Theories of Economic DevelopmentWhat is Economic Development? Economic Development occurs with the reduction and elimination of poverty, inequality and unemployment within a growing economy. What do theories and models try to do? Economic development theories and models seek to explain and predict how: - Economies develop (or not) over time - Barriers to growth can be identified and overcome - Government can induce (start), sustain and accelerate growth with appropriate development polices Theories are generalizations. While Less Developed Countries (LDCs) share similarities, every country’s unique economic, social, cultural, and historical experience means the implications of a given theory vary widely from country to country. Big Push Theory The Big Push Theory has been presented by Rosenstein Rodan. The idea behind this theory is this that a big push or a big and comprehensive investment package can be helpful to bring economic development. In other words, a certain minimum amount of resources must be devoted for developmental programs, if the success of programs is required. This theory is of the view that through 'Bit by Bit' allocation no economy can move on the path of economic development, rather a specific amount of investment is considered something necessary for economic development. Therefore, if so many mutually supporting industries which depend upon each other are started the economies of scale will be reaped. Such external economies which are attained through specific amount of investment will become helpful for economic development. Balanced growth involves the simultaneous expansion of large number of industries in all sectors and regions of the economy. Balanced growth theory argues that as a large number of industries develop simultaneously, each generates a market for one another. If a large number of different manufacturing industries are created simultaneously then markets are created for additional output. For example, firms producing final goods can find domestic industries that can supply them with their inputs. The benefits of growth are spread over all sectors and, ideally, regions. Rosenstein Rodan has presented three types of indivisibilities and economies of scale. They are as: (1) Indivisibilities in Production Function: When so many industries are established the economies regarding factors of production, goods, and techniques of production are accrued. Rosenstein Rodan gives more importance to economies which arise due to the establishment of social overhead capital. The infra-structure consists of means of transportation, communication and energy resources. They all contribute to development indirectly. They last for a longer period of time. (2) Indivisibilities of Demand: The complementarily with respect to demand requires that UDCs should establish such industries which could support each other. To make investment in one project may be risky because in UDCs the demand for goods and services is limited due to lower incomes. In other words, the also known as theModel of Cumulative Causation. The population continues to grow and rapid urbanisation starts to occur.most of which were European . A rapid expansion of tertiary industry occurs. or the problem of limited market will come to an end in UDCs. although one will take dominance (this is usually textiles).Agriculture starts to become more commercialised as mechanization occurs. Dependency theory or dependencia theory . on 15 countries . when incomes increase due to increase in investment the MPS must be greater than APS.A subsistence economy based on basic agriculture. Stage 1: TRADITIONAL SOCIETY . Economic growth becomes more evenly distributed throughout the country due to a process of filter through .this occurs via Cumulative Causation . Stage 2: PRE-CONDITIONS FOR TAKE-OFF . Walt Whitman Rostow. Political and social reforms and improvements occur in conjunction with the industrialization. the size of market will be extended in UDCs. A specific amount of investment can be made in the presence of specific savings But in case of UDCs because of lower incomes the savings remain low. Earlier industries start to decline as manufacturing takes dominance and a wider range of industries develop. TNC's start to invest and this further provokes the development of industries. and resources start to be exploited. Rostow’s Theory of Economic Development The Rostow Model of Development was created in 1960 by an American.This stage is characterised by the dominating presence of the multiplier effect . In the presence of these indivisibilities and non-existence of external economies only a Big Push can take the economy out of dole drums of poverty. Other than the land for food production there is very limited exploitation of raw materials and so the development of other industries and services is also restricted. Stage 4: DRIVE TO MATURITY . It means a specific amount of investment is necessary to remove the obstacles in the way of economic development. One of the main shifts that occur as a country moves through the 5 stages of the Rostow Model of Development is within the employment sector and the changes that occur here reflect those that happen within industry. This investment is known as FDI = Foreign Direct Investment. Therefore. Industrialisation increases and workers switch from working the land to working in factories thereby kick-starting the process of urbanisation. As a result.and suggested that it was possible for all countries to break the vicious cycle of poverty and develop through the 5 linear stages that construct his model. Infrastructure continues to be developed but growth often remains only in a few regions in the country = growth poles. The outputs are consumed by the producers instead of being exchanged and the only trade that