Chapter 3: Classic Theories of Economic Growth and Development

What is Development?

- It is not purely an economic phenomenon, and it must encompass more than

the material and financial side of people’s lives, to expand human freedoms.
- should therefore be perceived as a multidimensional process involving the
reorganization and reorientation of entire economic and social systems.

What to expect in this chapter:

- the historical and intellectual evolution in scholarly thinking about how and
why development does or does not take place

THE FOUR APPROACHES IN THE CLASSICAL THEORIES OF ECONOMIC

DEVELOPMENT

1. Linear Stages of Growth model

- Theorists of the 50s and 60s viewed the process of development as a series
of successive stages of economic growth wherein all countries must pass.
- It was primarily of saving, investment, and foreign aid were all that was
necessary to enable developing nations to proceed along an economic
growth path that had historically been followed by the more developed
countries. Development thus became synonymous with rapid, aggregate
economic growth.
2. Theories and Patterns of Structural Change
- Was first observed in the 70s, together with the third approach.
- Focused on theories and patterns of structural change.
- Used modern economic theory and statistical analysis in an attempt to portray
internal structural change as a stage in a country’s mission into sustaining
rapid economic growth.
3. International-Dependence revolution
- Also introduced in the 70s.
- Was viewed as more radical and political.
- Viewed underdevelopment in terms of international and domestic power
relationships, institutional and structural economic rigidities, and the resulting
proliferation of dual economics and dual societies both within and amon the
nations of the world.
- Dependence theories tend to emphasize external and internal institutional
and political constraints on economic development.
- Emphasis was on the need for major new policies to eradicate poverty.
 - It provided more diversified employment opportunities and reduced income
inequalities.
4. Neoclassical (or neoliberal) freemarket counterrevolution
- Prevailed in the 80s and 90s.
- Emphasized the beneficial role of free markets, open economies, and the
privatization of inefficient public enterprises.
- According to this theory, failure to develop was not due to exploitative external
and internal forces as expounded by dependence theorists, but was a result
of too much government intervention and regulation of the economy.

LINEAR STAGES THEORIES

1. Stages-of-growth model of development

- A theory associated with the American economic historian Walt W. Rostow,
according to which a country passes through sequential stages in achieving
development.
- He argued that advanced countries had all passed the stage of “takeoff into
self-sustaining growth” and underdeveloped countries were either still the
traditional society or the “preconditions” stage that should follow certain set of
rules of development to take off into sustaining economic growth.
2. Harrod-Domar Growth model
- A functional economics relationship in which the growth rate of gross
domestic product depends directly on the national net savings rate and
inversely on the national capital-output ratio.

STRUCTURAL CHANGE THEORY

1. Structural-change theory
- The hypothesis that underdevelopment is due to underutilization of resources
arising from structural or institutional factors that have their origins in both
domestic and international dualism. Development therefore requires more
than just accelerated capital formation.
- 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.
- It employs the tools of neoclassical price and resource allocation theory and
modern econometrics to describe how this transformation process takes
place.
2. Lewis Two-Sector model
- A theory of development in which surplus labor from the traditional agricultural
sector is transferred to the modern industrial sector, the growth of which
 absorbs the surplus labor, promotes industrialization, and stimulates
sustained development.
- formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later
modified, formalized, and extended by John Fei and Gustav Ranis.
- Structural Transformation- The process of transforming an economy in such a
way that the contribution to national income by the manufacturing sector
eventually surpasses the contribution by the agricultural sector. More
generally, a major alteration in the industrial composition of any economy
- Surplus labor- The excess supply of labor over and above the quantity
demanded at the going free-market wage rate. In the Lewis two-sector model
of economic development, surplus labor refers to the portion of the rural labor
force whose marginal productivity is zero or negative.
3. Patterns-of-development analysis
- An attempt to identify characteristic features of the internal process of
structural transformation that a “typical” developing economy undergoes as it
generates and sustains modern economic growth and development.
- 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.
Chapter 1

CHAPTER 1: DISCUSSION QUESTIONS

1. Why is economics central to an understanding of the problems of development?

The term Economics on the other hand deals with production, distribution and
consumption of goods and services and with the theory and management of economies
or economic systems (with respect to money available). It is the study of choice making
behavior of people with the limited amount of resources available at their disposal.
When we compare the two terms i.e. Development and Economics, we find that
Economics is the integral part of the study of development as both move in the same
direction and thus, its study becomes central to the understanding of problems of
development.

