Development Theory

Module 2 (ii)
Theories of Economic Development:
Structuralism

Disclaimer: In preparation of these slides, materials have been taken from different sources in
the shape of books, websites and research papers etc. This lecture is prepared and delivered only
for educational purposes and is not intended to infringe upon the copyrighted material. Sources
have been acknowledged where applicable. The views expressed are presenter’s alone and do not
necessarily represent actual author(s) or the institution.
Balanced Vs. Unbalanced Growth Models

• Balanced growth theory of economic

development has been associated particularly
with Professors Ragnar Nurkse and
Rosenstein-Rodan
• Their "doctrine" has been challenged by
Albert Hirschman and Paul Streeten who
offered a doctrine of unbalanced growth
 Balanced Growth Models
• Streeten traces balanced growth back to Friedrich List
• Friedrich List: the complementarity between transport and
manufacturing, and the mutual stimulation of correctly
composed production and consumption
• Nurkse: low income-elasticity of demand for exports of less-
developed countries combined with the very low level of
domestic demand are the chief obstacles to successful
development.
• Adam Smith's dictum: "the inducement to invest is limited by
the size of the market."
• Nurkse's answer was simultaneous investment in several or
many mutually interdependent consumer goods industries along
the lines dictated by demand elasticities
• "dynamic expansion of the market" springing from the
simultaneous establishment of several industries, by establishing
pecuniary external economies in the form of demand for each
other's products, could be jointly profitable.
• Rosenstein-Rodan's "big push" theory more stress than Nurkse's
theory on the need for simultaneous investment in the
intermediate and primary sectors of the economy as well as in
complementary final industries.
• Rosenstein- Rodan and Nurkse, are similar in demanding a
"critical minimum effort" on the part of a developing country to
escape from the "vicious circles of poverty" into the realms of
"self-sustained growth."
• Role of Government
– It is hard to envisage balanced growth without some form of central
planning.
– It is "building demand" instead of "building ahead of demand.“
– Nurkse believed that the elimination of demand deficiency would
mitigate the supply deficiencies by encouraging a higher level of saving
and encouraging more induced investment.
– British growth in the eighteenth and nineteenth centuries, when
foreign trade was a primary "engine of growth,"
– presently less-developed countries which need balanced growth
because the opportunity to expand through foreign trade is
unavailable owing to an "export lag”
– Export Lag: "a lag in the rate of growth of external demand in relation
to the rate of growth of domestic factor supplies”
 Unbalanced Growth Model

• Hirschman begins with the assumption that the factor most lacking in
presently less developed countries is the ability to make investment
decisions.
• The technique of economic development is to create strategic
unbalances
• As Streeten puts it:
"the pressures created by lack of balance may render factors of production
and particularly entrepreneurial decisions more responsive to economic
incentives."
• Hirschman also admits the possibility of investing in advance of demand
in industries at a final or near-final stage in the production process,
where the pressure to restore the balance may be political in nature.
• Forward and backward linkage effects of
investment:
– High backward linkage will stimulate demand for products
at an earlier stage in the production process and thus
encourage investment at that stage.
– Forward linkage effects will increase the availability and
decrease the cost of the product at later stages in the
production process
– There is favor of unbalanced growth of those industries
with the maximum combination of effective linkage
effects which probably lie somewhere in the intermediate
stages of production
– The end result of a strategy of unbalanced growth may
well be characterized as balanced growth.
• The process of growth must proceed by
unbalanced steps.
• Streeten sums up the doctrine of unbalanced
growth as follows: Choose projects which
– while advancing some sectors, concentrate the
pressure of unbalance on sectors whose response to a
challenge is likely to be strongest
– while creating bottlenecks, also break them
– while providing new products and services also induce
new development to take place in other directions
– while providing a new product or service, require
consequential investments in other lines.
• Unbalance stimulates growth which leads to
new unbalances and further stimuli
• Such a strategy will often involve building
ahead of demand, running plant at less than
full capacity, and the temporary support of
unprofitable ventures.
Economic Development with Unlimited Supplies of Labor

• The classical economists assumed that an

unlimited supply of labor was available at
subsistence wages.
• Production grows through time due to capital
accumulation
• elaborating the assumption of an unlimited
supply of labor
– Should not be made for all areas of the world
– An unlimited supply of labor may exist in those
countries where population is so large that there
are large sectors of the economy where the
marginal productivity of labor is negligible, zero, or
even negative.
– E.g. “disguised” unemployment in the agricultural
sector
– It is harder to believe that employers will pay wages
exceeding marginal productivity.
• domestic service:
– inflated in over-populated countries
– Social prestige requires people to have servants
• The price of labor is a wage at the subsistence level
• The supply of labor is therefore “unlimited” so long
as the supply of labor at this price exceeds the
demand.
• In this situation, new industries can be created, or
old industries expanded without, limit at the
existing wage ; or, to put it more exactly, shortage of
labor is no limit to the creation of new sources of
employment.
• If we ask from what sectors would additional
labor be available if new industries were
created offering employment at subsistence
wages, the answer becomes even more
comprehensive.
• For we have then not only the farmers, the
casuals, the petty traders and the retainers,
but we have also three other classes from
which to choose.
 Other sources of Surplus Labor
1. there are the wives and daughters of the household.
– The employment of women outside the household depends upon
religious and conventional factors and is a simple matter of employment
opportunities.
– The transfer of women’s work from the household to commercial
employment is one of the most notable features of economic
development.
2. the increase in the population resulting from the excess of births
over deaths.
3. Marx offered a third source of labour to add to the reserve army,
namely the unemployment generated by increasing efficiency
(however this argument can be rejected on empirical grounds )
• In an over-populated economy an enormous
expansion of new industries or new
employment opportunities is possible without
any shortage of unskilled labor becoming
apparent in the labor market.