to direct additional per capita income to increase investment.
(iii) There exists a shortage and scarcity of uncultivable area of land.
(iv) The economy is having inefficient techniques of production.
(v) The economy is furnished with social and economic inertia.
Nelson presents three sets of relationships to show the trapping of an economy at a low level
of income:
(i) Y = f (K, L, Tech.).
(ii) The new investment consists of capital which is created out of savings in the form of additions to
the stocks of machine tools etc. in the industrial sector plus the additions of new lands to the amount
of land under cultivation.
(iii) With low per capita incomes, short run changes in the rate of population growth are caused by
changes in death rate; and the changes in death rate are caused by changes in the level of per capita
income. Whenever, the per capita income reaches a level above the subsistence level, further
increase in per capita income will have a negligible effect on death rate.
Diagram/Figure:
Now we present Fig. 1 to demonstrate this theory.

In the (1) part of Fig. the dP/P curve represents percentage rate of growth of population, while the
Y/Pcurve represents per capita income. The point J is minimum subsistence per capita income where
dP/P = Y/P.
Here, the population is stationary. But to left of J, the population is decreasing while to the right of J,
the growth rate of population increases to the upper physical limit, shown by 'U'.
This happened due to increase in per capita income above subsistence level as shown by the arrow
movement on the horizontal axis in the (1) part of Fig. For some time the population will grow at this
level with rise in per capita income and then it will start falling at point M.
In (2) part of Fig., dK/P is per capita rate of investment out of savings. The curve dK/P is the growth,
curve of investment which relates the per capita of investment to different levels of per capita income.
At point 'X', there are zero savings. While to its left, there are negative savings. If we move above
point 'X' along the growth curve of investment, the per capita rate of investment will rise beyond the
upper physical limit of the growth rate of population as denoted by 'U' in (1) part of Fig. 1.
In (3) part of Fig., Y/P is again per capita income. While dY/Y is rate of growth of total income, and
dP/P income, is growth curve of population at various levels of per capita. The point 'S' is so drawn
that it equals the zero savings level of income (point X in (2) part) and minimum subsistence level of
per capita income 'J'. So the situation where J = X = S the low level equilibrium trap exists in the
economy.
Here: dY/Y = dP/P. For any increase in per capita income beyond point S, the growth rate of
population is higher than the growth rate of income, (dP/P > dY/Y). This will push the economy back
to point S, the point of stable
equilibrium. Thus the economy is caught in low level equilibrium trap. This low level of trap will be
stronger the more quickly the rate of population growth responds to a given rise in per capita income,
and more slowly the rate of growth in total income responds an increase in investment.
Methods to Escape from Trap:

The economy requires a discontinuous jump beyond the per capita income level of (Y/P1). Here, the
national income grows at a higher rate than population growth which is stable at an upper limit.
Ultimately, the economy reaches (Y/P2) level where growth rate of income equals the growth rate of
population, as shown by point 'N' in (3) part of Fig. Nelson says that, to escape this trap:
(i) There should be a favorable socio-economic political environment in the country.
(ii) Social structure be changed by greater emphasis on theft and entrepreneurship.
(iii) The size of the family by reduced.
(iv) Measures be taken to change the distribution of income.
(v) The proportion of public investment be increased.
(vi) In order to enhance capital and investment the loans be obtained from foreign countries.
(vii) Improved techniques of production be used to utilize the existing resources.
Leibenstein's Critical Minimum Effort/Theory of Under

Development:
Harvey Leibenstein is of the view that UDCs are characterized by vicious circle of poverty
(VCP) which keeps them around a low income per capita equilibrium state. The way out of this
impasse is a certain 'Critical minimum effort' which would raise the per capita to a level at which
sustained development could be maintained. In other words, a UDC will have to introduce 'Stimulus' in
an amount which should be more than a critical level for the sake of change.
Leibenstein says that every economy is subject to 'Shocks and Stimulants'. A shock has the impact
of reducing the per capita income initially; while a stimulant tends to increase it.
Certain countries are poor and backward because of the reason that the magnitude of stimulant is
small while that of shocks is large. On the other hand, if income raising forces are more than income
depressing forces the economy will be having critical minimum effort which will take the economy on
the path of development.
Growth Agents:
According to Leibenstein, if the income increasing forces expand at a higher rate than the income
depressing forces, then the favorable conditions for economic development will be existing. In the
process of development such conditions are created by the expansion of 'Growth Agents'.
These growth agents comprise of entrepreneurs, investors, savers and the innovators. The growth
contributing activities result in creation of entrepreneurship, the increase in stock of knowledge, the
expansion of production skills of people and increase in the rate of savings and investment.
Leibenstein introduces two types of incentives for UDCs:
(i) Those incentives which do not increase national income, but they bring a change in the distribution
of income. He calls them "Zero-Sum incentives".
(ii) Those incentives which result in expansion of national income. He calls them "Positive Sum
incentives".
The entrepreneurs in UDCs are engaged in zero sum activities. They wish to attain monopolies;
political influence; and social prestige. Thus as a result of zero sum activities the real national
incomes of UDCs do not increase. They just cause a change in the distribution of income. The
positive sum activities which are essential for development have limited scope in UDCs. Therefore,
according to Leibenstein, there is a need to direct the zero sum activities of the entrepreneurs of
UDCs to the positive sum activities. It is, therefore, necessary that 'minimum effort' should be
sufficiently large to create an environment whereby the positive sum activities could flourish.
The following factors are responsible for depressing per capita income in UDCs:
(i) Zero sum entrepreneurial activities.
(ii) Conservative activities of organized and unorganized labor.
(iii) The resistance to new knowledge and ideas and attachment to old ideas.
(iv) Increase in consumption, and unproductive use of those resources which could be used for capital
accumulation.
(v) Increase in population.
(vi) The high capital-output ratio.
To overcome these influences which keep an economy in backwardness a sufficiently large critical
minimum effort is required to sustain a rapid rate of economic growth. In this way, on the one side the
zero sum activities could be overcome, and positive sum activities could flourish. As a result of critical
minimum effort, the per capita income would rise leading to increase the level of savings and
investment. They will in a turn would lead to:
(i) An expansion of growth agents. (ii) The capital-output ratio will come down. (iii) The income
depressing forces will get weaken. (iv) Such a social environment will be created which will promote
social and economic mobility. (v) The secondary and tertiary sectors will expand and specialization
will be encouraged. (vi) An atmosphere will be created where there will be social and economic
change leading to decrease the population.
Now we use Fig. 1 to represent the role of income generating and income depressing forces.
Diagram/Figure:
The 45° line shows, the induced increase and decrease in the per capital income. While X 1 X1 curve
shows income generating forces and Z1 Z1 curve represents income depressing forces.
If due to 'Stimulants' the per capita income increases from Oe to Om, the per capita income will
increase up to na. But here the income depressing forces 'fb' are greater than income generating
forces 'fa'. As a result, the economy will follow the downward path 'abcd'.
In this way, the economy reaches point 'E'. Therefore, if the economy is to be put on the path of
development the per capita income will have to be increased till Ok by increasing investment. As a
result, the income will increase till SG which will in turn generate the path of endless expansion of per
capita income as shown by arrow movement rising above G. That package of investment which leads
to increase per capita income even after point 'G' is given the name of "Critical Minimum Effort by
Leibenstein".
The critical minimum effort need not to be made all at once. It would be more effective if it is broken
up into a series of smaller efforts.
Leibenstein's thesis is based upon this empirical evidence that the rate of population growth is a
function of level of per capita income. At the subsistence level population growth declines. According
to Leibenstein, at biological determined maximum growth rate of population, the equilibrium level of
income, fertility mortality rates maximum consistent survival population.
If the per capita income is increased above the subsistence equilibrium position, the mortality rate
falls without any drop in fertility rate. As a result, the population will grow. But it will happen only up to
a point. Beyond that the increase in per capita income lowers the fertility rate and as development
gains momentum the rate of population growth declines. According to Leibenstein, a biological
determined maximum growth rate of population is in between 3% to 4%. Now we use Fig. 2 to
demonstrate it.
Here the curve N represents that increase in per capita income which equalizes the increase in
population to increase in national income while the curve P shows the growth rate of population at
different levels of per capita. We start with point 'a' where the economy is in equilibrium at subsistence
level. Here neither income nor population increases. If per capita is increased till Yb, the population
growth rate and increase in national income are of 1%. If the level of per capita income is Yc, the
growth of population is greater than growth rate of national income. Ycg > Ycc or 2% > 1%.
Therefore, the need is to increase per capita income in such a way that increase in national income is
more than increase in population. Therefore, if per capita income increases more than Ye, the
population growth starts declining. At point e, the population growth rate is 3% per annum which is the
maximum possible growth rate of population on biological grounds. Thus according to Leibenstein,
the Ye is the minimum critical level of per capita income which is necessary for economic growth.
Criticism/Demerits:
(i) Population, Growth and Per Capita Income: It has been assumed that the growth of the
population is an increasing function of growth of per capita income in the beginning. While later on, it
is a decreasing function. But, it is not so. Rather, the population growth takes place along with the
increase in public health facilities.
(ii) Decline in Birth Rate and Per Capita Income: It has been assumed that whenever per capita
income exceeds the critical minimum level the population goes on to decline. All is based upon the
experience of the West. But as far as UDCs are concerned the population of UDCs decreases due to
change in outlook of the people.
(iii) Role of State in Birth Control: No UDC can wait for this, that its per capita income could
increase and then its birth rate would fall down automatically. Therefore, state will have to interfere
with to check population growth. This was ignored by Leibenstein.
(iv) Complex Relationship Between Per Capita Income and Growth Rate: Prof. Myint says that
there exists a complex relationship between per capita income, growth rate and national income.
Leibenstein has over simplified such all, The relationship of per capita income with savings and
investment is concerned with the distribution of income and effectiveness of financial institutions.
Moreover, the capital-output ratio also does not remain same. It goes on to change along with
changes in techniques of production.
(v) Closed Economy Model: Leibenstein theory does not show the effects of foreign capital on the
income, savings and investment of UDCs.
Big Push Theory By Rosenstein Rodan and Economic

Development:
The Big Push Theory has been presented by Rosenstein Rodan. The idea behind this theory is
this that a big push or a big and comprehensive investment package can be helpful to bring economic
development. In other words, a certain minimum amount of resources must be devoted for
developmental programs, if the success of programs is required.
As some ground speed is required for the aircraft to airborne. In the same way, certain critical amount
of resources be allocated for development activities. This theory is of the view that through 'Bit by Bit'
allocation no economy can move on the path of economic development, rather a specific amount of
investment is considered something necessary for economic development. Therefore, if so many
mutually supporting industries which depend upon each other are started the economies of scale will
be reaped. Such external economies which are attained through specific amount of investment will
become helpful for economic development.
Rosenstein Rodan has presented three types of indivisibilities and economies of scale. They
are as:
(1) Indivisibilities in Production Function: When so many industries are established the economies
regarding factors of production, goods, and techniques of production are accrued. Rosenstein Rodan
gives more importance to economies which arise due to the establishment of social overhead capital.
The infra-structure consists of means of transportation, communication and energy resources. They
all contribute to development indirectly. They last for a longer period of time. The SOC can not be
imported. To construct it a big amount of capital is required. For some time, the excess capacity may
grow in SOC, but they are very much must. Accordingly, UDCs will have to spend 30% to 40% of
investment on SOC. The SOC is attached with the following indivisibilities:
(i) The SOC must be provided before Directly Productive Activities (DPA).
(ii) It is lumpy and it has a minimum durability.
(iii) It lasts for a longer period of time and it is irreversible.
These indivisibilities serve as big obstacle in the way of economic development of a UDC.
(2) Indivisibilities of Demand: The complementarily with respect to demand requires that UDCs
should establish such industries which could support each other. To make investment in one project
may be risky because in UDCs the demand for goods and services is limited due to lower incomes. In
other words, the indivisibilities of demand require that at least a certain amount of investment be
made in so many industries which could mutually support each other. As a result, the size of market
will be extended in UDCs; or the problem of limited market will come to an end in UDCs. It is shown
with Fig.
Diagram/Figure:
Here D1 and MR1 are the average and marginal revenue curves of a firm when investment is made in
this single firm. This firm sells OQ1 quantity and charges OP1 price. Here it faces losses equal
to P1cab.
But if investment is made in so many industries the market will be extended. In this way, the demand
will increase as shown by D4 and corresponding marginal revenue curve is MR4. Now the equilibrium
takes place at E where OQ4 quantity is produced and OPb price is charged. As a result, the industries
are having profits equal to P4RST.
It means that the greater investment in so many industries nay convert the losses into profits.
(3) Indivisibility in Supply of Savings: The supply of savings also serves as an indivisibility. A
specific amount of investment can be made in the presence of specific savings But in case of UDCs
because of lower incomes the savings remain low. Therefore, when incomes increase due to increase
in investment the MPS must be greater than APS.
In the presence of these indivisibilities and non-existence of external economies only a Big Push can
take the economy out of dole drums of poverty. It means a specific amount of investment is necessary
to remove the obstacles in the way of economic development.
Criticism/Demerits:
Rosenstein theory is better in the sense that it identified that market imperfections are the big
obstacles in the way of economic development. Therefore, a big amount of investment will solve the
problem of limited markets, rather depending upon market mechanism, and such heavy amounts of
investment will become helpful for economic growth. Despite this merit, followings are the demerits of
this theory.
(i) Negligible Economies in Export, and Import Substitute Sectors: The 'Big Push' infrastructure
may be justified on the ground of external economies. But, according to Viner, the export sector and
.import-substitute sectors are so backward in UDCs that they hardly give rise to economies.
(ii) Negligible Economies from Cost Reducing Investment: The goods which are concerned with
public welfare hardly yield external economies. Moreover, the investment which is aimed at reducing
costs does not yield economies.
(iii) Neglecting Investment in Agri. Sector: In this theory emphasis has been laid upon making
investment in infrastructure and industries. While it neglects the investment to be made in agri. and its
allied sectors. As the agri. sector is the largest sector in UDCs and it will be a mistake to ignore it.
(iv) Inflationary Pressure: From where the funds will come in UDCs to spend them on SOC. If the
funds are raised through foreign loans and by printing new notes they will create inflation in the
economy.
(v) Administrative and Institutional Difficulties: This theory stresses upon state investment to
remove deficiency of capital. But in case of UDCs the machinery is corrupt. There exist a lot of
problems in state machinery. The private and public sectors compete with each other, rather
supporting each other. Consequently, there will not be the balanced growth in the economy.
(vi) It is Not a Historical Fact: The Big Push theory is a recipe for the UDCs, but it has not been
derived on the basis of historical experience. As Prof. Hagen says, "the Big Push theory lacks the
historical evidences and facts".
Linear Stages Theory and Rostow's Stages of Economic