3. What do you hope to gain from this course on development economics?

As I go through with this course, I want to gain more knowledge about the real
situations happening across the world. I want also to know how every country cope with
their problems on their development and how helpful is learning from the historical
record of economic progress to handle up with those problems. Lastly, I also want to
know the reason why most of the countries remain poor (in spite of these development
programs they do) while the other countries make rapid progress toward development.

5. Why is an understanding of development crucial to policy formulation in developing

nations? Do you think it is possible for a nation to agree on a rough definition of
development and orient its strategies accordingly?

The aim of any policy that is formulated by a nation is to bring about positive
changes in the economy that are nevertheless for its betterment only. When we say
betterment of positive changes, somewhere we are talking about the development
process only. To formulate a policy for a nation, it has to be clear that, in which area the
country needs to develop and when accordingly it should formulate its policies.

The term development means different nations. To some nations, it would mean
only an increase in its GDP and per capita income and to other, it would mean provision
of health and education facilities and to some nations, it would mean some other
changes so I think it is not possible for a certain nation to agree on a rough definition of
development.

7. How does the concept of “capabilities to function” help us gain insight into
development goals and achievements? Is money enough? Why or why not?
 Amartiya Sen wants to tell us that we should use the commodities by knowing all
the functions related to it.As Amartya Sen said, "Economic growth cannot be sensibly
treated as an end in itself. Development has to be more concerned with enhancing the
lives we lead and the freedom we enjoy.

In the next question, money is really not enough. Freedom and self-esteem and
equality to lead life and enjoy life and use the life in the best way is also a part of
development. Money is enough only to enhance the freedom of choice but not the
development. In development, your function abilities should be increases as much as
possible.

9. What critical issues are raised from the examination of development problems and
prospects facing Brazil?

The Brazilian development has been identified as growth without development in

the recent years due to some critical problems faced by it. these steps to overcome
these problems have also been initiated by the government.

Poverty: though the poverty situation in Brazil is improving, still 15 percent of the
population is earning less than $1 per day. However, government has started a Bolsa
Familia government program in which the poor families shall receive cash from the
government for raising their family on the condition that they will send their children to
school and keep them vaccinated.

Inequality: It has been reflected through a report on Brazil income inequality that
up to 60% of Brazilian population falls under low-income group and only 10% fall under
high-income group. the government has raised their minimum wages as well as through
Bolsa Familia.

Sustainable development: sustainable development preserves the ecology. The

rest of the world benefits from the Brazilian rain forests, through prevention of global
warming. steps have been taken in this regard in the form of payments to forests
dwellers to preserve and protect natural resources and other financial supports

Racial discrimination: this can be seen in various forms of Brazil. One could
rarely see the Blacks in political affairs, educational universities, and in good living
conditions. All these areas are pre dominated by Whites. Initiatives in this regard have
not been so rewarding.

Though per capita income of Brazil must have increased in the past decade, but
until the time above social issues are not resolved for the benefit of the Brazil, there
cannot be development in the real sense in Brazil.
 Chapter 2

CHAPTER 2: COMPARATIVE ECONOMIC DEVELOPMENT

1. For all of their diversity, many less developed countries are linked by a
range of common problems. What are these problems? Which do you think
are the most important? Why?
 1. Lower levels of living and productivity
 2. Lower levels of human capital
 3. Higher levels of inequality and absolute poverty
 4. Higher population growth rates
 5. Greater social fractionalization
 6. Larger rural populations but rapid rural-to-urban migration
 7. Lower levels of industrialization
 8. Adverse geography
 9. Underdeveloped financial and other markets
 10. Lingering colonial impacts such as poor institutions and often external
dependence.
 I think the most important is the lingering colonial impacts such as poor
institutions and often external dependence, because this is still the main problem
today. For example is Philippines, relies heavily on borrowing money from other
countries. It is a developing country, but the fact that the project funds came from
others, it means it is reliant to other countries.

