CHAPTER 3

Classic Theories
of Economics Growth and
Development
A. Classic Theories of Economic
Development: Four Approaches

A.1 Linear Stages of Growth Model

* Focused on theories and patterns of
structural change.

A.2 Theories and Patterns of Structural Change

* Viewed underdevelopment in terms of
international and domestic power relationships,
institutional and structural economics rigidities
and the resulting proliferations of dual
economies and dual societies.
A.3 International Dependence Revolution
* Emphasized external and internal
institutions and political constraints on
economic development.

A.4 Neo-classical Free Market Counter

Revolution
* Emphasized the beneficial role of free
markets, open economies and privatization of
inefficient public enterprises.
B.Development as Growth and the Linear
Stages Theories

B.1 Rostow’s Stages of Growth

* Walt W. Rostow – American economic
historian.
* The transition from under development
to development can be described in terms of a
series of steps or stages through which all
countries must proceed. (traditional society,
pre conditions for take-off, take-off, drive to
maturity, age of high mass consumption).
Walt Whitman
Rostow's Five
Stages of
Economic
Growth Model
Walt Rostow took a historical
approach in suggesting
that developed countries have
tended to pass through 5 stages to
reach their current degree of
economic development.
1. Traditional society. This is an
agricultural economy of
mainly subsistence farming, little
of which is traded. The size of the
capital stock is limited and of low
quality resulting in very low labor
productivity and little surplus
output left to sell in domestic and
overseas markets
Stage # 1. Traditional Society:

● This initial stage of traditional society signifies a primitive society

having no access to modern science and technology. In other words, it
is a society based on primitive technology and primitive attitude
towards the physical world.
● However, Rostow does not view this traditional society as being
completely static. In this stage of a society output could be increasing
through the expansion of land area under cultivation or through the
discovery and spread of a new crop. But the critical fact about this type
of society is that there is limit to attainable output per head. This limit
arises due to the absence of access to modern science and technology.
● This type of a society allocates a large proportion of its resources to
agriculture and is characterized by a hierarchical social structure in
which there is little possibility for vertical mobility. The value system
that prevails in such a society is what Rostow calls a long-run fatalism.
People of these societies think that not much economic progress is
possible for them and for their future generations.
1. Pre-conditions for take-off.
Agriculture becomes
more mechanized and more output
is traded. Savings and investment
grow although they are still a small
percentage of national income
(GDP). Some external funding is
required - for example in the form
of overseas aid or
perhaps remittance incomes from
migrant workers living overseas.
Stage # 2. Preconditions or the Preparatory Stage:
This covers a long period of a century or more during which the preconditions for take-off are established.
These conditions mainly comprise fundamental changes in the social, political and economic fields.

For example:
(a) A change in society’s attitudes towards science, risk-taking and profit-earning;
(b) The adaptability of the labor force;
(c) Political sovereignty;
(d) Development of a centralized tax system and financial institutions; and
(e) The construction of certain economic and social infrastructure like railways, ports, power generation and
educational institutions.

It is evident from above that in this second stage of growth foundations for economic transformation are laid.
The people start using modern science and technology for increasing productivity in both agriculture and
industry. Further, there is a change in the attitude of the people who start viewing the world where there are
possibilities of future growth. A new class of entrepreneurs emerges in the society who mobilize savings and
undertake investment in new enterprises and bear risks and uncertainty. In the sphere of political organization, it
is during this stage that an effective centralized nation state starts emerging.

Thus in the stage of precondition for take-off Rostow views agriculture as performing three roles; first,
agriculture must produce sufficient food grains to meet the demand of growing population and of the workers
who get employment in agriculture. Secondly, increase in agricultural incomes would lead to the demand for
industrial products and stimulate industrial investment. Thirdly, expanding agriculture must provide much of the
savings needed for the expansion of the industrial sector.
1. Take-off. Manufacturing industry assumes
greater importance, although the number of
industries remains small. Political and social
institutions start to develop - external finance
may still be required. Agriculture assumes
lesser importance in relative terms although
the majority of people may remain employed
in the farming sector. There is often a dual
economy apparent with rising productivity and
wealth in manufacturing and other industries
contrasted with stubbornly low productivity
and real incomes in rural agriculture.
Stage # 3. The “Take-Off’ Stage

● “The take-off stage” is defined as “the

interval during which the rate of
investment increases in such a way that
real output per capita rises and this initial
increase carries with it radical changes in
the techniques of production and the
disposition of income flows which
perpetuate the new scale of investment and
perpetuate thereby the rising trend in per
capita output.”
● Thus, the term “take-off ” implies three
things – first, the proportion of investment
1. Drive to maturity. Industry
becomes more diverse. Growth
should spread to different parts of
the country as the state of
technology improves - the
economy moves from being
dependent on factor inputs for
growth towards making better use
of innovation to bring about
increases in real per capita
incomes
Stage # 4. Drive to Maturity – Period of Self-Sustained
Growth

● This stage of economic growth occurs when the economy

becomes mature and is capable of generating self-sustained
growth. The rates of saving and investment are of such a
magnitude that economic development becomes automatic.
● The initial key industries which sparked the take-off
decelerate as diminishing returns set in. But the average rate
of growth is maintained by a succession of new rapidly-
growing sectors with a new set of leading sectors. The
proportion of the population engaged in agriculture and other
rural pursuit’s declines, and the structure of the country’s
foreign trade undergoes a radical change.
1. Age of mass consumption.
Output levels grow, enabling
increased consumer
expenditure. There is a shift
towards tertiary sector
activity and the growth is
sustained by the expansion
of a middle class of
consumers.
Stage # 5. Mass Consumption

● In this stage of development per capita income of a country

rises to such a high level that consumption basket of the
people increases beyond food, clothing and shelters to articles
of comforts and luxuries on a mass scale.
● Further, with progressive industrialization and urbanization of
the economy values of people change in favor of more
consumption of luxuries and high styles of living.
● New types of industries producing durable consumer goods
come into existences which satisfy the wants for more
consumption. These new industries producing durable
consumer goods become the new leading sectors of economic
growth.
Rostow's Stages of Growth
Development Model
B.2 Harrod-Domar Growth Model

* Every economy must save certain

proportion of its national income, if only to
replace worn-out or impaired capital goods
(buildings, equipment and materials).
* However, in order to grow, new
investments representing net additions to the
capital stock are necessary.
C. Structural Change Models

* Focuses on the mechanism by which

underdeveloped economies transform their
domestic economic structures from a heavy
emphasis on traditional subsistence agriculture
to a more modern, more urbanized and more
industrially diverse manufacturing and service
economy.
C.1 The Lewis Theory of Development

* The underdeveloped economy is

consists of two sectors: a traditional, over
populated rural subsistence sector
characterized by zero marginal labor
productivity and a high productivity modern
urban industrial sector into which labor from
the subsistence sector is gradually transferred.
C.2 Patterns of Development Analysis
* Focuses on the sequential process through which the
economic, industrial and institutional structure of an
underdeveloped economy is transformed over time to permit
new industries to replace traditional agriculture as the engine
of economic growth.

*Several characteristic features of the development process

** Shift from agricultural to industrial production
** Steady accumulation of physical and human capital
** Change in consumer demands from emphasis on food and
basic necessities to desires for diverse manufactured goods and
services
** Growth of cities and urban industries
**Decline in family size and over-all population growth
D. The International Dependence Revolution
D.1 The Neo-colonial Dependence Model
* Attributes the existence and continuance of
underdevelopment primarily to the historical evolution of
a highly unequal international capitalist systems of rich
country – poor country relationships.

D.2 The False Paradigm Model

* Attributes underdevelopment to faulty and
inappropriate advice provided by well meaning but often
uninformed biased, and ethnocentric international expert
advisers from developed-country assistance agencies and
multinational donor organizations.
D.3 The Dualistic Development Thesis

* Represents the existence and persistence of

substantial and even increasing divergences
between rich and poor nations and rich and poor
people on various levels.

* Embraces four key arguments: different

sets of conditions, co-existence is chronic and not
merely transitional, degrees of superiority or
inferiority have an inherent tendency to increase,
existence of the superior elements does little or
nothing to pull up the inferior elements.
E. The Neoclassical counter revolution
* Favored supply-side macroeconomic policies,
rational expectations theories and the privatization of
public corporations.

*Central argument is that underdevelopment results

from poor resource allocation due to incorrect pricing
policies and too much state intervention by overly
active developing nation governments.

* Can be divided into three components namely: free

market analysis, public choice theory and market
friendly approach.
 END OF
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