Growth:
Linear Stages Theory:
The theorists of 1950s and early 1960s viewed the process of development as a series of successive
stages of economic growth through which all the advanced nations of the world had passed. As all the
modern industrial nations of the world were once undeveloped peasant agrarian economies.
Accordingly, their historical experience in transforming their economies from poor agri. subsistence
societies to modern industrial giants had important lessons for backward countries of Asia, Africa and
Latin America. In this respect, we discuss the Rostow's stages of economic growth.
W.W. Rostow's Stages of Economic Growth:

W.W. Rostow was an American economist who presented 'Stages of Growth' model of
development. According to Rostow, the process whereby all the developed industrial nations of the
world transformed themselves from backwardness to prosperity can be described in terms of a series
of stages. These stages of economic growth are:
(1) Traditional society, (2) Pre-conditions to take-off, (3) Take-off, (4) Drive to maturity, (5) High mass
consumption. They are discussed below:
(1) Traditional Society:
The traditional society is one whose production functions are based up pre-Newton science and
technology. This unchanging technology places a ceiling on productivity. In this society a higher
proportion of resources is devoted to agriculture. Man is valued on family basis, not on the basis of his
capabilities. Long Fatalism prevails in such society. The range of possibilities for a grand children are
the same what they were for grand father. The society is ruled by those who owned or controlled land.
These landlords used to have a long chain of servants and soldiers. This society was available during
the Medieval Ages in Europe.
(2) Pre Conditions to Take Off:
It is a period of transition where the conditions for take-off are developed. Historically, it was due to
invasion of advanced societies which destroyed the culture of traditional society. This paved the way
for the emergence of new ideas. In this way, when the new ideas develop people start thinking about
economic progress which could provide a better life for the present and future generation. Once the
changes set in, they feed on themselves. It is the education which broadens the mental out look of the
people, and it induces the people to accept new challenges. In this way, the new entrepreneurs come
forward to take risks.
Due to establishment of financial institutions savings and investment are mobilized in SOC. But still
the society is characterized by low productivity. Still there is a need to build an effective national state
against the traditional land lordism. According to Rostow, the transition is a multi-dimensional
phenomenon. A country with 75% of its population in agri. will have to be shifted to industry, trade and
commerce. The view to have more children will have to be replaced by less children. The income will
have to be shifted from the feudals to those who will spend it on productive items. The man will be
valued on the basis of his competence. Moreover, during this transitional period, the following major
changes will occur:
(i) Crucial Role By Agriculture: For the sake of transition the self-sufficiency in agri. is required.
Such self-sufficiency is justified on the following grounds:
(a) To meet the increased needs of growing population.
(b) With agri. surplus foreign exchange can be earned to meet the import bill of capital goods.
(c) The overall increase in the productivity due to agri. development will provide stimulus to other
sectors of the economy.
In short, agri. sector must supply expanded food, expanded markets and expanded funds to the
modern sector.
(ii) Growing Outlays on SOC: According to Rostow in this period the resources are diverted to SOC.
The SOC has three distinctive characteristics:
(a) The gestation period is long, (b) It is lumpy, (c) It is beneficial for the community.
Due to these reasons it is the duty of state to provide SOC as during 1815 to 1840 the SOC was
provided by state in US and UK.
(3) Take Off Stage:
The take-off stage is a break-through in the history of the society. The take-off stage remains for
more than two or three decades. In this stage three conditions must be satisfied:
(i) The rate of investment must rise from 5% to 10% of GNP.
(ii) The development of one or more substantial manufactured sector with the high growth rate.
(iii) The existence of social, political and institutional framework which could give impulses to modern
sector expansion.
Further:
(i) Increase in rate of investment: It is attached with changes in income distribution, i.e., the income
begins to flow into the hands of capitalists who would re-invest to increase the rate of capital
formation. This process of capital formation will further be promoted by fiscal measures of govt.,
banking institutions and capital markets.
(ii) Emergence of leading sectors: The entrepreneurs of one or two leading sectors re-plough their
profits. Moreover, the expansion of leading sectors helps to pay for imports and debt charges. It was
the Canadian grain, Swedish timber and Japanese silk which helped these countries to develop other
sectors of their economies.
Loan able funds play an important role in the emergence of leading sectors, particularly in financing
large overhead capital. Rostow grouped the sectors of the economy as:
(a) Primary growth sectors:
Where possibilities for innovations in unexplored resources yield a higher growth rate.
(b) The Supplementary growth sectors:
Where these sectors supplement. For instance coal, iron, and engineering industry in relation to rail
road.
(c) The Derived growth sectors:
Advances in these sectors occurs in relation to growth of total real income, population and industrial
production. Historically, these sectors range from cotton textile, heavy industrial complex and dairy
products.
(4) Drive to Maturity Stage:
According to Rostow 40 years after the take-off stage there is a long interval. During this interval the
economy experiences a regular growth and modern technology is extended over to a bulk of
resources. On the basis of entrepreneurial and technological development everything is produced
which is desired. There may be a shift in emphasis from coal, iron and heavy engineering to machine
tools, chemicals and electrical equipments.
Germany, France, UK and US passed through this period during the end of 19th century. 10% to 20%
of GNP is ploughed in investment and output grows more than increase in population. The goods
which were earlier imported now they are produced at home. In short, the economy becomes a part of
international economy.
(5) Age of High Mass Consumption Stage:
According to Rostow as societies achieved maturity in 20th century, real incomes rose and the people
became aware of as well anxious to have a command over the consumption of the fruits of mature
economy. The leading sectors of the economy produce consumer durables like TV, fridges and
automobiles etc. Here the society pays more attention on social welfare and social security than on
economic growth. US passed through this stage in 1913-14, and then in the post war period of 1946-
56.
Practical Importance of Rostow's Stages:

The above stage theory of development, or the history of modern societies is of the view that the
advanced countries had passed the stage of take off into self-sustaining growth. While the UDCs are
still passing through traditional society or the pre-conditions to take-off.
Accordingly, UDCs must learn a lesson from the economic history of advanced nations. They should
follow the rules of development to take-off and then to self-sustaining economic growth. In this
respect, the UDCs should mobilize domestic and foreign savings in order to generate sufficient
investment to accelerate economic growth.
The economic mechanism whereby more investment will lead to more growth can be stated in terms
of famous Harrod Domar Model of Economic Growth. It means that the Rostow stage theory
stressed upon capital formation for the sake of economic development. And it is H-D model which
guides the UDCs.
Criticism:
Rostow's five stages of economic growth are against Marx stages of feudalism, bourgeoisie,
capitalism, socialism and communism. Both these approaches describe the evolution of society from
economic point of view. Both the approaches admit that economic changes have social, political and
cultural consequences.
However, there exist certain dissimilarities in both these approaches. Rostow did not discuss the
class conflict, while it is very much available in Marx's stage theory. Marx approach was a reaction
against capitalism, whereas it is not the case with Rostow. Rather, Rostow conveyed a message to
UDCs that they should learn a lesson from the good or bad experiences of DCs. Despite these merits
of Rostow's theory, following criticism has been leveled against it.
(i) Stage Making Idea is Misleading: Rostow says that all the nations have passed through these
stages. But it is incorrect to say that all the nations have followed this route when they are having
different environment and resources etc.
(ii) Leading Sectors: According to Rostow the leading sectors are responsible for economic
expansion. But Kuznets says that Rostow did not identify the chronology of leading sectors.
(iii) Data is Unconfirmed: Kuznets says that the statistical data presented by Rostow regarding
doubling of productivity in the period of take-off stage is not reliable and confirmed.
(iv) No Distinction Between Pre-Conditions and Take-Off: The characteristics of pre-conditions

and take-off are very much similar. Therefore, it is not possible to assess when take-off starts after
pre-conditions.
(v) Self-Sustained Growth: Kuznets has greatly criticized self-sustained growth which takes place
during takeoff stage. He says that the increase in per capita income, increase in savings, and
investment may even take place before take-off.
(vi) Pre-Conditions is Not a Chronological Concept: According to Caironcross it is incorrect to say

that the SOC will attain necessary minimum size even before the take-off. Moreover, Rostow's views
regarding agriculture are not true historically. In some countries agri. expanded during
industrialization, and SOC was mostly required during the industrialization.
(vii) Idea of Increase in Investment is Not New: Rostow presented the idea that increase in
investment from 5% to 10% will take the economy into take-off stage. But Caironcross says that it is
not a new idea. It is also available in Lewis thinking. He further says when the saving habits will
change, whether in pre-conditions or in take-off stage?
Rostow's Stages and UDCs:

As we told earlier that Rostow stages have a greater appeal for UDCs. The take-off stage is
analogous to industrialization and the UDCs are desirous to industrialize their economies as soon as
possible. As they are having saving gap which can be filled up with foreign capital (both public and
private), as mentioned by H-D model. But there exist following problems whereby Rostow and H-D
models will be least beneficial for UDCs. They are as:
(i) Attitudes and Arrangements in UDCs: The Rostow and H-D models were found applicable in
DCs because the European countries which received aid under 'Marshall Aid Program', initiated by
US to construct war affected economies of Europe possessed the necessary structural, institutional
and attitudinal conditions, i.e., they had well integrated commodity and money markets, highly
developed transport facilities, well trained and educated manpower, the motivation to succeed, and an
efficient govt. bureaucracy. In this way, the capital was effectively used to get higher levels of output
The same like conditions, attitudes and arrangements are not available in the UDCs like Pakistan
They lack the managerial experience, skilled labor and the ability to plan and administer a wide
variety of development projects.
(ii) Removal of Unemployment: The conditions regarding take-off as presented by Rostow do not
entertain the case of those countries which have abundance of population, and unemployment is
increasing there. How they will be able to remove their unemployment. Thus the theory which does
not present any solution to remove unemployment how it can be applicable in case of UDCs.
(iii) Value of COR is not Constant: In Rostow and H-D models of growth the value of COR has been
kept constant. But such assumption may be true in case of DCs, but not in case of UDCs. The UDCs
produce agri. goods, and in the presence of rising population and stagnant economic conditions the
decreasing returns to scale apply, rather constant returns to scale.
(iv) Spontaneous and Automatic Growth: Rostow's take offstage shows that here the growth is
automatic and spontaneous. But in case of UDCs, there does not exist any possibility that in a sudden
growth will take place.
(v) Integration with World Economy: Now a days the UDCs are well integrated with the world
economy. The external factors which are beyond their control can nullify the best strategies followed
by UDCs. It means that development can not be attained just through supplying the missing factors
like capital, foreign exchange and skill.
Harrod-Domar (H-D) Growth Model:

Definition of COR:
Any economy which wishes to grow it is in need of new investment, i.e., the net additions to capital
stock. If for the output worth $1, the stock of capital worth $3 is required, then the ratio between
capital and output will be 3 to 1. Such relationship is known as COR.
It means that to increase GNP worth $1, the new investment worth $3 will be required. The COR is
represented by 'k', it is as:
Formula of COR:
k = K/Y or k = ΔK/ΔY
The saving ratio is shown by 's'. The saving ratio is shown by the equation:
S = sY
The investment (I) is defined as the change in capital stock (ΔK) then:
I = ΔK
As we told above that k = K/Y or k = ΔK/ΔY which means that there exists a direct relationship of total
output and stock of capital. Solving for ΔK.
ΔK = k.ΔY
We know at equilibrium: I = S
As I = ΔK, and ΔK = k.ΔY, then:
I = ΔK = k.ΔY
While S = sY, then I = S.
S = sy= k.ΔY = ΔK = I or simply, it is:
sY = k.ΔY
Dividing the above equation by Y and k:
sY = k.ΔY or s = ΔY or ΔY = s = MPS
Y(k) Y(k) k Y Y k COR
The last equation shows that the rate of growth of GNP (ΔY/Y) is determined by saving ratio (s) and
national COR (k).
In other words, it says that the growth rate of national income is directly or positively related to saving
ratio (i.e., the more an economy is able to save - and invest - out of given GNP, the greater will be
the growth of GNP), and inversely or negatively related to the economy's COR (i.e., the higher is k,
the lower will be the rate of GNP growth).
The economic logic of last equation is this that if the economies want to grow they must save and
invest a certain proportion of their GNP. The more they save and invest, more will be their growth
rate. The actual rate at which they can grow for any level of savings and investment depends upon on
how productive that investment is.
The productivity of this investment, i.e., how much additional output can be produced from an
additional unit of investment, can be measured by the inverse of the COR (k). It is as:
1/COR = 1/K which shows the output-capital ratio (or output investment ratio). As S = sY, by equating
S and I, we get the following equation:
S = I or sY = I or s = 1/Y
This equation shows the rate of new investment. If we multiply it by its productivity we will get the rate
at which GNP will increase.
(s) . 1 = I x 1 = I x 1 x ΔY = ΔY
k Y I/ΔY Y I Y
Now returning to the stages of growth theory and using final equation of H-D model (ΔY/Y = s/k), we
come to know that the fundamental trick of economic growth is simply to increase the proportion of
savings. If we raise 's' we can raise ΔY/Y (the rate of GNP growth). If the value of COR is 3 and the
saving ratio is 6% in the country like Pakistan, then our economy can grow at the rate of 2% per year,
as:
ΔY/Y = s/k = 6%/3 = 2%
If in the country like Pakistan the savings are increased to 15% through reducing the consumption
and increasing the taxes, the growth rate can be increased from 2% to 5%. It is as:
ΔY/Y = s/k = 15%/3 = 5%
Rostow and his fellow stage theorists explained the take-off stage by this way. It means that those
countries who were able to increase the savings rate by 15% to 20% grew at much faster rate than
those which failed to boost their savings. Thus, the problem of economic growth and development is
simply a matter of increasing saving and investment.
Constraints on Development of UDCs and the Remedy:
The main obstacle to or constraint on development in the most of UDCs is the low level of new capital
formation or investment. Any country which wishes to grow at the rate of 6% per annum, if k = 3, then
it will be in need of 18% of savings. If it manages for 15% domestic saving, then there would rise the
"Saving Gap' of 3%. Such gap could be filled either through foreign aid or through the foreign private
investment.
Thus the capital constraint stages approach to growth and development justifies "The Massive
Transfers of Capital and Technical Assistance from DCs to UDCs"
Adelman and Morris Stage Theory OR Social, Political,

