Group 3

Classic Theories of
Economic
Growth and
Development
Classic Theories of Economic Growth and Development:
FOUR APPROACHES

Linear Stages of Growth Model (1950s-1960s)

Theories and Patterns of Structural Change
(1970s)
International-Dependence Revolution (1970s)
Neoclassical, Free-Market Counterrevolution
(1980s-1990s)
Linear-Stages Theories
Massive injection of capital
Historical experience of developed countries

Two models under this Theory

1. Rostow’s Stages of Growth Model
2. The Harrod-Domar Growth Model
 Rostow's
Stages of
Growth Model
Walt Whitman Rostow
(October 7, 1916 - February 13, 2003)

A prominent American economic

historian, professor and political
theorist
an influential advisor to both
President Kennedy and President
Johnson.
Wrote “The Stages of Economic
Growth: A Non-Communist
Manifesto” (1960)
Rostow Stages of Growth
a country passes through sequential stages in achieving
development.

5 Developmental Stages:
1. Traditional Society 4. Drive to Maturity
2. Preconditions to Take-Off 5. Age of High-Mass
3. Take-Off Consumption
Traditional Society Preconditions to
Take-off
This stage is characterized
by a subsistent, Here, a society
agricultural-based begins to develop
economy with intensive manufacturing and a
labor and low levels of more
trading, and a population national/international
that does not have a —as opposed to
scientific perspective on regional—outlook.
the world and technology.

Take-Off
Rostow describes this stage as a short period of intensive growth, in
which industrialization begins to occur, and workers and institutions
become concentrated around a new industry.

Drive to Maturity
This stage takes place over a long period of time, as standards of living
rise, the use of technology increases, and the national economy grows
and diversifies.

Age of High Mass Consumption

This stage takes place over a long period of time, as standards of living
rise, the use of technology increases, and the national economy grows
and diversifies.
The Harrod-Domar Growth Model (1930s-1940s)
By Roy Harrod and Evsay Domar
 The basic idea of the Harrod-Domar model is that economic growth
depends on the amount of capital that is available for investment, and that
the rate of capital accumulation is proportional to the rate of savings.
Capital-Output Ratio
A ratio that shows the units of capital required to produce a unit
of output over a given period of time.
Economic relationship between the size of the total capital
stock, K, and total GDP, Y

Net Savings Ratio

Savings expressed as a proportion of disposable income over some
period of time.
Components of Economic Growth
1. Capital Accumulation
2. Population and Labor Force Growth
3. Technological Progress
 1. Capital Accumulation
Increasing a country’s stock of real capital (net investment in fixed
assets). To increase the production of capital goods necessitates
a reduction in the production of consumer goods.
Physical Capital Stock - The total amount of physical goods existing at
a particular time that have been produced for use in the production of
other goods and services..
Economic infrastructure - The amount of physical and financial capital
embodied in roads, railways, waterways, airways, and other
transportation and communications, plus other facilities such as water
supplies, financial institutions, electricity, and public services such as health
and education.
Human Resources/Capital - Can improve its quality and thereby have
the same or even a more powerful effect on production as an increase
in human numbers.
2. Population and Labor Force Growth
more productive workers, and a large
overall population increases the potential
size of domestic markets.

3. Technological Progress
Increased application of new scientific
knowledge in the form of inventions
and innovations with regard to both
physical and human capital.
 Neutral Technological Progress
Higher output levels achieved with the same quantity or combination of
all factor inputs

Labor Saving Technological Progress

The achievement of higher output using an unchanged quantity of labor
inputs as a result of some invention (e.g., the computer) or innovation
(such as assembly-line production).

Capital-Saving Technological Progress

Technological progress that results from some invention or innovation
that facilitates the achievement of higher output levels using the same
quantity of inputs of capital.
Labor Augmenting Capital-
Technological Augmenting
Progress Technological
Progress
Technological progress
Technological
that raises the productivity
progress that raises
of an existing quantity of
the productivity of
labor by general education,
capital by innovation
on-the-job training
and inventions.
programs, and so on.
 Group 3