exists is the barter/exchange of items required for living (not done for profit).Growth becomes self-sustaining as it is now supported by technological innovation. Stage 3: TAKE-OFF . He based the Model. Other industries start to emerge.indivisibilities of demand require that at least a certain amount of investment be made in so many industries which could mutually support each other.The initially exploitative industries move elsewhere and any remaining industries shift production to durable consumer goods. Stage 5: AGE OF HIGH MASS CONSUMPTION . which represents economic development. The work is very labour intensive as there is very limited technology. (3) Indivisibility in Supply of Savings: The supply of savings also serves as an indivisibility. Agriculture is crucial to daily life and the only industry that exists. Higher rates of savings can be transferred into higher rates of investment to generate self-sustaining economic growth. It is a central contention of dependency theory that poor states are impoverished and rich ones enriched by the way poor states are integrated into the "world system. but eventually trickle down to the poor. Ricardo predicts all countries gain if they specialize and trade the goods in which they have a comparative advantage. which are borrowed for investment purposes. Therefore. or not 'fully' integrated as is often argued by free market economists. but because of how they are integrated into the system. The Harrod-Domar Savings Model The Harrod-Domar model developed in the l930s suggests that a population’s savings provide the funds. For Lewis growth of the industrial sector drives economic growth. coordinated investments in all industries. Comparative advantage The basis of standard free trade theory.Dependency refers to over reliance on another nation. migrate to the modern industrial sector where high rising marginal product. Dependency theory uses political and economic theory to explain how the process of international trade and domestic development makes some LDCs ever more economically dependent on developed countries. where the opportunity cost of production is lower. It is a body of social science theories predicated on the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states. Absolute advantage Occurs when a country or region can create more of a product with the same factor inputs. The Harrod-Domar model developed in the 1930’s to analyze business cycles. Firm’s profits are reinvested. The Solow Growth Model Economic growth is depends on the quantity and quality of resources and technology. Additional workers in urban areas ." Dependency theory states that the poverty of the countries in the periphery is not because they are not integrated into the world system. Those with the greatest number of backward and forward links to other industries are prioritized. This is true even if one of the trading nations is more productive in all traded goods (has an absolute advantage) compared to the other country. For example. which are borrowed for investment purposes. enriching the latter at the expense of the former.e. The Lewis model is structural change model that explains how labor transfers in a dual economy. Unbalanced Growth Theory Unbalanced growth theorists argue that sufficient resources cannot be mobilized by government to promote widespread. For Lewis growth of the industrial sector drives economic growth. rich families buy local produce and employ servants. Growth means jobs for surplus rural labor. The Lewis Model argues economic growth requires structural change in the economy whereby surplus labor in traditional agricultural sector with low or zero marginal product. etc The Harrod-Domar model developed in the l930s suggests savings provide the funds. Transferring surplus labor from rural to urban areas has no effect on agricultural productivity as MP of rural workers = 0. Comparative advantage exists when a country has a margin of superiority in the production of a good or service i. government planning or market intervention is required in a few strategic industries. The Trickle Down Theory Here the initial benefits of growth go the rich. First introduced by David Ricardo in 1817. The Lewis Dual Sector Model The Lewis model is structural change model that explains how labor transfers in a dual economy. the labor and population element. and (3) the labor supply function (related to population growth). Hence rural urban migration offers self-generating growth. Together with a saving function. With a target growth rate. Assuming that the capital-output ratio is fixed by technology and does not change in the short run. Extra incomes increase demand for domestic products while increased profits fund increased investment. Domar of the USA). coordinated investments in all industries. surplus workers are not taken on by the formal sector.V. Urban poverty has replaced rural poverty. If the country is not capable of generating that level of saving. The Harrod-Domar model in the early postwar times was commonly used by developing countries in economic planning. cannot generate development but differ in that government planning or market intervention is required just in strategic industries. In the long run. and ß is the capital-output ratio). growth rate is constrained by population growth and also by the rate of technological change.increase output hence incomes and profits. Unbalanced Growth Theory Unbalanced growth theorists argue that sufficient resources cannot be mobilized by government to promote widespread. the required saving rate is known. It is more difficult to introduce the third building block of a growth model. alone. Exogenous Growth model The Exogenous Growth theory (or Neoclassical Growth Model) of Robert Solow and others . Where firms invest in new labor saving capital