and Economic Stage Theory:
Irma Adelman and Morris presented their theory of stages of economic growth in their
book "Society, Politics and Economic Development" in 1967. They share with Rostow and others that
the process of economic development can best be analyzed in terms of stages. They use different
techniques in distinguishing these stages. Again, they explain growth within each stage and they
identify the factors that determine the transition from one stage to another. These two economists
deal with political, social, cultural and economic factors by focusing on the experience of LDCs. Thus,
they provide empirical results regarding the stages of economic growth relating to contemporary
countries.
Adelman and Morris use a variety of statistical techniques, including factor analysis, discriminate
analysis, canonical correlation and analysis of hierarchical interactions. These techniques present
different forms of multivariate analysis. However, we use Factor Analysis Approach.
Like Regression Analysis, factor analysis is basically the 'Analysis of Variance Technique'. It
decomposes the variance of a variable into several components based on its association with other
variables. Factor analysis is primarily helpful to organize and simplify complex statistical data. Factor
analysis is close to regression analysis. However, it is clarified that regression analysis may make it
possible to identify causality and dependence, while factor analysis may be thought of as identifying
only interdependence.
Application of Factor Analysis to the Identification of Stages:

The first step in stage theory is to classify or define the characteristics of a stage and to identify
countries with respect to particular stages. With reference to a sample of 74 LDCs, Adelman and
Morris obtain quantitative or semi-quantitative data for each of 40 different social, political and
economic indicators of development. Some of these development indicators are traditional like per
capita GNP, but some which are social and political ones are non-traditional like character of agri.
organization, extent of leadership, commitment to economic development, degree of modernization of
outlook, extent of social mobility and character of basic social organization.
The list of 40 indicators consisting of socio-cultural, political and economic groups is given in
table 1.
According to Adelman and Morris, some of the below-mentioned indicators, in turn, based upon two
or more sub-indicators. For example, indicator 6, "Extent of Social Mobility" is measured by:
(i) The ratio of the population five to nineteen years of age that is enrolled in primary and secondary
schools.
(ii) The importance of the indigenous middle class.
(iii) The presence or absence of prohibitive cultural or ethnic barriers to upward social mobility.
Table 1:
Indicators of Social, Political, and Economic structure utilized by Adelman and Morris:
Socio-Culture Indicators Political Indicators Economic Indicators
(1) Size of the Traditional (13) Degree of National (25) Per Capita GNP in 1961.
Agricultural Sector. Integration and Sense of
National Unity.
(2) Extent of Dualism. (14) Extent of Centralization of (26) Rate of Growth of Real per
Political Power. Capita GNP.
(3) Extent of Urbanization. (15) Strength of Democratic (27) Abundance of Natural
Institutions. Resources.
(4) Character of Basic Social (16) Degree of Freedom of (28) Gross Investment Rate.
Organization. Political Opposition and Press.
(5) Importance of the Indigenous (17) Degree of Competitiveness (29) Level of Modernization of
Middle Class. of Political Parties. Industry.
(6) Extent of Social Mobility. (18) Predominant Basis of the (30) Change in Degree of
Political Party. Industrialization.
(7) Extent of Literacy. (19) Strength of the Labor (31) Character of Agricultural
Movement. Organization.
(8) Extent of Mass (20) Political Strength of the (32) Level of Modernization of
Communication. Traditional Elite. Techniques in Agriculture.
(9) Degree of Culture and Ethnic (21) Political Strength of the (33) Degree of Improvement in
Homogeneity. Military. Agricultural Productivity.
(10) Degree of Social Tension. (22) Degree of Administrative (34) Adequacy of Physical
Efficiency. Overhead Capital.
(11) Crude Fertility Rate. (23) Extent of Leadership (35) Effectiveness of the Tax
Commitment to Economic System.
Development.
(12) Degree of Modernization of (24) Extent of Political (36) Improvement in the Tax
Outlook. Stability. System.
(37) Effectiveness of Financial
Institutions.
(38) Improvement in Financial
Institutions.
(39) Rate of Improvement in
Human Resources.
(40) Structure of Foreign Trade.
After determining the indicators and sub-indicators, Adelman and Morris assign each of the 74 LDCs
a letter grade with respect to each indicator. Finally, the letter grade scales for these indicators, many
of which are only qualitative, are converted to a numerical scale. The resulting "ordinal" scores are the
basic data for their application of factor analysis and for their subsequent extensions of that analysis
with other tools of multivariate analysis.
Table 2:
Rotated Factor Matrix for Per Capita Gross National Product together with 24 Social and
Political Variables.
Political and Social Indicators Routed Factor Loadings Commonality

F1 F2 F3 F4
Per Capita GNP in 1961 -0.73 0.31 -0.26 -0.03 0.669
Size of the Traditional Agri. Sector 0.89 -0.21 0.17 -0.08 0.869
Extent of Dualism -0.84 0.14 -0.30 0.04 0.824
Extent of Urbanization -0.84 0.13 -0.12 0.02 0.741
Character of Basic Social Organization -0.83 0.24 0.10 0.03 0.761
Importance of Indigenous Middle Class -0.82 0.14 -0.23 -0.08 0.755
Extent of Social Mobility -0.86 0.2 1 -0.18 -0.18 0.848
Extent of Literacy -0.86 0.32 0.03 -0.11 0.845
Extent of Mass Communication -0.88 0.28 -0.06 -0.02 0.858
Degree of Cultural and Ethnic -0.66 -0.30 0.34 -0.21 0.680
Homogeneity
Degree of National Integration and -0.87 -0.07 0.01 -0.18 0.792
Sense of National Unity
Crude Fertility Rate 0.63 -0.14 0.05 0.18 0.448
Degree of Modernization of Outlook -0.75 0.31 -0.39 -0.03 0.805
Strength of Democratic Institutions -0.48 0.72 -0.26 -0.19 0.857
Degree of Freedom of Political, -0.33 0.82 -0.02 -0.10 0.802
Opposition and Press
Degree of Competitiveness of Political -0.32 0.79 0.08 0.25 0.801
Parties
Predominant Basis of the Political -0.43 0.70 0.04 0.01 0.681
Party System
Strength of the Labor Movement -0.38 0.63 -0.36 -0.05 0.678
Political Strength of the Military -0.26 -0.58 0.36 0.41 0.706
Extent of Centralization of Political -0.07 -0.65 0.08 -0.02 0.432
Power
Political Strength of the Traditional 0.08 -0.07 0.73 0.05 0.543
Elite
Extent of Leadership Commitment to -0.14 -0.02 -0.80 -0.21 0.669
Economic Development
Degree of Administrative Efficiency -0.39 0.37 -0.59 -0.16 0.663
Degree of Social Tension 0.22 0.02 0.02 0.87 0.816
Extent of Political Stability -0.07 0.05 -0.39 -0.82 0.821
The first application of the technique is the interaction of social and political indicators in the process
of development. For this purpose, all the economic indicators given in the above Table 1, except per
capita GNP, are omitted and even this indicator is kept separate from the for factors into which the
social and political indicators are clustered. The results appear in Table 2.
Factor 1 (F1 in the table) refers broadly to the extent of social differentiation and integration, i.e.,
"processes of change in attitudes and institutions associated with the breakdown of traditional social
organization".
Factor 2 (F2) is associated with political systems indicating the transition from "centralized
authoritarian political forms to specialized political mechanisms capable of representing the varied
group interests of a society and of aggregating these interests through participant national political
organs".
Factor 3 (F3) relates to leadership, "the strength of industrializing elites relative to traditional elites".
Factor 4 (F4) refers to social and political stability.

Methodology for Determination of Factors (Matrix or Mathematical
Approach):
(It is optional for students):
The above mentioned Factor Analysis problem can be expressed in matrix form. As, if we have data
for mcountries consisting of n indicators such as GNP per capita, level of education, and so on, we
can denote the decomposition of the variance of each indicator as:
Formula:
Where x is a column vector of n indicators, A is a vector of 1 x n, B is a matrix of n x q, f is a vector of

order q x 1, and U is a vector of order n x 1. In matrix form for m countries, we write:
X = A + BF + U
Where X is an m x n matrix with elements the observable indicators for each country. The elements of
the factor F are the latent variables, the factors. B consists of coefficients of these factors,
called factor loadings.
The major aim of factor analysis is to determine the factor loadings, i.e., the coefficients that relate the
observed variables to the common factor. Factor loadings play the same role in factor analysis as
regression coefficients in regression analysis. The squared factor loadings represent the relative
contribution of each factor to the standardized variance of each indicator, i.e., xi. If a given factor, ft
appears only in a subset of the elements of X, it is called a group factor. It is possible, however, that a
factor fi appears in all the elements of X. Then it is called a common factor, and the commonality for
each variable is represented by the sum of squares of its factor loadings. Commonality indicates the
extent to which the common factors account for the total unit variance of the variable xi. It is akin to
the coefficient of multiple determination in regression analysis, the R 2.
The square of the related factor loadings represents the proportion of the variance in an indicator that
is explained by a particular factor, after allowing for the contributions of the other factors. Thus, a
factor 1 (F1) loading of 0.89 for the size of traditional agri. sector implies that about 81% of variance of
this indicator is attributed to factor 1, i.e., to social differentiation and integration. The per capita GNP
indicator was not included with any of
the other indicators in any single factor, but was included in the factor analysis, and thus there are
factor loadings for it with regard to each of the four factors. The factor loadings for the per capita GNP
are - 0.73 for F1, 0.31 for F2, -0.26 for F3 , and -0.03 for F4.
Since the squares of factor loading indicate the percent of the variance in the variable associated with
each of the factors, Adelman and Morris claim that 53% of inter-country variation in per capita GNP in
1961 is explained by F1, and additional 10% by F2, another 7% by F3 and about 1/10th of 1% by F4.
The sum of the squared factor loadings in the case of GNP per capita 70% is the commonality of each
indicator, and it represents the proportion of the total variance that is explained by the four factors
taken together. The finding that 70% of the variance in GNP per capita is attributed to socio-political
indicators grouped in the four factor loads Adelman and Morris conclude that:
"It is just as reasonable to look at underdevelopment as a social and political phenomenon as it is to
analyze it in terms of inter-country differences in economic structure."
A further interpretation of rotated factor loading is given as:
"The loading of -0.73 of GNP per capita for F1 and 0.89 for the size of the traditional agri. sector
included in F1 implies that GNP per capita is inversely related to the size of the traditional sector.
The authors further apply factor analysis to the same set of data for the 74 LDCa. Since F1 is the
most important factor and constitutes a much broader index of development than the other
conventional measures, each country is then scored relative to F1. These factor scores, in turn, are
used to divide the sample of countries into three groups, identified as different stages of development,
the "lowest intermediate and highest" stages.
Separate factor analyses are then computed for three different sets of countries, i.e., regional sub-
samples for Africa, Asia and Latin America, with the same set of indicators. Since, the three different
regions correspond at least roughly to different stages of development, the authors find the
characterization of the factors varies from stage to stage. Adelman and Morris came to the conclusion
that the social factors determining inter-group differences in GNP per capita are the lowest group
(Africa) and the political factors played the dominant role in explaining such differences at later
stages.
In an other application of factor analysis, Adelman and Morris (1967) investigate the interactions of
social, political and economic factors using all the indicators in Table 1. This analysis is applied
separately to each of the three different stages identified on the basis of the country scores with
respect to F1. In these cases, the rate of growth (instead of per capita GNP) is the dependent
variable. The results remained more or less the same. They came to the conclusion that the countries
at the lowest end of the socio-economic scale, the growth process required to have both social and
economic transformation. For the countries at the intermediate level of development, the statistical
results are inconclusive. However, it were the economic factors which govern the process of
industrialization. Finally, the political pre-conditions for development are important in countries at the
high end of socio-economic scale. The crucial correlates of economic performance in these countries
are the effectiveness of economic institutions and the extent of national mobilization for development.
Criticism/Demerits:
(i) Data Collection is a Complex Phenomenon: The experts have an objection regarding data
collection. As it is said that driving such indicators as "character of basic social organization" or
"importance of indigenous
middle class" may be futile exercise as the case with defining Rostow's "Pre-Newtonian Science and
Technology". Again, attaching economic development with social and political variables operationally
is imaginative.
(ii) Indicators and their Relationships: The critics are of the view that some indicators are based, at
least partially, on the same sub-indicators and thus may have introduced some spurious correlation
among the variables. This is specially true with regard to 12 social indicators associated with factor 1
whose results have been given in Table 2.
(iii) Ordinal Measurement of Indicators: According to Brookins, a set of problems arises as a result
of the ordinal measurement of the indicators included in the analysis. He is of the view that ordinal
variables are inappropriate for deriving' elasticities and 'multipliers'.
(iv) Assumptions are Arbitrary: It is objected that many of the assumptions made at various points
in the analysis are arbitrary, and some are quite unjustified. This also looks quite strange when
Adelman and Morris did not include any economic indicator (except GNP per capita) in their first
formulation of the stage theory. However, in their next formulation (short run analysis) these indicators
were included. It also means that the theorists are well authorized to include or exclude the indicators
in the analysis.
(v) Beauty of Analysis: Despite certain shortcomings the beauty of the analysis lies in the fact that
they have classified complex data and by reading the correlations they have formulated specific
hypotheses. On such hypotheses would be that the four factors (the extent of social differentiation
and integration, the political transformation from authoritarian regimes to representative govts., the
quality of leadership, and the extent of social and political stability) account for the variance observed
in a number of socio-cultural and political indicators from a large sample of LDCs. Another hypothesis
would be that the relative importance of the factors varies from stage to stage, with social factors
being more important in the early stages, political and economic factors in the later stage.
International Structuralist Models:

