Module 2 classic Theories of economic development

• Theory

  A systematic explanation of interrelationships among economic variables, and its purpose is to explain causal relationships among these variables
• Classic Theories of Economic Development: Four Approaches

  • The Linear Stage-of-Growth Model
  • Structural Change Model
  • International-Dependence Revolution
  • Neoclassical, Free Market Counterrevolution
• The Linear Stage-of-Growth Model

  1. Heavily inspired by the Marshall Plan

  2. Transform their agrarian economy into an industrialized one
• Rostow's Stages of Growth Model

  1. The Traditional Society

  2. Preparatory Stage

  3. Take-off Stage

  4. Drive to Maturity

  5. Stage of Mass Consumption
• Harrod-Domar Growth Model


  Used to explain an economy's growth rate in terms of the level of savings and productivity of capitals
• Capital-Output Ratio (COR)

  If low, a country can produce more with little capital. If high, more capital is required for production and value of output is less
• Structural Change Model

  Demonstrate how a country's economy transforms from the subsistence level
• Two Sectors Surplus Labor Theoretical Model (W. Arthur Lewis)

  • Overpopulated rural sector with zero marginal labor productivity
  • Highly urbanized and industrial manufacturing and service economy
• Pattern of Demand Analysis (Hollis B. Chenery)

  1. Shift from agricultural to industrial production

  2. Steady accumulation of physical and human capital

  3. Change in consumer demand from basic necessities to diverse manufacturing of goods

  4. Growth of cities and urban industries

  5. Decline in family size and overall production

  6. International trade, creating a market for its exports
• Four Key Arguments of the International-Dependence Revolution

  • Different sets of conditions coexist
  • Chronic co-existence (not temporary) of wealth and poverty
  • Degrees of superiority or inferiority show no signs of diminishing and instead increases
  • Superior element does little to pull up or "trickle down" to the inferior element
• Neo-Colonial Dependence Model

  • Indirect outgrowth of Marxist thinking
  • Underdevelopment as a result of historic evolution
  • Regardless if intentional, nations are under an unequal power relationship
  • Small elite ruling class
• False-Paradigm Model

  • Underdevelopment as a result of faulty and inappropriate advice by well-meaning through uninformed or biased advisers
  • Inappropriate policies merely serving vested interest of existing power groups
  • Intellectuals, economists, civil servants trained in alien and "irrelevant" western concepts
• Dualistic-Development Thesis

  • The existence of the superior elements actually serve to push down the inferior elements (let alone "trickle down")
  • In interrelations, the superior elements do little or nothing to pull up the inferior elements
• Neoclassical, Free Market Counterrevolution

  Challenges Stalist models in favor of free markets, public choice and market-friendly approaches
• Adam Smith

  Father of economics
• Aspects of Adam Smith's Theory of Economic Development

  • Division of labor
  • Capital accumulation
• Division of Labor

  Analysis of the factors that bring about expansion of output is the division of labor, benefits of division of labor he refers to increase in dexterity, saving in time, and invention of better machines and appliances
• Accumulation of Capital

  As a means of economic development, Adam Smith gave an important place to saving and accumulation of capital
• Vicious Circle of Poverty

  Productivity of people is low because the capital stock is small; capital stock is small because savings of the people are small and savings are low because incomes of the people are small due to their low productivity
• Way out of the Vicious Circle

  The capitalist class that saves most of their profits and invests in capital accumulation for accelerating economic growth