equipment. Recently arrived rural migrants join the informal economy and live in shantytowns Given urban growth drives economic growth it can lead to the neglect of agriculture by government Neglect of Agriculture – yet most people live in rural areas where incomes are relatively low Increased profits may be invested in labor saving capital rather than taking on newly arrived workers For many LDC's. growth rate equals s/ß (s is the saving rate. An example in the Asian context is to ascertain the relationship between high growth rates and high saving rates in the cases of Japan and China. They share analysis with balanced growth theorists that free markets. (2) the saving function. rural urban migration levels have been far greater than the formal industrial sector’s ability to provide jobs. ECONOMIC DEVELOPMENT THEORIES The three building blocks of most growth models are: (1) the production function. a justification or an excuse for borrowing from international agencies can be established. The ability of the modern sector to absorb surplus works depends on the speed of investment and accumulation of capital. The equation takes its name from a synthesis of analyses of growth process by two economists (Sir Roy Harrod of Britain and E. growth rate is solely determined by the saving rate on the basis of whatever is saved will be invested. Harrod-Domar Model The Harrod-Domar theory delineates a functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national saving ratio (s) and inversely on the national capital/output ratio (k) so that it is written a g = s / k. Economic models such as Big Push. One well known example is Bangalore in India. This model is a classical model because it uses the classical assumption of subsistence wage. including in emerging countries is now more and more based on innovation and knowledge. The original Solow (1957) study showed that technological change accounted for almost 90 percent of U. Creating Porter's clusters is one of the strategies used. It is a model taking the peculiar economic situation in developing countries into account: unemployment and underemployment of resources (especially labor) and the dualistic economic structure (modern vs. Take-off. new taxes imposed by the government or savings placed in banks by people in the traditional sector). in our postindustrial economy. are only partial theories of economic growth that address specific issues. Surplus Labor Model The Lewis-Ranis-Fei (LRF) theory of Surplus Labor is an economic development model and not an economic growth model. The existence of surplus labor gives rise to continuous capital accumulation in the modern sector because (a) investment would not be eroded by rising wages as workers are continued to be paid subsistence wage. This process will continue until the surplus labor in the traditional sector is used up. Unlike the Harrod-Domar model. The modern sector entrepreneurs can continue to pay the transferred workers a subsistence wage because of the unlimited supply of labor from the traditional sector. Empirical studies on developing countries have shown different results. Unbalanced Growth..S. In the LRF model.g. The profits and hence investment in the modern sector will continue to rise and fuel further economic growth in the modern sector. economic development. traditional sectors). the purpose is to explain the serious urban unemployment problem in developing countries. economic growth in the late 19th and early 20th centuries. Toronto Marketing Company telephone answering service Harris-Todaro Model The Harris-Todaro (H-T) theory of rural-urban migration is usually studied in the context of employment and unemployment in developing countries. and (b) the average agricultural surplus (AAS) in the traditional sector will be channeled to the modern sector for even more supply of capital (e. The applicability of this model depends on the development stage and economic success in the developing . In the H-T model. This is in line with the Harrod-Domar model but in the context of less-developed countries. Here it is understood that the development process is triggered by the transfer of surplus labor in the traditional sector to the modern sector in which some significant economic activities have already begun. the saving rate will only determine the level of income but not the rate of growth. and so forth. The sources-ofgrowth measurement obtained from this model highlights the relative importance of capital accumulation (as in the Harrod-Domar model) and technological change (as in the Neoclassical model) in economic growth. Even so. saving and investment are driving forces of economic development. The importance of technological change would be reduced to enhancing productivity in the modern sector for even greater profitability and to promote productivity in the traditional sector so that more labor would be available for transfer.places emphasis on the role of technological change. a situation in which the workers in the traditional sector would also be paid in accordance with their marginal product rather than subsistence wage. . The H-T model is applicable to less successful developing countries or to countries at the earlier stages of development. One implication in the H-T model is that job creation in the urban sector worsens the situation because more rural migration would thus be induced.country. China's policy of rural development and rural industrialization to deal with urban unemployment provides an example. In this context. The distinctive concept in the H-T model is that the rate of migration flow is determined by the difference between expected urban wages (not actual) and rural wages. The policy implications are different from those of the LRF model.
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