There is an other approach regarding the study of international underdevelopment which came into
being as a result of dissatisfaction against the 'Stages approach'. Such approach is given the name
of "International Structuralist Model". According to this approach:
"The international poverty of UDCs is due to a variety of institutional and structural economic rigidities.
As a result, the UDCs are caught up in a dependence and dominance relationship to rich countries".
The structuralist model is divided into two streams of thoughts which are discussed below:
Neo-Colonial (Neo-Marxist) Dependence Model:

This model is the result of Marxian thinking. This approach is of the view that underdevelopment of
UDCs is due to the historical evolution of a highly unequal international capitalist system of rich and
poor countries relationship. According to this model, the capitalistic system is furnished with
exploitation. As a result, some people get rich while majority of the people suffer from backwardness
due to dependencies.
In the same way, the international capitalistic system operates in such a way that the benefits are
accrued by the rich nations of the world. Moreover, the development efforts on the part of UDCs do
not become fruitful because of exploitive international economic system. Paul Baran explains this
theory as:
The certain groups in UDCs like landlords, entrepreneurs, merchants, public officials and trade union
leaders who enjoy high incomes, social status and political power constitute a small elite ruling class
are desirous to perpetuate the international capitalistic system of inequality, perhaps for their self-
interest.
These people of UDCs serve, as well as are rewarded by the special interest power groups in the rich
nations which comprise of MNCs, multi-lateral aid agencies, IMF and IBRD etc. Their activities and
view points often check the reform efforts which can be beneficial for the majority of the population.
Thus, according to
Neo-Marxist theory:
"The poverty of UDCs is attributed to the policies pursued by industrial countries and their extensions
in the form of small, but powerful 'comprador' groups in UDCs".
In this respect Dos Santos Writes:
"Under-development is a consequence and particular form of capitalist development known as

dependent capitalism. The dependence causes the poor countries to be both backward and exploited.
Dominant countries are endowed with technological, commercial capital and socio-political pre-
dominance over dependent countries. Dependence is based upon an international division of labor
which allows industrial development to take place in some countries while restricting it in others,
whose growth is conditioned by and subjected to the power centers of the world".
False Paradigm Model:
This approach attributes the underdevelopment of 3rd world countries to inappropriate advice which is
so often given by uniformed international 'experts' and advisors from both DCs assistance agencies
and multi-lateral donor organizations such as; World Bank, IMF, UNDP, ILO, UNCIEF and FAO etc.
These experts offer sophisticated concepts, elegant models and complex technical methods of
Economics and other social sciences which can lead to inappropriate policies. Because of institutional
and structural factors such as the highly unequal ownership of land, disproportionate control over
domestic and international financial assets and very unequal access to credit etc., these policies often
serve the vested interests of existing power structures, both domestic and global.
Moreover, according to this argument, leading university intellectuals, trade unionists, future high level
govt., economists and other civil servants all get their training in developed-country institutions where
they arc injected with the foreign ideas, concepts and models which have least relevance for their own
countries. As in Pakistan like countries at university level the Western econometric models are taught
which are of least use to solve the problems of the people living in 'Interior Sindh'. Again at govt., level
in Pakistan Planning Commission most of the discussion is made on the concept of COR, saving and
investment ratios, H-D Model and growth rates of GNP etc. In such state of affairs, the prestigious
planning is made which could safeguard the interests of the elites, whereas the desirable institutional
and structural reforms are neglected, or they are given the least and traditional attention.
Both the streams of 'International Structuralist Model' are of the view that it is the capitalism, its
policies and its followers which have promoted the international poverty. Therefore, the supporters of
this model reject the philosophy of accelerating the growth of GNP as an index of development. On
the contrary, they emphasize upon the structural and institutional reforms both at domestic and at
international level. Such reforms will be helpful in eradicating absolute poverty, increasing job
opportunities, removing the income inequalities, and raising the general life standard of the masses
by providing them necessary food, health care and clean water. Thus, the structuralists are of the
view that the growth does not matter, it is the character of the growth process itself which counts
much so that the wider segments of 3rd world countries could benefit from growth.
Dualism and the Concept of Dual Societies:

It is the international-structuralist model which highlighted the concept of dual societies. This means
that there exist rich nations and poor nations at world level; and a few rich accompanied with a
majority of poor people in the developing countries. Thus, dualism is a concept which represents the
existence and persistence of increasing divergences between rich and poor both at world level and at
country levels.
Components/Elements of Dualism:
Prof. Hans Singer presents the four components of dualisms:
(i) The different sots of conditions amongst which some are superiors while others are inferior, and
they coexist in a given space at a same time. For example, the co-existence of modern and traditional
methods of production in urban and rural sectors; the co existence of wealthy, highly educated elites
with the masses of illiterate poor people; and the coexistence of powerful and industrialized wealthy
nations with the weak, impoverished peasant societies in the international economy etc.
(ii) The co-existences which we mentioned above are chronic, not just the transitional. Thus it is not a
temporary phenomenon which in time will eliminate the discrepancy between the superior and inferior
elements.
(iii) The degrees of superiority or inferiority have an inherent tendency to increase, rather diminishing
As the productivity gap between a DC industry and its counter-part in LDCs goes on to widen day by
day.
(iv) The inter relations between superior and inferior elements are of such nature that superior
element does little or nothing to pull up the inferior.
International Dualism:
There are four components of international dualism:
(i) There exist greater differences in between different countries and geographical regions regarding
per capita incomes.
(ii) These differences are not temporary and short termed, rather they are chronic. As the standard of
living enjoyed by an average Pakistani and that of an American is different for centuries, not for
decades.
(iii) These differences go on increasing, rather decreasing. As the growth rates of GNP and that of
GNP per capita have really been widened between developed countries and under-developed
countries.
(iv) The inter-relationships between rich and poor countries in international economy are of such a
nature that they have promoted the growth of the rich countries at the cost of poor countries.
Factors of International Dualism:

The following factors have been found responsible for international dualism:
(i) The DCs have a power to control and manipulate world resources and commodity markets to their
advantage.
(ii) The foreign investment activities by MNCs.
(iii) The privileged access of rich nations to scarce raw material.
(iv) The export of unsuitable and inappropriate science and technology.
(v) The transfer of out-dated and irrelevant systems of education to societies where education is
considered as a key component in the process of development.
(vi) Dumping policies pursued by the rich countries which discourage industrialization efforts of UDCs.
(vii) The harmful international trade theories and policies which have confined the UDCs to export just
primary products.
(viii) The harmful aid policies pursued by donors which help in perpetuating the international dualistic
economic structures.
(ix) The creation of elites in poor countries who are influenced by the external ideas.
(x) The transfer of unsuitable methods of university training for unrealistic and often irrelevant
international professional standards, for instance the externally conceived degree requirements for
doctors, engineers, technicians and economists.
(xi) The international brain-drain which has encouraged the international mobility to the rich nations
because of handsome salaries etc.
(xii) The demoralizing 'Demonstration Effect' of luxury consumption on the part of wealthy people both
at home and abroad, as propagated in through foreign movies and magazine advertisements.
No doubt, most of the problems arising out of international poverty are due to international capitalistic
system, yet the poverty of UDCs can not be entirely attributed to the behavior of rich countries. Thus
we conclude international dualism with the remarks given by Hans Singer:
"The growth in the rich countries has led to develop the most sophisticated, costly and capital
intensive technologies, mortality reducing and diseases control measures etc. All such have led to
create population explosion, rising unemployment and inability to develop their own technological
capacities".
Domestic/Local Dualism:
Above we told international dualism where we showed that greater differences exist regarding social
and economic aspects between the rich countries and poor countries. The same like situation also
exists in case of poor countries at the domestic levels. It is shown by the following arguments:
(i) The standards of living vary greatly between the top 20% and the bottom 40% of the population.
The majority of the rich reside in big cities like Lahore, Karachi and Islamabad in Pakistan, while the
great cluster of mass poverty are generally found in the rural regions.
Not to talk of disparities in life standard of the rich and the poor of the UDCs, there also exist the
pockets of great wealth co-existing with spreading slums. The case of exalted buildings and
increasing Katchi Abadies (Muddy Shelters) in Karachi is before us. The phenomenon of inferior and
superior not only exists in respect of distribution of wealth, income and power, it is also available in
the technological nature of UDCs industrial production. The advanced manufactured large sector
using capital intensive technologies co exists with labor intensive, small scale activities catering for
limited local needs.
(ii) The coexistences of a few rich accompanied by mass poverty, and the craze to use capital
intensive technologies by a few producers accompanied by labor intensive technologies by majority of
the producers go on increasing, rather disappearing.
(iii) The gap between the rich and the poor, and between modern and traditional methods of
production shows signs of growing even wider, not only within individual UDCs, but also among the
3rd world countries as a group. Countries like South Korea, Singapore, Taiwan and Malaysia etc.
have experienced higher growth rates of per capita. While Pakistan India, Bangladesh and Ghana
etc., have shown a little growth in per capita income. Again, the gap between the rich and the poor
within the dualistic economies is also widening.
(iv) In case of UDCs one does not find any relationship between the rising wealth of modern enclaves
and improvement in the living standards of traditional society. In other words, in case of dual societies
one does not find the existence of "Spread Effects". It means that the growth of the superior is
keeping inferior more weaker and inferior.
Dualistic Theories:
There are different theories which are of the view that the poverty and underdevelopment of poor
countries is attributed to their dualistic character.
(1) Social Dualism, (2) Technological Dualism and (3) Financial Dualism.
(1) Social Dualism or Sociological Dualism:

J.H. Boeke is a Dutch Economist who studied Indonesian Economy and presented his theory of
social dualism.He maintains that there are three characteristics of a society in the economic sense.
They are as:
(i) Social Spirit (ii) Organizational Form (iii) Techniques Dominating Them.
Their inter-relationship and interdependence is called the social system or social style. A society is
homogeneous if there is only one social system in the society. But the society which has two or more
social systems is known as dual or plural society.
Dr. Boeke says that the dual society is a society which has two full grown social styles which
represent pre-capitalism and post-capitalism. Such a dual society is furnished with the existence of an
advanced imported western system on the one side and endogenous pre capitalistic agricultural
system on the other side. The former is under the western influence which uses the advance
techniques and where standard of living is high. The later is native and it is furnished with the
outdated techniques and low social and economic life. This is called social or sociological dualism and
these two systems are clashing. The imported social system is highly capitalistic and it may be
socialistic as well as communistic system.
Characteristics of Dualistic Society:
On economic basis the dualistic society is classified as by giving the names:
(i) Eastern Sector and (ii) Western Sector.
There are certain characteristics of eastern sector of a dualistic economy which distinguishes it
from western sector. They are as:
(i) The needs of eastern sector are limited. People pass a contented life.
(ii) People work for social needs rather for economic needs. For example, if a three acres are enough
to supply the needs of a household he will not cultivate six acres.
(iii) Goods are cultivated according to their prestige value rather on their use value.
(iv) As a result of all above, the eastern economies are characterized with backward bending supply
curves of effort and the risk taking.
(v) The native industries have neither organization nor capital and they are ignorant of modern
technology and market conditions.
(vi) People are indulged in speculative activities rather in business enterprises.
(vii) They do not take risk by making productive investment.
(viii) They lack the initiative and organizational skill which is a feature of western sector of dual
economy.
(ix) Labor is unorganized, passive and unskilled. They are reluctant to leave their village and
community. They are fatalist.
(x) The urban development takes place at the cost of rural life.
(xi) Exportation is the main objective of foreign trade in the eastern sector while the western sector
believes in imports.
Due to these features of eastern society the western economic theory is not applicable as far as
UDCs arc concerned.
The western economic theory is meant to explain capitalistic society whereas eastern sector is pre
capitalistic. The western sector or society is based upon unlimited wants and money economy etc.
Moreover. The MP theory cannot be applied in UDCs for resource allocation and distribution of
income because of immobility of resources. Thus Boeke says:
We should not try to transplant the delicate houseplant of western theory to tropical soils where an
early death awaits for it. If the pre-capitalistic agricultural sector of eastern sector is attempted to
develop along western lines it will create retrogression. The modern agricultural techniques can not
be applied how-long the mental attitudes of the farmers are not changed, otherwise the increase in
wealth following modern technology will result in further growth of population. Moreover, in case of
failure of modern technology, the indebtedness of the country will increase. Therefore it is better that
these existing agricultural systems should not be disturbed.
As far as industrial field is concerned the eastern producers cannot follow the western technology on
the basis of economic and social reasons. He says that the adoption of western technology to
industrialize Indonesian economy has moved the goal of self sufficiency farther and ruined its small
industry.
Boeke refers to five kinds of unemployment in UDCs:
(i) Seasonal, (ii) Casual, (iii) Unemployment of regular workers, (iv) Unemployment of white collard
class, (v) Unemployment of Eurasians.
According to Boeke the govt., is unable to remove such unemployment because of the reason that it
will require the funds which the govt. cannot avail. Booke says that limited wants and limited
purchasing power in eastern sector hamper economic development. If the food supply is increased or
industrial goods are increased, it will bring a glut of commodities in the market. The prices will fall and
economy will face depression.
But this does not mean that Boeke is against industrialization, and agricultural improvement. Rather
he is in favor of slow process of industrialization and agricultural development on small scale which
could have an adaptability with the dualistic structure of eastern society. The urge for development
should come from the people themselves. New leaders must emerge who should work for the goal of
development with faith, charity and patience.
Criticism:
Professor Bengmin Higgins has criticized the social dualistic theory on the following grounds:
(i) Wants are not Limited: If we analyze "Indonesia's life" we do not find that the desires of the
people are limited because here the values of MFC and MPM are higher. This is the reason that the
govt. has to impose import restrictions. Moreover, whenever the harvest is good the farmers become
prosperous and the demand for luxurious goods rises.
(ii) Casual Labor are not Unorganized: Boeke presented the version that casual workers are
unorganized and passive. But this may be true as far as agricultural sector is concerned but they are
not unorganized in coffee, tea, rubber and plantation etc.
(iii) Eastern Labor is not Immobile: Boeke thought that eastern labor is immobile. It is not so
because of attraction of modern facilities of life in the urban areas. Moreover the high income
incentives force the labor to move from rural areas to urban areas.
(iv) Dualistic Theory is not Particular To UDCs Only: The eastern society, according to Boeke,
only exists in UDCs. It is not true. It does exist in Canada, Italy and even in the United States.
(v) Applicability to Western Society: According to Professor Higgins most of the characteristics of
eastern society given by Boeke are present even in the western societies. For example, during hyper
inflation, speculation is preferred to investment. This means, the people in the western countries also
have a strong desire to keep their capital safe and in liquid form, The western society also believes in
conspicuous consumption as discussed by Veblin and Snob effects. The backward bending supply
curve of efforts has been experienced by Australia during post war period and by US in the fifties.
(vi) Not a Theory But a Description: It is objected that the Boeke's dualistic theory is merely a
description rather than a theory. His findings are based upon neo-classical theory which has the
limited applicability in the western world.
(vii) Does not Provide Solution to the Problem of Unemployment: Boeke's dualism centers more
on socio-cultural aspects rather on economic. He only says that govt. is not in a position to remove
unemployment. Moreover, he does not mention the situation of under employment. Therefore his
theory is full of shortcomings.
Conclusion:
The main problem of dualistic economies is to provide employment opportunities and Boeke theory
fails to do it. Therefore, Prof. Higgins has developed the theory of technological dualism.
(2) Technological Dualism:

Professor Higgins has developed the theory of Technological Dualism. By this we mean:
"The use of different production functions in the advance sector and in the traditional sectors of
UDCs".
The existence of such dualism has increased the problem of structural or technological
unemployment in the industrial sector and disguised unemployment in the rural sector. Higgins theory
of technological dualism incorporates the factor proportion problem as discussed by K.S.
Eckaus, which is related to limited productive employment opportunities found in the two sectors of a
UDCs because of market imperfections, different factor endowments and different production
functions.
The UDCs are characterized with structural disequilibrium at the factor level. This arises, because a
single factor gets different returns in different uses or because price relationship among factors are
out of line with factor availabilities. Such disequilibrium leads to unemployment or underemployment
in two ways. It is as:
(i) Imperfection of price system.
(ii) Structure of demand which results in surplus labor in overpopulated backward country.
Thus the technological unemployment in UDCs is because of surplus labor which results from
misallocation of resources and structure of demand.
Higgins constructed his theory by assuming two goods; two factors and two sectors and their factor
endowments and production functions. Of these two sectors the industrial sector is engaged in
plantation, mines, oil field and large scale industry. It is capital intensive and characterized by fixed
technical coefficients that is, the factors have to be combined in a fixed proportions.
While the rural sector is engaged in producing food stuffs, handicrafts and very small industries. It has
changeable technical coefficients of production. Hence it has different alternative combinations of
labor and capital. The production functions in the industrial sector are represented as in figure:
Figure/Diagram:
Here the IQ1, represents the combination of OL1, of labor (L) and OK1, of capital (K) which produces
a certain level of output. While IQ2, IQ3 and IQ4 represent higher level of output which arc only
possible if K and L are increased in the same proportion. Thus the points; A, B, C and D show fixed
combinations of capital and labor which are used to produce different levels of output.
The line OE represents expansion path in the industrial sector and its slope represents constant factor
proportions. The line K2L2 shows that the production process is capital intensive. To produce Q1,
output OK1, of K and OL1 of L are used. If the actual factor endowment is at S rather A. It means that
more labor are available to produce same amount of output. While here units of K are OK1. Since
there are fixed technical coefficients, the excess labor supply will not affect the production techniques
at all. The L1L2 units of labor will remain unemployed. It is only when capital stock increases to SF,
then it will be possible to absorb this excess labor supply in this sector. Otherwise it has to seek
employment in rural sector.
The production functions for rural sector are shown in the figure:
The isoquants, Q1, Q2, Q3 and Q4 show variable coefficients of production. In order to produce more
output more labor is employed as compared with the capital. As a result the good land (capital)
becomes scarce and all available land is cultivated by high labor intensive techniques. At point E
where maximum output level is reached as shown by Qn.
Thus, according to Higgins, because of different production functions the unemployment and
underemployment comes into being in UDCs. According to Higgins the industrial sector uses capital
intensive techniques and fixed technical coefficients and it is not in a position to create employment
opportunities at the same rate at which population grows. Rather, the industrialization reduces the
employment in this sector. Therefore, the rural sector is an alternative for the surplus labor.
In the beginning it is possible to absorb the additional labor by bringing more lands under cultivation.
This leads to optimal combination of labor and capital. Eventually good lands become scarce. The
ratio of labor to capital in that sector rises and the techniques become increasingly variable in this
sector. Ultimately all available lands is cultivated by high labor intensive techniques and MP of labor
becomes zero and negative. Thus with the growth of population disguised unemployment begins to
appear. Under these circumstances farmers have no incentives either to invest more capital or to
introduce labor saving techniques. As a result the techniques of production, the productivity of labor
and socio-economic life is remained at low level in the rural sector.
In the long run the technological progress does not help in removing the disguised unemployment.
Rather it tends to increase the number of disguised unemployed. The situation is further aggravated
by keeping wage rates artificially high by trade unions or by govt. policies. For high industrial wages
relative to the productivity provide an incentive to the producers for introducing labor saving
techniques and thereby it diminishes the further capacity of the industrial sector to absorb surplus
labor. Accordingly these factors increase the technological dualism in UDCs.
Criticism:
Professor Higgins has attempted to present how disguised unemployment gradually rises in the rural
sector of dualistic society. But the theory has following defects:
(i) Assumption of Fixed Technical Coefficient: Higgins wrongly assumes fixed technical coefficient
in the industrial sector without any empirical verification.
(ii) Factor Prices do not Entirely Depend Upon Factor Endowment: This theory indicates how the
factor endowment and different production functions result in disguised unemployment. So disguised
unemployment is connected with the factor prices. But it has been found out that the factor
endowments do not entirely determine the factor prices.
(iii) Ignoring The Institutional Factors: There are many institutional and psychological factors which
have been ignored by Higgins in connection with their effect on factor proportion.
(iv) Ignoring the Use of Labor Absorbing Techniques: According to Higgins that industrial sector
employs highly capital intensive techniques which are imported. But practically we find that all
imported techniques are not labor saving. For example, Japan's agricultural development is not due to
capital intensive techniques.
(v) Size and Nature of Disguised Unemployment is not Assessed: Higgins does not clarify the
nature of disguised unemployment in the rural sector and excess labor supply in the industrial sector.
Moreover, he does not tell about the extent of disguised unemployed due to technological dualism.
(3) Financial Dualism:

Professor Hala Myint has developed the theory of financial dualism. Such dualism rises because
of division of money markets in unorganized and organized money markets in LDCs. The rate of
interest in unorganized market is higher than the rate of interest in organized money market which is
concerned with modern sector. The unorganized money market consists of village money lenders,
landlords, arties. They charge the high interest because of the following reasons.
(i) The lenders have monopoly and position of the borrowers is very weak.
(ii) There is a shortage of savings in the traditional sector because most of the savings are made in
terms of land or gold.
(iii) Due to natural calamities etc. the risk attached with such lending are very high.
Thus we find that the high interest rate which the farmers have to pay not only consists of formal
interest charges but also the concealed charges obtained through under pricing the grains purchased
by the farmers.
On the other hand, in the organized markets of LDCs the interest rates are low and credit facilities are
abundant. The loans are advanced to manufactured sector, export industry and modern commerce
sector.
Professor Myint says that there was an old financial dualism which used to exist in the open economy
of colonial period and the financial dualism which now exists.
Under colonial system there was perfect convertibility at fixed exchange rate. Consequently there was
no shortage of foreign exchange and there were no BOP problems. But now a days the LDC's have to
face internal as well as external balance. Thus the poor traders and small peasants not only have to
face high interest rates, but also the shortage of foreign exchange. Then they are not in a position to
get advanced machinery etc.
Under colonial system organized money market of LDCs is consisted of the branches of western
commercial banks which were linked with international financial market. In colonial system the
modern sector consisting of mines, plantation and foreign trade borrowed at low interest rates both
from western banks and the world capital markets. But the present LDCs have attained monetary
independence by establishing their own central banks. They have introduced the exchange control.
As a result, the organized money market of the LDCs have been separated from the world capital
market. Hence, their central banks are following the cheap monetary policy even when they are
having shortage of funds. They are maintaining over-valued exchange rate on the ground that
devaluation will create inflation. On the other hand there is chronic excess demand for foreign
exchange in these poor countries. To meet this situation, these countries depend upon exchange
controls, direct controls, monetary and fiscal policies. This has led to enhance the economic dualism
between the traditional sector and modern industrial sector. The cheap monetary policy by
maintaining artificial low interest rates has become helpful for the large industrial sector. The low
interest rates have discouraged the flow of funds from abroad and savings from within the country.
But it has created an excess demand for loans. Thus the major part of domestic savings are flowing
towards industrial sector. This has reduced the capital to traditional and agriculture sector which have
to get at higher interest rate.
The foreign exchange control to correct deficit in BOP has also benefited the modern industrial sector
against the traditional sector. It is because that the major share of available foreign exchange is
allocated to the industrial sector to import capital intensive goods. On the other hand, the agricultural
and small scale sector fail to get foreign exchange and import permits because of red-tapism and
corruption in the LDCs.
The most of the UDC's have established agricultural banks and cooperative societies. But these
institutions have been found providing loans to the influential people and to the model villages.
All this has led to misallocation of resources between the modern and traditional sector. So money
markets in the LDCs remain backward. Domestic inflation along with over-valued exchange rate have
encouraged flight of capital. The countries where this is checked, the capital moved in the purchase of
gold, jewellery, real estates and other speculative activities. This is because of low rate of interest
against investment. Hence the money market remains ineffective.
Govt. controls over the scarce supply of capital have also retarded the growth of financial
intermediaries in the LDCs. These controls favor the large manufacturing units and the banks. They
discriminate against the small borrowers and the money lenders who provide credit to the small
borrowers. In the LDCs govts. believe that capital funds invested in durable capital goods are
productive while those invested in financing agriculture and trading activities are unproductive.
According to Myint the cheap and easy credit to the traditional sector is not provided because of
following:
(i) The high over head costs and salaries of officials of commercial banks in the rural areas.
(ii) The red-tapism in dealing with small borrowers according to the rigid rules.
(iii) The lack of coordination between the head office and the branches.
(iv) Lack of subsidized loans supplied by the agricultural banks etc.
Professor Myint suggest two types of policies to reduce financial dualism in LDCs:
(i) The official interest rate in the organized capital market be increased. This will attract the savings
both from the country and out of the country. It will also create an equilibrium between the demand for
loan able funds and supply of loan able funds.
(ii) There should be free access on equal terms to capital funds by modern and traditional sector. This
will reduce misallocation of resources between the two sectors.
Rural-Urban Migration Model:

Rural-Urban Migration Model is the model of dual economy which states that:
"Economies have a backward agricultural sector and have an advanced industrial sector. The
backward sector has big amount of disguised unemployment, which by transferring to advanced
sector can be utilized and process of capital formation can be started".
In this respect, we shall study three models: (Click the following any link to read full article)
(1) Lewis Model of Unlimited Supply of Labor.
Lewis Model of Unlimited Supply of Labor:

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.
Assumptions of the Lewis Model:
Lewis model makes the following assumptions:
(i) There is a duel 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.
(ii) The subsistence sector does not make the use of 'Reproducible Capital', while the modern sector
uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward
sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is
greater than demand for labor.
The followings are the sources of unlimited supply of labor in UDCs.
(i) Because of severe increase in population more, than required number of labors are working with
lands, the so called disguised unemployed.
(ii) In UDCs so many people are having temporary and part time jobs, as the shoe-shines, loaders,
porters and waiters etc. There will be no fall in the production even their number 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, but they just perform house-hold duties. Thus they also
represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
Basic Thesis of the Lewis Model:

Lewis model is a classical type model which states that the unlimited supplies of labor can be had at
the prevailing subsistence wages. The industrial and advanced modern sector can be developed on
the basis of agri. to traditional sector. This can be done by transferring the labor from traditional sector
and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn
'surplus'. Such surplus will be re-invested in the modern sector leading to absorb the labor which are
migrated from subsistence sector. In this way, the surplus labor or the labor which were prey to
disguised unemployment will get the employment. Thus both the labor transfer and modern sector
employment growth are brought about by output expansion in that sector. The speed with which this
expansion occurs is determined by the rate of industrial investment and capital accumulation in the
modern sector. Though the wages have been assumed constant, yet Lewis says that the urban
wages are at least 30% higher than average rural income to induce the workers to migrate from their
home areas.
Figure/Diagram:
The process of migration and capital formation is shown with the help of fig (a).
In the fig., the production function regarding traditional sector has been demonstrated. Here in the
upper part of the fig., by employing LF of labor, the OT of food production has been produced, while
the amount of capital is fixed here. In the lower part of figure we have APL and MPL in the
subsistence farming sector which have been derived from the TPF curve in the upper part of the fig.
This is the behavior of a UDC where 80% to 90% of population lives and works in rural areas.
Lewis makes two assumptions regarding traditional sector:
(i) There is surplus labor because MPL = 0 (as MPLF curve cuts x-axis).
(ii) All rural workers share equally in the output so that rural real wage is determined by the APL, and
not by MPL. Thus it is OA, which has been attained by dividing OT by OLF labor in subsistence
sector.
In the fig (b) the upper segment we have the production functions regarding modern industrial sector.
In case OL, labor are employed, having the production function TPM(K 1), TP1 is being produced. In
the lower segment of fig., the demand for labor is D1(K1) at the constant wages (OW) which are
30% higher than the average rural wages.
In the Lewis model, the modern sector capital stock is allowed to increase from K 1 to K2 and K3 as a
result of reinvestment of profits by capitalist industrialists. This causes the TP curve in the upper part
of fig., to shift upward from TPM(K1) to TPM(K2) and to TPM(K3). The process that will generate these
capitalistic profits for reinvestment and growth is illustrated in the lower part of fig. (b). The modern
sector MPL curves have been derived from the TPM curves of the upper part of the fig. (b). These
curves are demand for labor curve because of assumption of perfect competition.
The OA in both lower parts of fig (a) and (b) represents the average level of real subsistence income
in the traditional rural sector. But in the modern sector the real wages have been represented by OW
(the 30% higher than rural wages).
At such wages the supply of rural labor is assumed to be unlimited or perfectly elastic as shown by
WSL curve in fig (b). This means that modern sector employer can hire as much labor as he likes
without any fear of rise in wages. It is also told that in traditional sector the supply of labor is in the
millions, while the employment in modern sector is in thousands. In the modern sector the
employment is made by the employer to the point where MPL = W. (the point F in the lower part of fig.
(b). Thus the basic employment is OL1, with this employment of labor CD1FL, output in manufacturing
sector is being produced. While the share of such employed labor will be OWFL 1.
The balance of output shown by the shaded area WD1F would be the total profits (surplus) that accrue
to the capitalists. As Lewis assumes that all of these profits are reinvested, the total stock of capital in
the modern sector will rise from K1 to K2. As a result, TPM will shift from TPM(K1) to TPM(K2) which in
a turn leads to increase MPL. In other words, the demand for labor will increase as shown by the
curve D2(K2) in the lower part of fig (b).
Now the new equilibrium in the modern sector takes place at point G where OL2 labor are being
employed. The total output rises to OTP2 or OD2GL2 while total wages and profits increase to
OWGL2 and WD2G, respectively. Once again, these larger (WD2G) profits are reinvested, the total
stock of capital will increase to K3. Again the TP curve will shift upward, as the TPM(K3), and demand
for labor curve will shift to D3(K3).
This process of modern self sustaining growth and employment expansion will remain continue till all
the surplus rural labor is absorbed in the new industrial sector. There after, additional workers can be
withdrawn from agri. sector only at a higher cost of lost food production because this will decrease the
labor to land ratios. In this way, the MPL will be no more zero. Here, labor supply curve will become
positively sloped along with the growth of modern sector. The structural transformation of the
economy will take place through shifting traditional rural agriculture to modern urban industry.
Criticism on the Lewis Model:
Although Lewis two-sector development model is simple and roughly it is in conformity with the
historical growth in the West, but it has following flaws and most of its assumptions do not fit in the
institutional and economic realities of UDCs.
(i) Proportionality Between Employment Creation and Capital Accumulation: Lewis model
assumes that there exists a proportionality in the labor transfer and employment creation in modern
sector and rate of capital accumulation in the modern sector. The faster the rate of capital
accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.
But if the capitalists reinvest their profits in the labor-saving capital equipment rather increasing the
labor employment (what has been assumed in Lewis model) the jobs will not be created and modern
sector will not expand. This happened in case of Pakistan where during 2nd five year plan, the wages
remained constant and the capitalists rather re-ploughing their surplus shifted it to the 'Swiss Banks'.
All this led to a resentment against the strategy of increasing the surpluses of capitalistic class. Now
we employ a diagram where we shall show that labor demand curves do not shift uniformly outward. It
is so because that increase in capital stock will embody labor saving technology.
In fig., it is obvious that even though the total output has grown substantially, i.e., OD 2 EL* > OD1EL*.
But the total wages remained OWEL* and the employment also remained OL* . Both remained
unchanged. All of increase in output has accrued to capitalists in the form of excess profits. This may
be given the name of "Anti-development" economic growth, all the extra income and output growth
went to a few capitalists while the income and employment levels for the masses of workers remained
unchanged. In this way, total GNP would rise,
but there would be no or little improvement in aggregate social welfare.
(ii) Peak Harvesting and Sowing Season: Lewis did not pay attention to the pattern of seasonality
of labor demand in traditional agri. sector. According to Mehra, labor demand varies considerably and
such demand is at its peak during the sowing and harvesting season. Thus during some months of
the year the MPL may be above-zero. In such situation, the positive opportunity costs will involve in
transferring the labor from agri. sector. As a result, the labor transfer will reduce agri. output.
(iii) Rise in Urban Wages: According to Prof. Mabro the absorption of surplus labor itself may end
pre-maturely because competitors (producers) may alter wage rates and lower the share of profit. It
has been shown that rural-urban migration in Egyptian economy was accompanied by increase in
wage rate of 15% and a fall in profits by 12%. Moreover, the wages in industrial sector were forced up
directly by unions, civil service wage scales, minimum wage laws and MNCs (multi-national
corporations) hiring practices tend to negate the role of competitive forces in the modern sector labor
market. Again, the wages in subsistence sector may go up indirectly through rise in productivity in this
sector.
(iv) Full Impact of Growing Population: Lewis model underestimates the full impact on the poor
economy of a rapidly growing population, i.e., its effects on agri. surplus, the capitalist profit share,
wage rates and overall employment opportunities. Similarly, Lewis assumed that the rate of growth in
manufacturing sector would be identical to that in agri. sector. But, if industrial development involves
more intensive use of capital than labor, then the flow of labor from agri. to industry will simply create
more unemployment.
(v) Ignoring the Balanced Growth: Lewis ignored the balanced growth between agri. sector and
industrial sector. But we know that there, exists a linkage between agri. growth and industrial
expansion in poor countries. If a part of profits made by capitalists is not devoted to agri. sector, the
process of industrialization would be jeopardized (perhaps, due to reduced supply of raw material).
Because of this flaw, Ranis-Fei model considers the balanced growth of both sectors. This will be
discussed after this model.
(vi) Ignoring the Role of Leakages: Lewis has ignored the role which the leakages can play in the
economy. As Lewis assumed that all of increase in profits are diverted into savings. It means that
savings of producers are equal to one. But, practically it is not so. The increase in profits may
accompany the increase in consumption. As in Pakistan during 2nd plan the capitalistic class diverted
their increased profits to palacious houses and conspicuous consumption. In such tike situation the
MPS out of profits will be less than one.
Again, it is not necessary that the capital formation will be made by the capitalistic class. The same
may be done by the farmers producing cash crops. As the small farmers producing cash crops in
Egypt have shown themselves to be quite capable of saving the required capital. Again, the World's
largest Coca industry in Ghana is the result of creation of small enterprise capital formation.
(vii) Process of Migration is Neither Smooth Nor Costless: Lewis assumed that the transfer of
unskilled labor from agri. to industry is regarded as almost smooth and costless. But, practically it is
no so as industry requires different types of labor. If this problem is removed with the help of
investment in education and skill formation, the process of migration will become costlier and
expensive.
(2) Fei-Ranis Model.
Fei-Ranis (FR) Model of Dual Economy:

The two economists John Fei and Gustav Ranis presented their dual economy model. There was a
flaw in Lewis model that it did not pay enough attention to the importance of agri. sector in promoting
industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased
productivity in agri. sector would become helpful in promoting industrial sector. In this respect, it
presents three stages whereby a UDC moves from stagnation to self-sustained economic growth.
Thus, this model is treated as an improvement over Lewis model of unlimited supply of labor.
Basic Thesis of the Model:

This theory is concerned with a poor economy which has following properties:
(i) There is an abundance of labor in such UDC and shortage of natural resources.
(ii) The population growth rate is very high which results in mass unemployment in the economy.
(iii) The major share of population is engaged in agriculture. But agriculture sector is stagnant. Hence,
the marginal productivity of labor is zero and negative in agriculture sector.
(iv) There are certain non-agrarian sectors in the economy where there is reduced use of capital.
(v) There is a dynamic industrial sector in the economy.
Thus the model suggests that:
"Economic development would be taking place if agricultural laborers are transferred to industrial
sector where their productivity will increase".
As we told earlier that it is a dual economy where there is a stagnant agri. sector and dynamic
industrial sector. The situation where MPL - 0, labor can be transferred to industrial sector without any
loss in agricultural output. The real wages in industrial sector remains fixed and it is equal to the initial
level of real income in agri. sector. Such wages are given the name of institutional wages.
Stages of Fei-Ranis Model:

Fei and Ranis develop their dual economy model with the help of three stages of economic growth.
They are presented as:
Diagram/Figure:
In the (a) part of the Fig., the labor supply curve is perfectly elastic, as between S and T. In phase (I)
as shown in (c) part of Fig., the MPL = 0. In other words AL = MPL = 0. But here APL = AB. Following
Lewis the FR model
argues that AD units of labor are the surplus amount of labor in agri. sector which is prey to disguised
unemployment. Therefore, they can be withdrawn from agri. sector without changing agri. output. In
phase (II) APL > MPL, but after AD, MPL begins to rise (c part of Fig). The growth of labor force in
industrial sector increases from zero to OG (a part of Fig). The APL in agri. sector is shown by BYZ
curve (c part of Fig).
After AD as migration takes place from agri. sector to industrial sector MP, > 0, but AP[_ falls. This
shows a rise in real wages for industrial labors because of shortage of food supply. An increase in
real wages will reduce profits and the size of 'surplus' which could have reploughed for further
industrialization.
The investment in industrial sector (with the surplus earned) will shift the MP curve outward right as
from aa to bb and then to cc. In this way agri. sector will be able to get rid of labor until the MPL = real
wages = AB =
constant institutional wage (CIW) which is obtained by dividing the total agri. output ORX (b part of
Fig) by AD amount of labor. In other words, the slope of ORX curve represents real wage rate. Thus
the MPL = CIW where the tangent to the total output line ORX at X is parallel to OX. In the second
phase DK amount of labor were employed. But still MPL < CIW or CIW > MPL. It means that in this
phase still a certain amount of labor is surplus or they are prey to disguised unemployment.
The first stage of FR model is very similar to Lewis. Disguised unemployment comes into being
because the supply of labor is perfectly elastic and MPL = 0. Therefore, such disguised unemployed
are to be transferred to industrial sector at the constant institutional wage.
In the second stage of FR model (phase) agri. workers add to agri. output but they produce less
than institutional wage they get. In other words, in the second stage the labor surplus exists where
APL > MPL, but it is not equal to subsistence (institutional) wages. Accordingly, such disguised
unemployed also have to be transferred to industrial sector. If the migration to industrial sector
continues a situation is eventually reached where the farm workers produce output equal to
institutional wages. This would mean that productivity in agri. sector has gone up. With this the third
phase (stage) starts.
In the third stage of FR model the take-off situation comes to an end and there begins the era of
self-sustained growth where the farm workers produce more than the institutional wage they get. In
this stage of economic growth the surplus labor comes to an end and the agri. sector becomes
commercialized sector. All such is explained with the Fig.
Accordingly, they have to be shifted to industrial sector. As labor are transferred to industrial sector a
shortage of labor will develop in agri. sector. In other words, it will be difficult for the industrial sector
to get the labor at same prevailing constant wages. As a result, the wages in the industrial sector will
rise as from T to Q in (a) part of Fig.
After point T the turn which occurs in the SZ curve is known as "Lewis Turning Point". In the 3rd
phase the agri. laborers produce more than CIW. (As here MPL > CIW shown in (c) part of Fig). In
this phase the take off comes to an end and self-sustained growth starts. This is also known as point
of commercialization (of agri.) in FR model. Here the economy is fully commercialized in the
absence of disguised unemployment. Such commercialization took place at the cost of absorption of
disguised unemployment in industrial sector.
The amount and time to re-allocate labor will depend upon:
(i) The rate of growth of industrial capital which depends upon the growth of profits in industrial sector
and growth of surplus generated within the agri. sector.
(ii) The nature and bias of technical progress in industry.
(iii) The rate of growth of population. It means that the rate of labor transfer must be in excess of the
rate of growth of population.
The three phases of labor transfer are summarized as:
In phase I: MPL = 0 and there exists the surplus labor equal to AD.
In pnase II: CIW > MPL > 0 and there exists the open and disguised unemployment equal to AK.
In phase III: MPL > CIW and the economy is fully commercialized and disguised unemployment is
exhausted. The supply of labor curve becomes steeper and both agri. and industrial sector compete
with each other to get labor.
Thus we find that whereas Lewis had failed to offer a satisfactory explanation of this subsistence
sector and ignored the real impact of population growth on the choice of capital intensity on the
process of surplus labor absorption. Moreover, FR model emphasized upon the simultaneous growth
of agri. and industrial sectors. Thus FR model believes in 'Balanced Growth' in the take-off stage. It
means that there should be a simultaneous investment in both agri, sector and industrial sector.
According to FR model in the beginning the surplus rises; such surplus will bo available as a capital in
the take-offstage. Some part of this surplus will be used in agri. development, while some part will be
reploughed in industrial development. As a result, both agri. and industrial sectors will grow under
'Balanced Growth' pattern.
Thus, three major points are highlighted in the FR mode:
(i) Growth of agri. is as important as the growth of industry.
(ii) There should be a balanced growth of agri and industrial sectors.
(iii) The rate of labor absorption must be higher than the rate of population growth to get out of the
"Malthusian Nightmare".
FR model argued that surplus can be generated by the investment activities of the land lords and by
the fiscal measures of the govt. However, leakages could exist because of the cost of transferring the
labor from agri. sector to industrial sector in the form of transport cost and building of schools and
hospitals, etc. Moreover, the transference may lead to increased per capita consumption of agri.
output, and a gap may also emerge in case of rural wages and urban wages. Again, if the supply
curve of- the labor is backward bending, the peasants may reduce their work effort as their incomes
rise.
Criticism:
The FR model is considered to be an improvement over Lewis. This model presents a balanced
growth of both the sectors of the economy, the most notable thing for the growth of UDCs. Despite
this fact, this model has following shortcomings:
(i) Marginal Productivity of Labor in Phase I: The FR model is of the view that MFL = 0 in the first
phase of growth, and the transfer of labor from agri. would not reduce output in the agri. sector in
phase I. But the economists like Berry and Soligo are of the view that agri. output in phase I of FR
model will not remain constant and may fell under different systems of land tenure, i.e., the peasant
proprietorship and share cropping etc.
(ii) Marginal Productivity of Labor is Not Zero: Prof. Jorgenson who has also presented a model of
'dual economy' has object FR model's contention of zero MP in phase I. He says whether MPL will be
zero is an empirical issue. During the seasons of sowing and harvesting the MPL > 0. Jorgenson
concluded on the basis of Japanese data even for the pre I world war period the supply of labor was
not unlimited. Then how MPL can be zero.
(iii) Ignoring The Role of Capital: The FR model concentrated upon land and labor as the
determinants of output, ignoring the role of capital. But Profs. Brown, Byres, Frankel, Griffen, Ghatak
and Ingersent are of the view that in the UDCs there has occurred what is known as 'Green
Revolution' in agri. which has promoted the greater use of capital and technology on lands.
Consequently, there has been a greater increase in the agri. productivity and agri. incomes.
(iv) Open Economy: FR model ignored the role of foreign trade as it assumed a closed economy
model. In the 2nd phase when agri. product decreases the TOT goes against industrial sector. This
would occur in the presence of closed economy. But if the model is made open such would not
happen as the goods could be imported in the presence of then-scarcity. This was especially
observed in case of Japan which imported cheap farm products to improve her TOT (terms of trade).
(v) Supply of Land in Long Run: FR model assumed that in the process of economic development
the supply of land remained fixed. But it is not true. The supply of land can be increased in case of
long run.
(vi) Commercialization Of Agri. And Inflation: According to FR model when 3rd phase starts the
agri. sector becomes commercialized. But it is criticized by saying that this phase does not start so
easily The shifting of labor to industrial sector will create labor shortage in agri. sector. This will create
shortage of food stuff leading to increase their prices. In this way, the inflation will generate which may
obstruct the process of development.
(vii) Low Productivity in Agri Sector: According to Jorgenson it has been observed that there has
been a very slow rise in the productivity of agri. sector. Consequently, the surplus will hardly be
created in agri. sector. Accordingly, agri. sector will not contribute to development Thus the growth
requires that the surplus must be generated and it should persist.
(3) M.P. Todaro's Model of Rural-Urban Migration.
Michael P. Todaro's Model of Rural-Urban Migration:

The unlimited supplies of labor models as presented by Lewis and Ranis-Fei failed to pay attention
over migration. They stressed upon saving, investment, growth rate and productive efficiency. But
during 1960s the economists realized that the dual economy models presented by Lewis and Ranis-
Fei do not have compatibility with the circumstances of UDCs as they are furnished with certain social
and economic structure.
In case of UDCs it is being observed that inspite of heavy unemployment and under employment in
urban areas a big migration is taking place from rural areas to urban areas. This situation contradicts
Lewis model. As during 1960s to 1970s the urban population increased by 60%, 52% and 51% in
Africa, Latin America and South Asia respectively. While in these regions the rural population
increased by 16%. This shows that the massive unemployment exists in the urban areas of these
regions. This, according to Todaro, is due to that mobility and migration which is taking place from
rural areas to urban areas. Thus, the Todaro model of rural-urban migration states:
"Despite mass unemployment in cities people are migrating from villages to towns and cities".
Assumptions of the Model:

(i) The migration is assumed to be an economic phenomenon.
(ii) The migrants make migration to cities on economic grounds, even if they know that heavy
unemployment exists in cities.
(iii) The migrants are well aware of with the employment opportunities in rural and urban labor
markets. Accordingly, they choose any one of them where their expected gains could be maximized.
Thus, the migration proceeds in response to urban-rural differences in expected rather than actual
earnings.
(iv) The expected gains are measured by (a) the difference in real incomes between rural and urban
work, and (b) the probability of a new migrant obtaining an urban job.
Diagram/Figure of Schematic Framework:
Todaro presents a Schematic Framework which shows how various factors affect the migration
decisions. In nut-shell, Todaro says that:
"The members of labor force, both actual and potential, compare their expected incomes for a given
time horizon in the urban sector (i.e., the difference between returns and costs of migration) with the
prevailing average rural incomes, and they migrate if the former exceeds the latter".
Todaro assumes the case of labor who is unskilled or semi skilled and he has to face a trade-off
between working at farms where his average per day wage is $50/- or he should migrate to city where
he can earn $100/- on the basis of his skill or education. In case of tradition models of migration it will
be more attractive for the labor to move to city. But such mobility from rural areas to urban areas will
lead to reduce the wage differentials. This may happen in case of DCs, However, the UDCs having
different economic and institutional framework may not experience such situation, it is because of the
reasons:
(i) That UDCs are having mass unemployment and a labor who is migrating to city can not hope to get
higher wages as well as employment in the developed industrial cities. Therefore, when any rural
worker migrates to city he will have to face unemployment. The maximum employment he can attain
will be casual and part time jobs like waiters, porter, typist or a teacher teaching tuitions etc.
(ii) When a labor migrates from rural areas to urban areas he will have to make a comparison
between those risks and possibilities which may arise due to unemployment and under-employment
in the city, in addition to wage differentials. Apparently, the wages in urban areas are two times higher
than rural areas, but such attraction is lost when one finds that there are limited chances of urban
employment. For example, if in a period of one year the chance is one out of five, then the probability
of securing the higher paid urban job is 20%. In such situation his expected income will be just $20/-,
rather $100/-. It will be irrational if the labor migrates to city, in such circumstances. However, if there
exist the 60% chances of getting an urban job the migrant will move to city where his income will be
$60/-, higher than farm income which was $50/- even there exists chronic unemployment in city.
(iii) If we increase the time element, keeping in view that majority of migrants in the age of 15 to 24
years. In such circumstances the decision to migrate would not depend upon expectations of short
run, rather long term factors will affect it. As if the migrant assesses that in the beginning there are
reduced employment chances. But later on, when his city relations increase or more urban
information become available to him, he will be able to find a better job with higher income. In such
situation, he will be prepared to work.
According to Todaro, how long the present value of the expected urban incomes exceeds the rural
incomes the migrant will prefer to migrate. Thus, on the basis difference in rural and urban wages the
migration will go on taking place. As if the average urban income is $120/- and average rural income
is $60/-, the chances of mobility from rural to urban areas will go on existing. All this will aggravate the
problem of unemployment in the cities. Thus as long as the difference in rural and expected urban
wages will be existing the migration from rural to urban areas will continue taking place, even if the
cities are flooded with heavy unemployed.
Characteristics of the Model:

(i) Migration is stimulated primarily by rational economic considerations of relative benefits and costs,
financial as well as psychological.
(ii) The decision to migrate depend on expected rather than actual urban-rural wage differentials.
(iii) The probability of obtaining an urban job is inversely related to the urban unemployment rate.
Evaluation of the Model:

(i) If the wage and employment differential in rural and urban areas continue the migration from
villages to cities will continue taking place.
(ii) Along with increasing job opportunities in urban areas, there is a need to devise an integrated rural
development program whereby the incomes of rural workers could be increased. This will reduce the
migration from rural to urban are as the most beneficial advice for the UDCs.
Neo-Classical Counter Revolution Theory:

Approach to Privatization and Free Market:
During I980's when conservative govts. were in power in US, UK, Canada and Western Germany
the neo-classical counter revolution theory and policy was revitalized. This counter revolution
favored supply-side macro economics and privatization of state-owned corporations in DCs, and it
stressed upon dethronement of public-ownership and govt. regulations in UDCs. This theory of
denationalization under the disguise of privatization, and deregulation got much more importance in
Washington at the headquarters of IMF and IBRD, UNDP and other international agencies which are
engaged in the stabilization and structural adjustment like programs. Such neo-classical theory is a
reaction to the interventionist arguments of dependence theorists.
The Dependencia Models of International Poverty are of the opinion that the poverty of UDCs can
be attributed to exploitation of the poor countries by the rich countries. But the proponents of neo-
classical counter-revolution theory like Lord Peter Bauer, Deepak Lai, Ian Little, Harry Johnson, Bela
Blassa, Julian Simon, Jagdish Bhagwati, and Anne Krueger are of the view that under-development
results from poor resource allocation due to incorrect pricing policies and too much state intervention
on the part of UDCs in their economic activities. Thus it is the state intervention or the greater role of
state in the economic life which has slowed down the pace of economic growth in the UDCs.
Therefore, the non-interventionist or neo-conservatives emphasize that if free markets are allowed to
flourish, public enterprises are privatized, free trade is promoted consequent upon export expansion,
foreign investors are welcomed, plethora of govt. regulations is eliminated, and the price distortions in
goods, labor and financial markets are removed, such all will stimulate economic efficiency and
economic growth. Thus against the view of Dependencia Models whereby poverty of Third World is
attributed to predatory activities of the First World and International Agencies, the neo classical
counter-revolution theory says that:
"It is heavy hand of state and corruption, inefficiency and lack of economic incentives that permeate
the economies of UDCs. Therefore, rather reforming international economic system, or restructuring
of dualistic economies, or increasing the flow of foreign aid to UDCs, or attempting to control
population growth, or emphasizing upon more effective central planning the UDCs should stress
upon Free-Markets, and Laissez-Faire Economies".
The govts. of the poor countries should allow the "magic of the market place" and invisible hand to
guide to resource allocation and promote economic development. Thus the neo-classical counter-
revolution theory is an attempt to restore private capitalism through the slogan of "privatization".
The neo-classical economists (counter-revolutionists) give the examples of Asian Tigers (South
Korea, Taiwan, Hong Kong and Singapore etc.) who marvelously stimulated their economics on the
basis of "free markets and price mechanism", whereas the economies of Africa and Latin America
worst failed even they depended upon 'interventionist policies'.
The neo-classical challenge to present orthodoxy can be bifurcated into three compositional
approaches, as:
(i) Free Market Analysis:
According to this approach, the markets alone are efficient, as the goods markets provide reasonable
signals for investment in new activities. Again, the labor markets show the reaction properly
automatically in new industries. Moreover, the entrepreneurs know better that what to be produced
and how they are to be produced, as the factor and goods prices reflect the true scarcity of their
present and future prices. Even if there is no perfect competition such remains effective. People have
complete freedom to invent new goods. In the same way, each economic agent easily avails of all
information more or less freely. In such like stale of affairs, any govt. intervention will not only be
unproductive but it will also lead to create distortions. Thus the development economists who support
free markets are of the view that if we implement the free market economic system all over the world it
will result in more efficient situation, and the market imperfections will be of least importance.
(ii) Public Choice Theory/Modern Political Economy:
This approach is also known as Modern Political Economy. This theory states that govts. fail to do
anything good. As this theory accepts that the politicians, bureaucrats, citizens and the state function
just on the ground of their interests. In other words, they use the govt. authority and power for their
personal interests. The citizens get their certain objectives (which are called rent) with their political
influence though govt. policies, as they are often found engaged in getting import licenses or scarce
foreign exchange . Whereas the politicians use the govt. resources to cumulate or maintain their
power or authority. While the states are always found desirous to confiscate private properties. Such
all leads to misallocation of resources as well as losing of personal freedoms. Thus, this theory
advocates the limited-or minimal size of the govt.
(iii) Market Friendly Approach:
This is a present variant of the Neo-Classical counter revolution theory which is available in the writing
of WB and its economists who were present in the catnips of free markets and public choice during
1980s. This approach accepts that there do available the imperfections in the product and factor
markets of UDCs. Accordingly, govt. has to play an important role in this regard so that the markets
could function well. But, the govt. will have to play this role through Market Friendly Approach. As it
will have to create a suitable and favorable environment for private enterprises by providing them
physical infrastructure, health-care and educational facilities. The market friendly approach is different
from free market approach and the public market approach, as this theory admits that there is a
greater role of market imperfections in the developing countries, particularly, when we see that there
exists lack of coincidence between investment activities. Again, one finds externalities due to
investment. Moreover, the imperfections are either available in a limited amount, or they remain
missing. Furthermore, one finds externalities regarding learning, and the attainment of scale
economies become weaker in the markets of UDCs.
Criticism:
During 1970's Dependence Revolution was observed in the literature of development economics
where the dependence theorists considered underdevelopment as an externally induced
phenomenon. But in 1980's the proponents of free markets brought a counterrevolution which has
been given the name of neo-classical counter-revolution. The neoclassical revisionists consider
underdevelopment as internally induced LDC's phenomenon which is surrounded by govt.
interventionists and bad economic policies. Now there rises the question whether free markets and
less govt. intervention will serve the purpose of attaining economic development on the part of UDCs.
In other words, whether market allocation will perform a better job than state intervention? The
answer is not positive. In this respect following arguments are given.
The economic, social, political, institutional and organizational structure of UDCe are different from
their western counter parts. Accordingly, the assumptions and policy percepts of neo classical theory
will hardly be applicable in case of UDCs. The UDCs lack competitive markets. Consumers are not
sovereign. The economies of UDCs are furnished with market imperfections. The markets are
fragmented, the limited information are available regarding employment, investment opportunities and
techniques of production. The money market is divided into organized and unorganized markets. The
people are highly illiterate. Their economies are still non-monetized. The speculative activities are
preferred over manufacturing. The land is a token of prestige, rather a source of income. There exists
big divergence in between private benefits and social benefits. The poor societies have to face both
consumption and production externalities. There exist discontinuities in production and indivisibilities
(i.e., economies of scale) in technology. Producers, whether private (Liver Brothers, D.G. Cement,
Crescent Sugar, Sitara Chemicals etc. in Pakistan) and public (Wapda, Sui-gas, Pakistan railway etc.
in Pakistan) have a great power in determining market prices and quantities sold. The Utopia and
idealism of competitiveness is hardly available in UDCs like Pakistan. In case of UDCs the markets
are characterized with disequilibrium and structural bottlenecks. Accordingly, in these countries the
responses to price and wage movements can be "perverse" (i.e., not in the direction of equilibrium).
There exists monopolies in connection with resource purchase and product sale. In the countries like
Pakistan Lewis model of unlimited supplies of labor applies, i.e., the unlimited amount of labor is
available at the prevailing wage rate. In such situation, the wages will remain depressed benefiting the
profit earners at the cost of wage earners. Thus the invisible hand in the poor countries like Pakistan
will not act to promote the general welfare but rather it will lift up those who are already well-off by
pushing down the vast majority. In other words, the resources of the poor economies will shift in favor
of rich elites.
The liberalization of 'International Payments System', i.e. the convertibility of rupee in dollar in
Pakistan and open sale and purchase of dollars will put our economy in trouble when we are having a
poor export base and a higher import-base. Again, we do not possess any thing to meet the
challenges which would arise after the promulgation of WTO rules. In such state of affairs, our
dependence on international agencies like IMF and IBRD will increase (like previous experience)
where we will be victimized by their conditional ties. Such scenario will be nothing more than what has
been told to this by 'the Neo-Marxist theory of growth'.
Traditional/Old and Modern/New Growth Theories:

Traditional/Old Growth Theory:
According to traditional/old growth theory output growth results from one or more of three factors:
(i) Increase in the quality and quantity of labor, (ii) increase in capital through saving and (iii)
investment and improvement in technology.
But as far as the poor closed economies are concerned they are furnished with very low rates of
savings. Accordingly, their growth rates remain very low. On the other hand the economies where the
saving rates were higher their per capita incomes rose very sharply. In the presence of open
economies the capital out flowed from the rich economies to the poor economies where capital labor
ratios were lower and thus the returns on investment were higher. Therefore, the measures to impede
the inflow of foreign investment on the part of governments of UDCs retorted their growth.
Thus, the cornerstone of neo-classical free market theory is attached with the liberalization of
domestic markets which will attract domestic and foreign investment. In this way, the capital
accumulation in the 3rd World Countries will increase.. In terms of GNP growth, this will be equivalent
to raising domestic saving rates which will enhance capital labor ratios and per capita incomes in
capital poor developing countries.
Modern/New/Endogenous Growth Theory:

The traditional neo-classical growth theory stressed upon foreign inflow of capital to meet the saving
gap in UDCs. But practically, such all led to 'debt crises' in Latin American and African countries etc.
during 1980's and 1990's. In such situation the disparities between the rich and the poor countries
widened, rather decreasing. The World Bank and IMF imposed free market reforms on highly
indebted countries. Such all should have promoted the higher investment, higher productivity and
improved standard of living for the masses of the 3rd world countries. But after such prescribed
liberalization of trade markets, many UDCs experienced little or no growth and failed to attract new
foreign investment or to halt the flight of domestic capital (the case of Pakistan which failed to bring
any drastic change in its economic life even following 'Stand by Arrangements' and
'Structural Adjustments programs' imposed by IMF and World Bank). With this back ground the
economists have presented a new approach to the economics of growth and development which is
known as 'Endogenous Growth' or 'New Growth Theory'. Now we discuss its features.
The New Growth Theory or the Endogenous Growth Theory provides a theoretical framework to
analyze the endogenous growth, i.e., the increase in GNP of a country. Here the growth of GNP
depends upon the system of production function where the variables of the system are endogenous
rather than exogenous. Contrary to traditional neo-classical growth theory the supporters of the New
Growth Theory are of the view that the increase in the GNP of a country is the natural result of long
run equilibrium. The endogenous growth theory analyses what determines the growth rate in a
country and why the growth rates differ among the countries. In other words, in this theory, it is
analyzed that what are the determinants of the rate of growth of GDP (shown by λ) which Solow
calls Residual Factor in his model.
Difference Between Old and New Growth Theories:
Despite certain resemblances with neo-classical theory, the new growth theory is different from the
neo-classical theory on the basis of its assumptions and implications. The differences in these two
theories occur due to three factors:
(i) The new growth theory rejects the neo-classical assumption that the marginal returns decrease
along with increase in investment.
(ii) This theory stresses upon increasing returns to scale.
(iii) The externalities also play their role in the determination of returns from investment.
As the supporters of this theory are of the opinion that there arise so many externalities due to public
and private investment in human capital. They increase productivity. Hence, the natural tendency of
falling or diminishing returns can be checked. Thus, when there applies increasing returns to scale,
the incomes of the countries will move away from equilibrium levels of the income. The role of
technology in the endogenous growth theory, but it does not play necessary role in the determination
of equilibrium level of national income.
Like H-D model, the new growth theory is also expressed with this simple equation:
Y = AK
Where A is some factor which influences technology, while K represents the physical and human
capital. This equation does not show the decreasing returns from the capital. Thus there exists the
possibility that because of investment in physical and human capital the External Economies and
Productivity increases could occur which offset the decreasing returns. As a result, an economy
experiences a sustainable growth in long run which is not accepted by traditional growth theory.
The new growth theory, in order to attain rapid economic growth not only stresses upon the capital
formation in human capital and savings, but it also describes following implications for growth which
are contrary to the traditional theory.
(i) In closed economies there does not exist any force which could take the economy to equilibrium
level.
(ii) National growth rates remain constant and differ across countries depending upon national saving
rates and technology levels.
(iii) There is no tendency for per capita income levels in capital poor countries to catch up with those
in rich countries with similar saving rates. As a result of these facts a temporary or a prolonged
recession in one country leads to a permanent increase in the income gap between itself and the
richest countries.
The different models of 'New Growth' theory also give this view that the international capital flows
increase the wealth disparities between the First World and Third World. This theory thinks that the
expected higher rates of return on investment in UDCs which have low K/L may be offset by the lower
levels of 'Complementary Investments' in human capital (education and training), infra-structure and
research and development. Again, it has also been found out that the poor countries benefit less from
the capital expenditures made on human capital formation etc. As the individuals receive no personal
gain from the positive externalities created by their own investments, the free market leads to the
accumulation of less than the optimal level of complementary capital.
Where complementary investments produce social as well as private benefits, govts. may improve the
efficiency of resource allocation by providing public goods or encouraging private investment.
Therefore, the new growth theory on the contrary to counter revolution theory, suggests for an active
role for public policy in promoting economic development. Thus, the new growth theory, despite
similarities with neo-classical theory, is a departure, from dogma of 'free markets' and 'passive role of
governments'.
According to New Growth Theory (NGT), the complementarily investment results in private and
public investment. The complementarily investment can do so by providing infrastructure and
promoting private investment in knowledge-based industries. As a result, not only the human capital
formation will increase, but increasing returns will also emerge.
Thus, quite against Solow model, the models of NGT accord the technical progress as an
endogenous result of public and private investment in human capital and the existence of knowledge-
based industries. Hence, the NGT models emphasize upon enhancing investment in human capital
directly and indirectly for the sake of economic growth. Again, these models encourage the foreign
direct investment in the fields of computer software while establishing knowledge or information-
based industries.
Romer's Model of Endogenous Growth Theory:

Prof. Romer, in his Endogenous Growth Theory Model, includes the technical spillovers which are
attached with industrialization. Therefore, this model not only represents endogenous growth but it is
closely linked with developing countries also. Moreover, in Homer's model, just the technological
spillovers are considered ignoring the determinants of savings and the problems of general
equilibrium.
According to Romer, the processes of production are derived at the level of a firm or industry. Each
firm individually operates under perfect competition. In this way, this model coincides with perfect
competition, and up till here, this model is close to the assumptions of Solow model. But Romer
deviates Solow when he assumes that the stock of capital in economy (K) influences the level of
output positively at the level of industry. This situation leads to generate increasing returns at the
industry level.
Romer includes the level of knowledge in firm's stock of capital. The knowledge part of the stock of
capital is essentially a public good (as it has been shown with A in the Solow model). This knowledge
or information shift over to the other firms rapidly in the form of a jump. Hence, this model wants to
promote learning by investing. Accordingly, in Homer's model, the investment in learning or
knowledge determines the economic growth, while in the H-D model, it is the physical investment
which determines the rate of economic growth.
Formula/Equation:
The formula for basic production function, according to Romer is as:
Yi = AKiα Li1-α K-ß
For the sake of simplicity, he considers all the industries alike. As a result, each industry will employ
similar amount of capital and labor. Accordingly, the aggregate production will be as:
Y = AKα+ß L1-α
In the beginning, we assume that the value of A does not increase with the passage of time, rather it
remains fixed. It means that for the time being it has been assumed that no technical progress takes
place. As we take the total differential of the general production function and divide it by dt as:
Where g shows the rate of growth of output and n represents growth of population. As Solow model
assumes constant returns to scale, therefore, in that model ß = 0. Hence, in the absence of technical
progress the per capita growth rate will be zero.
All the three factors described by Romer which also include the externalities of capital, will make ß =
0. As a result, the per capita growth rate, i.e., g - n > 0, and Y/L , i.e., per capita output will be
increasing. Again, we have introduced the endogenous growth in the model which depends upon
savings and investment, not on the productivity like exogenous factor. Thus, the notable property of
Romer's model is this that because of investment or technical spillover, the diminishing return's of the
capital can be checked.
Criticism of New Growth Theory:

(i) The main flaw of NGT is this that it is also based upon so many traditional neoclassical
assumptions which are not applicable in case of UDCs. As , here it has been assumed that there is a
single production sector or all the industries are alike. Therefore, because of growth, the re-allocation
of labor and capital amongst different industries and sectors is not entertained by the NGT. Moreover,
in case of UDCs, the economic growth is also affected by weak infrastructure, inadequate institutional
setup and ineffective capital and goods markets. As the NGT ignores such like powerful factors,
therefore, when we analyze the growth rate of different countries, we will not be able to implement this
theory.
(ii) The backward countries are not only poor because of reduced savings and investment in human
capital but also because they have a backward system of incentives. The developing countries often
experience the allocate inefficiencies, particularly when they transform themselves from traditional
economists to commercialized market system.
(iii) The NGT is concerned with the determination of long run growth rate whereas as far as
developing countries are concerned, it is more important for them to determine the short term and
medium term growth rate. Moreover, the NGT fails to get the empirical support.

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Week – 8

According to Prof. Nurkse:

Vicious circle of poverty:

Shortcomings/Flaws of the Model:

Factors of Nelson's Trap:

(iii) There exists a shortage and scarcity of uncultivable area of land.

(iv) The economy is having inefficient techniques of production.

(v) The economy is furnished with social and economic inertia.

(i) Y = f (K, L, Tech.).

Now we present Fig. 1 to demonstrate this theory.

Methods to Escape from Trap:

(i) There should be a favorable socio-economic political environment in the country.

(ii) Social structure be changed by greater emphasis on theft and entrepreneurship.

(iii) The size of the family by reduced.

(iv) Measures be taken to change the distribution of income.

(v) The proportion of public investment be increased.

(vii) Improved techniques of production be used to utilize the existing resources.

Leibenstein's Critical Minimum Effort/Theory of Under

Leibenstein introduces two types of incentives for UDCs:

(i) Zero sum entrepreneurial activities.

(ii) Conservative activities of organized and unorganized labor.

(v) Increase in population.

(vi) The high capital-output ratio.

Big Push Theory By Rosenstein Rodan and Economic

(ii) It is lumpy and it has a minimum durability.

(iii) It lasts for a longer period of time and it is irreversible.

Linear Stages Theory and Rostow's Stages of Economic

W.W. Rostow's Stages of Economic Growth:

(1) Traditional Society:

(2) Pre Conditions to Take Off:

(a) To meet the increased needs of growing population.

(3) Take Off Stage:

(i) The rate of investment must rise from 5% to 10% of GNP.

(a) Primary growth sectors:

(b) The Supplementary growth sectors:

(c) The Derived growth sectors:

(4) Drive to Maturity Stage:

(5) Age of High Mass Consumption Stage:

Practical Importance of Rostow's Stages:

(iv) No Distinction Between Pre-Conditions and Take-Off: The characteristics of pre-conditions

(vi) Pre-Conditions is Not a Chronological Concept: According to Caironcross it is incorrect to say

Rostow's Stages and UDCs:

Harrod-Domar (H-D) Growth Model:

As I = ΔK, and ΔK = k.ΔY, then:

S = sy= k.ΔY = ΔK = I or simply, it is:

Dividing the above equation by Y and k:

ΔY/Y = s/k = 6%/3 = 2%

ΔY/Y = s/k = 15%/3 = 5%

Adelman and Morris Stage Theory OR Social, Political,

Application of Factor Analysis to the Identification of Stages:

(ii) The importance of the indigenous middle class.

Socio-Culture Indicators Political Indicators Economic Indicators

Political and Social Indicators Routed Factor Loadings Commonality

Factor 4 (F4) refers to social and political stability.

Where x is a column vector of n indicators, A is a vector of 1 x n, B is a matrix of n x q, f is a vector of

A further interpretation of rotated factor loading is given as:

International Structuralist Models:

Neo-Colonial (Neo-Marxist) Dependence Model:

In this respect Dos Santos Writes:

"Under-development is a consequence and particular form of capitalist development known as

Dualism and the Concept of Dual Societies:

Factors of International Dualism: