Chapter 3: Classic Theories of Economic Growth and Development

Development - a MULTIDIMENSIONAL process involving the reorganization and

reorientation of entire economic and social system – cultural, institutional, & political.

Four (4) Theories of Economic Development:

1. Linear-Stages-of-Growth Models
2. Theories and Patterns of Structural Change
3. International Dependence Revolution
4. Neoclassical, Free Market Counterrevolution

Linear-Stages-of-Growth Models
1. Rostow’s Stages of Growth
○ country passes through a sequential stages in achieving development
Stage Dependency
Stage 1: Traditional Society Rural Economy
- Agricultural dominance, simple
economy, subsistence
economy, barter system (now
impractical)
Stage 2: Transitional Society Social Appreciation of Education and
Skill Development
- Specialization - mode of
economy; to enhance this,
infrastructure is needed
Stage 3: Take Off Sub-urban Economy
- critical stage; make/break; - Industialization
either successful/babagsak; - Fast movement of people
almost all countries have (mobilization)
experienced this stage
Stage 4: Drive to Maturity Growth and Developed Economies
- Diversification of products
- Mass production
- High reliance on export
Stage 5: High Mass Consumption Global Economy and Market-Managing
Economies
- Focused on consumer goods
(demands)
- Rely on quality & reliable
service
2. Harod-Domar Growth Model -
○ shows an economic relationship in which growth rate is directly
dependent on levels of saving and is inversely dependent on capital-
output ratio
○ Capital goods - used to produce finished goods; depreciate over time
(e.g. machines, materials, equipment
○ Capital-output ratio – shows the units of capital required to produce a

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 ○ Capital-output ratio – shows the units of capital required to produce a
unit of output over a period of time
○ The problem: capital depreciation due to being worn-out and impaired of
capital goods (buildings, equipment and materials)
✓ Investment
✓ Labor force growth
✓ Technological progress
○ Capital-intensive economies - heavily reliant on machineries (e.g. use
of AI)
○ Labor-intensive economies - many human workers
○ We should invest in labor-intensive (according to Harod-Domar)
○ Developed countries look for developing countries that offer cheap labor
(outsourcing)
○ Low capital goods = low output
 Depreciation is not good; hence, it is not good to invest too much
on capital goods

• Criticisms on Linear-Stages-of-Growth Models

○ It is a necessary condition but not the sufficient condition.
○ Changing international economic order
 We now live in a collaborative world
 Decoupling - phenomenon wherein they break the chain
(disintegration of markets); NIC
○ Attitudinal conditions (i.e. educated workforce, efficient government, &
motivations to succeed)
○ Developed transport system

Theories and Patterns of Structural Change

- Underdevelopment is due to the underutilization of resources
- Structural change: rural and urban structure
1. Lewis Two-Sector Model
○ From rural to urban shift --- Lewis Turning Point
○ Aim: marginal productivity - adding labor
Agricultural Sector Manufacturing Sector
Non-capitalist Capitalist
Low profitability Profit incentive
Low opportunities Rising wages
Subsistence farming Opportunities
Low Productivity High Productivity
High Population Medium to High Population
○ Surplus labor – portion of the rural labor force whose marginal
productivity is zero or negative; exists because of unemployment
○ Surplus labor from the traditional agricultural sector is transferred to the
modern industrial sector

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 ○
modern industrial sector
○ Criticisms on Lewis Two-Sector Model
 Reinvestment to sophisticated labor-saving capital equipment
 Capital flight (abroad)
 Prevalence of Urban surplus labor
 Modern sector wage rises quickly even unemployment exists
□ Wage rises for professionals and IT
□ Opportunities are in the modern sector because of the need
for education as a qualification
○ Mcdonaldization - G. Ritzer
 As we industrialize, more business are emulating Mcdo's
processes/principles---efficiency, predictability, calculability, control
(all quantifiable)
 Some purchase capital equipment instead of human capital, which
contradicts the view that Urban areas provide more job
opportunities
2. Chenery’s Patterns-of-development Analysis
○ A shift from:
 Agricultural → Industrial
 Food & Basic Necessities → Manufactured goods & services
 Accumulation of physical & human capital - qty. over quality
 Farms → Cities (Migration)
 Overall population growth (though there is a decline in family size
due to death)
 Children lose their value → Children quantity rather than quality
□ Parents consider children as investments
○ Criticism on Chenery’s Patterns-of-development Analysis
 Wrong conclusion about causality

International Dependence Revolution

- Developing countries are caught up in a dependence and dominance
relationship with developed countries
1. Neocolonial Dependence Model
○ similar to the World Systems Analysis ( I. Wallerstein)
 Core – gives high profit consumption goods to semi & peripheries
 Peripheries – give labor and raw materials to semi & core
□ “reliant” to the CORE
2. False Paradigm Model
○ proposition that developing countries have failed to develop because their
development strategies (usually coming from “experts” from the West)
have been based on an incorrect model of development
 Wrongly adapting/interpreting principles/practices from other
countries
3. Dualistic Development Thesis
○ represents the (co)existence and persistence of increasing divergence
between rich and poor nations
○ Arguments:
 Superior & inferior conditions can co-exist in a given space

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  Superior & inferior conditions can co-exist in a given space
 The co-existence is chronic and not merely transitional
 Inherent tendency to increase the productivity gap
 Develop its underdevelopment through trickle-down effect
□ Pakaunti nang pakaunti iyong naipapasang benefits/aid sa
inferior/poor
• Implication
○ Autarky – a closed economy that attempts to be completely self-reliant
(North Korea)

Neoclassical, Free Market Counterrevolution

1. Neoclassical Counterrevolution Model
○ market fundamentalism; similar to free market analysis (Adam Smith)
○ Free Market – prices freely rise/ fall when buyer’s demand rise/fall or
seller’s supply rise/fall
○ Laissez-faire economics – economies and businesses function best when
there is no interference by the government
○ Unregulated market vs government-regulated market
 Unregulated market will be more prone to self-interest
 Invisible hand - selfish desires give positive impact to the economy
2. Public Choice Theory
○ new political economy approach - let the consumers decide
○ self-interest guides all individual behavior and that government are
inefficient and corrupt because people use government to pursue their
own agenda
3. Market-friendly Approach
○ requires government to create an environment in which markets can
operate efficiently and to intervene only selectively in the economy in
areas where the market is inefficient (market failure)
○ Solve market failures - e.g. building roads
4. Solow Neoclassical Growth Model
○ growth model in which there are diminishing returns to each factor of
production but constant returns to scale
○ a steady-state growth path is reached when output, capital, and labor are
all growing at the same rate.
○ Factors Affecting Output Growth:
 Increase in labor quantity and quality (through population growth
and education)
 Increase in capital (through savings and investment)
 Increase in technology
Open Economy Closed Economy
- Practices foreign trade - No foreign trade transaction

Development is theoretical and human-made.

- Theoreical - not absolute truth
- Human-made - we can create our own version of development

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