What is Development?

Development is a multi-dimensional process involving the reorganization an reorientation

of entire economic an social systems

Development is not purely economic phenomenon, but it encompass more the material an
financial side of people’s lives. It involves radical changes in institutional, fundamental
changes in structure of the economy (rising of industry, falling of agriculture in the share
of the GNP, increasing more percentage of people living in the cities, social (decelerating
population growth, change in demographic structure) and administrative structure as well
as attitudes (move on to consumer durables goods, to leisure time products an services) ,
customs and beliefs. Development is further supplemented by non-economic social
indicators (gain in literacy, health conditions and services, provision of housing). A key
element of economic development is that the people of the country must be the major
participant in the process that brought about these changes in the structure.

Under development involves inter nation and domestic power relationship, institutional
and structural economic rigidities; proliferation of economic dualism; dual societies with
and among nations of the world.

Economic growth refers to a rise in national or per capita income and product (measure
as the gross domestic product (the value of goods and services produce by a country’s
economy in a year) divided by the population.

Prior to the1970s, development was nearly seen as an economic phenomenon in which

rapid gains in overall and per capita GNP growth would trickle down to the masses in te
form of jobs and other economic opportunities or create the necessary conditions for the
wider distribution of the economic and social benefits of growth.

The New Development View

Development focuses on the levels of living of the masses of people. It involves in major
changes in social structures, popular attitudes, national institutions, acceleration of
economic growth, reduction of inequality, and the eradication of poverty. Past experience
of economic growth had shown that masses of the people remained for most part
unchanged. This signals that something was wrong with the narrow definitions of
development.

Objectives of Development
1. to increase the availability and widen the distribution of basic life sustaining
goods such as food, health shelter and protection;
2. to raise the level of living including higher incomes, the provision of more jobs,
better education, and greater attention to cultural and humanistic values
3. to expand the range of economic and social choices

1
Economic Theory of Development

The post world war II literature on economic development has been dominated by four
major sometimes competing of thought:

 Linear Stages Theory – the linear stages of growth

Rostow Stages of Growth
Harrod domar Growth Model
 Structural Change Model – theories and pattern of structural change
 International Dependence Revolution -
 Neoclassical Counter Revolution – free market counter revolutions
 Endogenous growth Model – new or endogenoug theory of economic growth

1. Stages of Growth development Model

A. Rostow’s Stages of Gowth (Walt W. Rostow): The trasition from under
development to development can be described in terms of a series of steps or
stages through which all countries must proceed.
 The traditional society
 The pre-condition for take off into sustaining growth
 Take off
 The drive to maturity
 The age of high mass consumption

Take off – the mobilization of domestic and foreign saving in order to generate
sufficient investment to accelerate economic growth. More investment means
more growth

B. Harrod domar Growth Model

- must save a certain proportion of its national income to replace
worn out capital goods
- in order to grow, new investments representing net additions to the
capital stocks are necessary
(1) the country must save (s) some proportion of s of national economy (y)
S = sY
(2) investment (I) – the change in the capital stock K represented by
ΔI= k

Y / K = k (capital output ratio ICOR)

ΔY = k
ΔK

Therefore, ΔK = kΔY

(3) total national savings, (S) must be equal to investment

S=I

2
 We know that S = sY and I = Δk = kΔY
Therefore:
S = sy = kΔY = Δk = I or
Sy = kΔY
Dividing both by Y and the k,

ΔY = s
Y k

Haorrod-Domar theory of economic growth states that the rate of growth of

GNP (ΔY/Y ) is determined jointly by the national savings ratio, s and the
national capital output ratio k. The growth rate of the national income will
be directly and positively related to savings ratio ( the more an economy is
able to save and invest, out of a given GNP, the greater the growth of that
GNP).

The Rate of Growth of GNP is determined by :

o national saving ratio ( s )
o national capital output ratio (k)
o must save an invest a certain proportion of their GNP

Stages of Growth did not work because:

o low level of new capital formation in most poor
countries
o saving and investment is not the necessary sufficient
condition for accelerate economic growth in Less
developed Countries
o inappropriate or irrelevant assumptions of western
economic theory- based on experience of the Marshall
Plan in Europe
o highly integrated and complex international system in
which the best and the most intelligent development
strategies can be nullified by external forces –
international dependence paradigm

2. Structural Change Model

The mechanism by which underdeveloped economies transform their
domestic economic structure from heavy emphasis or traditional subsistence
agriculture to modern more urbanized, more industrial, diverse manufacturing
an services . It is also known as the price and resource reallocation theory

The Lewis Theory:

Structural transformation of:
o traditional an over populate rural subsistence sector characterize
by zero marginal labor productivity - surplus labor

3
 o high productivity of modern urban industrial sector
Criticisms

o the three of its key

o assumptions do not fit the institutional an economic realities of the third world –
increased savings and investment are perceived as necessary but not sufficient
condition for economic growth.
o the rate of labor transfer an employment creation in the modern sector is
proportional to the rate modern sector accumulation growth
o surplus labor in the rural areas but full employment in the urban areas – but in the
third world, unemployment is in the urban areas

2. International Dependence Theory – developing countries as beset by

institutional, political and economic rigidities both domestic and international
and caught up in a dependence and dominance relationship with rich countries.
There three streams of tought:

 The neocolonial Dependence Model

 The false-Paradigm Model
 The dualistic development thesis

Neocolonial Dependence Model

It exist as an indirect outgrowth of Marxist thinking – due to highly unequal
international capitalist system of rich and poor countries relationships. The Centre
is the developed countries while the peripheral are (the less developed countries).
The peripheral are poor – insufficient saving an investment and lack of education
and skills. The dominant countries are endowed with technological, commercial
capital and socio-political dominance over dependent countries

False Paradigm Model

Faulty and inappropriate advice provide by well meaning but often uninformed,
biased and ethnocentric international expert advisers from developed country
assistance agencies and multinational donor organizations
Expert offer sophisticated concepts with elegant theoretical structures, and
complex econometric models for development that lead to incorrect policies. .

Dualistic development Thesis

The world of dual societies – rich nations an poor nations resulted in increasing
divergence and rich and poor people. The four elements are;

o Different sets of condition – superior vs inferior; modern and traditional

methods of production in urban and rural sectors.
o The co-existence of international inequalities

4
 o The degree of superiority or inferiority have an inherent tendency to
increase. The productivity gap between workers in developed countries and
LDC. Failure to pull up the inferior elements by rich countries

4. Neoclassical Counter Revolution

Focusing on the supply side of the economy
due to poor resource allocation due to incorrect pricing policies, an too much state
intervention by the third world government
 permitting competitive free market to flourish
 privatization of state owned enterprise
 promoting free trade an export expansion
 encourage investors from developed countries
 eliminating the plethora of government regulation an price distribution
factors, product an financial markets
 heavy hand of the state an the corruption an efficiency, lack of
economic incentives
 Promoting free market an laisses faire economies

5. Endogenous Growth Model

o The poor performance of neoclassical theories in illuminating the

sources of long term economic growth has led to a general
dissatisfaction with traditional theory.
o The third world debt crisis of 1980 and early 1990 – the traditional
theory fail to explain the dramatic disparities in economic performance
across countries – the growth rate differentials across countries
o Providing emphasis on technology and human capital
o Suggest an active role for public policy in promoting economic
development through direct and indirect investment in human capital
formation
o Encourage foreign private investment in knowledge intensive industries
computer software and telecomunication.