The
International-
Dependence
Revolution
Three Major Stream of Thoughts
1. Neocolonial Dependence Model
2. False-Paradigm Model
3. Dualistic-Development Thesis
The Neocolonial Dependence Model
It attributes the existence and continuance of
underdevelopment primarily to the historical evolution of
a highly unequal international capitalist system of rich-
poor country relationship.
It is dominated by such unequal power relationships
between the Center and the Periphery.
Neocolonial Viewpoint of Underdevelopment
Elites inhibit any genuine reform efforts that might
benefit the wider population, and thus leads to even
lower levels of living.
Attributes a large part to the developing world’s
continuing poverty, and the extension of the policies of
industrial countries in the less developed countries
through Comprador Groups.
Underdevelopment is seen as an externally induced
phenomenon.
Theotonio Dos Santos
Underdevelopment is a
consequence and a
particular form of capitalist
development known as
Dependent Capitalism.
Dependent Capitalism is a
conditioning situation in which
the economies of one group
of countries are conditioned
by the development and
expansion of others.
 Pope John Paul II
People must denounce the
existence of economic, financial,
and social mechanisms that
accentuates the situation of
wealth for some and poverty
for the rest.
 The False-Paradigm Model
Developing countries have failed to develop because their
development strategies, which are usually given to them by
Western economists, have been based on an incorrect
model of development.
 The Dualistic-
Development Thesis
Dualism is the existence and persistence of substantial and
even increasing divergences between rich and poor nations
and rich and poor peoples on various levels.
 1. Different sets of 3. The degrees of
conditions, of which inferiority fail to show
some are superior any signs of
and others inferiors, diminishing, but have
Four Key can coexist in a an inherent tendency
given space. to increase.
Arguments
of Dualism 2. This coexistence is 4. The existence of the
chronic and not superior elements
merely transitional. does little or nothing
to pull up the inferior
element.
Dependence, false-paradigm, and dualism theorists place
more emphasis on international power imbalances and on
needed fundamental economic, political, and institutional
reforms, both domestic and worldwide.
Developing countries should not get too entangled with
developing countries and pursue a policy of Autarky, or at
most trade only with developing countries.
Group 3
Underdevelopment results from poor resource allocation
due to incorrect pricing policies and too much state
intervention by overly active developing-nation
governments.
It argues that the developing world is underdeveloped
because of the heavy hand of the state and corruption,
inefficiency, and lack of incentives that permeate the
economies of developing nations.

Neoclassical Revolution
NEOCLASSICAL REVOLUTION
Three Component Approaches

1. Free Market Approach

2. Public-Choice Approach
3. Market Friendly Approach
 Economic system
operates with free
Free markets, often under
the assumption that an
Market unregulated market
Approach performs better than
one with government
regulation.
 It is also known as the New
Political Economy Approach,

Public- which argues that governments

can do nothing right.
It states that self-interest
Choice guides all individual behavior and
that governments are
Theory inefficient and corrupt because
people use government to
pursue their own agendas.
 The notion historically
promulgated by the World Bank
that successful development
policy requires the government to
Market- create an environment in which
markets can operate efficiently
Friendly and to intervene only selectively in
the economy in areas where the

Approach markets are inefficient.

This accepts the notion that
market failures are more
widespread in developing
countries.
Traditional Neoclassical Growth Theory
The liberalization of national markets draws additional domestic and
foreign investment and thus increases the rate of capital
accumulation.
Solow Neoclassical Growth Model
Developed by Robert Solow.
Differed from the Harrod-
Domar formulation by adding
a second factor, Labor, and
introducing a third
independent variable,
Technology, to the equation.
Harrod-Domar Formula
Solow Neoclassical
Growth Formula

Y = Gross Domestic Product

K = Stock of Capital
L = Labor
A = Productivity of Labor
Factors of Output Growth
1. Increase in Labor Quantity and Quality
2. Increase in Capital
3. Improvement of Technology
 Closed Economies or those with no external
activities grow more slowly in the short run than
those with high saving rates and tend to converge
to lower per capita income levels.

Open Economies or those economies with trades and foreign

investments experience income convergence at higher levels
as capital flows from rich countries to poor countries where
capital labor are lower thus return on investments are higher.
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Conclusion and Implications
Whereas dependence theorists saw underdevelopment as an
externally induced phenomenon, neoclassical revolutionists saw the
problem as an internally induced phenomenon of developing
countries, caused by too much government intervention and bad
economic policies.
The problem with this theory is that many developing economies
are so different in structure and organization that the behavioral
assumption and policy precepts of traditional neoclassical theory
are sometimes questionable and often incorrect.
The reality of the institutional and political structure of many
developing world-economies often makes the attainment of
appropriate economic policies based either on markets or on
enlightened public intervention an exceedingly difficult
endeavor.
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