2. Can you think of other common (not necessarily universal but widespread)
characteristics of less developed countries not mentioned in the text? See if you
can list four or five and briefly justify them.
 No presence of civilization, industrialization is directly related to civilization, when
a country is not civilized, and then there is no industrialization, making other
countries easily conclude that this country is under developed or no development
at all.
 Absence of Industrialization, since industrialization is a major trend for
developing countries, if there is no trace of industrialization; they can easily
conclude that this country is under developed or no development at all.
 Low sustainability, because on the lower income sectors they are always the one
vulnerable into this. Low income sectors for example, a contractual worker, which
has a span of time working and after a year or even six months; they need to find
another job. This inhibits the low income sector to sustain their living expenses.
 High Inflation Rates, mostly lower income sectors are affected, reduces their
purchasing power to buy goods and necessities, forcing them either to control
their consumption or do not buy at all.

3. What is meant by the statement that many developing nations are subject
to “dominance, dependence, and vulnerability” in their relations with rich
nations? Can you give some examples?
  In terms of dominance, the developed countries dominated developing nations in
many aspects like military, economic, and etc. one example of this is China
dominating other countries in Asia.
 In terms of dependence, although we may not notice, developing countries rely
on developed countries. We may not depend on them in terms of wealth, but
sometimes we depend on them for the security and alliance. One example of this
is the alliance of Philippines and Russia.
 In terms of vulnerability, we are vulnerable on many factors, like colonization,
because developed countries dominating developing countries, they cannot
simple make policy without the consultation from them losing their rights to
decide.

4. What are some additional strengths and weaknesses of the Human

Development Index as a comparative measure of human welfare? If you were
designing the HDI, what might you do differently, and why?
 The advantage of HDI is that it has many bases, does not rely on income but
also in education and health. It is also accepted worldwide as it offers country
wide data with estimates; it produces much accurate and forecasts results. It also
helps the government to create projects and to allocate budgets to focus on
accordingly. I think I need to add the average family number, as this variable
tends to increase overtime, we can make more approximate and forecast results
so that we can quickly measure human welfare.

5. Why do many economists expect income convergence between developed

and developing countries, and what factors would you look to for an explanation
of why this has occurred for only a limited number of countries and in such a
limited degree so far?
 Economists think that it is a fireworks effect. Meaning, when developed country’s
income increases, the effect is scattered out to other developing countries. Some
developing countries helped by the developed countries, their income are
expected to increase, although at first there would be a huge discrepancy, but it
will shrink over time. The factor that it occurs on limited countries is because of
political status, it is like a give and take; if you give some, you will take some. For
example is when you make alliance to another country, they will help you. They
need to have a something to gain from you to help you.

6. Which measure shows more equality among countries around the world—
GNI calculated at exchange rates or GNI calculated at purchasing power parity?
Explain.
 The GNI calculated at purchasing power parity is that shows more equality since
the GNI is computed by converting it into international dollars that has the same
purchasing power as the dollars of United States that creates a single measure
for all. By using this, the purchasing power was better reflects the living
standards uniformly.
 7. What is the meaning of a “colonial legacy”? Discuss any disadvantages
and possible advantages.
 Colonial legacy is the same as colonialization which means that strong countries
takes over the control over weak countries.
Disadvantages:
 Health impact. Invasion of other countries could produce diseases and hunger
 Enslavement and mass exploitation. Since strong countries have control, they
were forced to work at very low wages
 Inequality among masses. The education was accessible only for rich that led to
inequality among rich and poor masses.
 Resource drain. Strong countries consume the weaker countries resources to
their own advantage.

8. Discuss the differences between the traditional HDI (examined in Appendix

2.1) in comparison to the New NHDI formulation. In what ways do you think either
one is a better measure of human development? In your answer, consider the
significance of computing with a geometric mean, instead of an arithmetic mean.
 The education attainment on NHDI, two components are added; Actual
education attainment and expected attainment of today’s children
 The upper limits to each criterion are increased to observe maximum value.
 The difference between the traditional and NHDI is that the traditional uses GDP
per capita while the new is GNI per capita.
 The better measure for the human development is the NHDI because geometric
mean reflects poor performance directly.
 Chapter 3

1. Stages of growth theory of development says that a developing country passes

through five stages of development, namely traditional society, the pre-conditions
for takeoff into self-sustaining growth, the take off, the drive to maturity, and the
age of high mass consumption. According to it, the developed nations have
passed through the takeoff stages whereas the underdeveloped nations are still
in the stage of being a traditional society. Thus, it is important for underdeveloped
nations to save a portion of their national income plus mobilize their savings
towards generation of sufficient investments, if its to achieve development at a
faster pace.

The structural change theory of Lewis and Chenery is based on the hypothesis
that underdevelopment is due to underutilization of resources. In this theory, an
underdeveloped economy consists of two sectors namely: agricultural and
manufacturing sector.
Neomarxist theory of international dependence believes that underdevelopment
is seen in various nations because of the perpetuation of highly unequal
international capitalist system. The developing nations were once ruled by the
colonialist. These people divided the population into rich and poor class through
mass exploitation, labor, and enslavement and giving access to education to little
elite class of people during that time. This process continues even today and
thus development has not been made possible in these nations.
The false paradigm model says that nations are underdeveloped because they
have blindly accepted the path of development as suggested by the developed
nations without considering the needs of their nation.
Each of these theories has some information about the causes of
underdevelopment in the nations. These reasons, if reconciled, would provide
better solutions for accelerating development processes in various nations.
2. Some people claim that international dualism and domestic dualism are merely
different manifestations of the same phenomenon. What do you think they mean
by this, and is it a valid conceptualization?

Economically speaking, dualism refers to the ideas of “rich and poor”,

when a rich element exists, so does a poor element and vice versa. It is said that
both domestic and international dualism have originating ideas to
underdevelopment, as said in the structural change theory.

International dualism refers to the large scale, where countries are rich or
poor. Domestic dualism, on the other hand, refers to where societies in a country
are rich or poor. The difference between the two solely relies on how big the
scale is dependent upon. The same phenomenon in which these two
 manifestations rely on is underdevelopment, and based on what I’ve understood,
it’s a valid conceptualization because between the two, there is this factor of
comparability in which underdevelopment can be observed in a smaller scale and
a larger scale. I think that by what they meant regarding the statement that they
are merely “different manifestations” of underdevelopment is that that
phenomenon can be observed and can be yielded from these two different
manifestations, but the final observation of these inequalities can stem from
underdevelopment.

3. Given the diversity of developing countries, do you think that there could ever be
a single, unified theory of development? Explain your answer.

Based on the chapter’s information, I think that there can never be a

single, unified theory of development for developing countries, because of the
fact that they are truly diversified, and different from each other, with little to no
common denominator to base the theory onto, apart from the common
similarities and differences. What makes them unique is precisely the reason why
theories on their development cannot be singled out into a unified theory of
development.

4. In what ways do developing countries depend on rich countries? In what ways is

the opposite true?
Interdependence among nations via trade and investment over the period
of time has inevitably increased over time. This has led to the evolution of
International-Dependence revolution. The theory of Dependence
articulates the reliance of developing countries on developed nations’
economic policies to stimulate their own economic growth.

Developing countries depend on developed countries for various reasons

to a large extent. Certain groups in the former with high income and social
status constitute a very small elite ruling class. They are dominated and
are dependent on international specialist power groups including
multinational corporations, the world bank, IMF, etc, which are tied by
funding to wealthy capitalist countries. This in a way shows that they are
dependent indirectly on developed countries.

In opposite, it is said that developing countries give out more to developed

countries via interest payments, income made by expatriates in
developing countries then repatriating home to their own country.