Theories of Economic Development

 

Classical & Contemporary Theories of

Economic Development

Two type of theories explain how poor country become a developed situation.

Classical Theories

Those are kind of traditional views, that explaining how a country become developed situation from a poor situation.

There are four models;

1. The linear stages of growth models
2. Structural change models
3. International Dependence models
4. Neoclassical counter-revolution model

Each model suggests that, this is the specific reason or key factor that was caused to the development of poor level of country.

1. The linear stages of growth models

This is the first generation of economic development models. That was formulated in the early years after thee world war II.

There are some stages to be pass, when change the position of economic development.

In this stage people have think of that the major injections to the economy need to have a growth rates.

Under the linear stages of growth model, again there are two types of models;

• Rostow’s stages growth model
• Harrod-Domar model

Rostow’s stages growth model

Transition from under development to development would pass through five stages;

1. Traditional society

                 ↓

1. Preconditions for take off

                  ↓

3. Takeoff

                     ↓

4. Drive to maturity

                      ↓

5. High mass consumption

That starting from Barter system, move to the high mass consumption.

The decisive stage is the “takeoff”, through which developing countries are expected to transit from an underdeveloped to a developed state.

Increasing rate of investments is considered to be necessary to induce per capita growth.

According to Rostow’s stage;

If have more manufacturing & industrial sectors, should have investments(more injections)

                                                                                                

Harrod-Domar model

Prime mover of the economy is again investments.

Therefore every country needs capital to generate investments.

The principal strategies of development from the stage approach were commonly used by developing countries in the early post war years.

With a target growth rate, the required saving rate can then be known.

If domestic savings were not sufficient, foreign savings would be mobilized.

2. Structural change models

During most of the 1960 s & early 1970 s, economists generally described the development process as structural change by which there allocation of labour from the agricultural sector(Rural areas) to the industrial sector(Urban areas) is considered the key source for economic growth.

Under the structural change model, again there are two models;

• The two-sector model/Theory of surplus labour
• Structural change & patterns of Development

Lewis’s two sector model (1954)

In urban areas, there are many industries & facilities. As a result of that, in traditional agricultural sector(rural area) labour thinking to shift manufacturing sector(urban area).

Then in urban area may be a surplus of labour.

Labours will pack in urban area more & more but employment opportunities are limited. So in manufacturing sector, there are more labours & there labour cost will low. It means companies have more profits & can have savings. Then can reinvest & reach capital growth.

Structural change & patterns of Development ( Chenery 1960 )

Focused on the pattern of development & hypothesized that the pattern was similar in all countries & was identifiable.

On the process of structural change does recognize that pattern of development can be different among countries, which is dependent on the countries particular set of factors including;

- a country's resource endowment & size

- it is government policies & objectives

- the availability of external capital & technology

- the international trade environment

If considering high of these factors, there is no much influence to the growth rate patterns of developments are differ from country to country.

3. International Dependence models

This is very popular in 1970 s & early 1980 s.

The dependence theory argued that underdevelopment exists because of developed countries & multinational corporations over developing countries.

However, developing countries received a very small portion of the benefits that the dependent relationship brought about.

The unequal exchange, in terms of trade against poor countries, made free trade a convenient vehicle of “exploitation” for the developed countries.

Developed countries can exploit national resources of developing countries through getting cheap supply of food & raw materials.

Meanwhile, poor countries are unable to control the distribution of the value added to the products traded between themselves & the developed countries.

4. Neoclassical counter-revolution model

In contrast with the international dependence model, these approaches mainly argued that underdevelopment is not the result of the predatory activities of the developed countries & the international agencies but was rather caused by the domestic issues arising from heavy state intervention such as poor resource allocation, government induced price distortions & corruptions.

There have introduced three approaches;

• Free market approach -Markets alone are efficient, competition is effective, technology & information freely available & cost less. Government is counterproductive.

• New political approach
  Government do nothing right because of selfish interest, miss allocation of resources.

• Market friendly approach
  Imperfection in economy & need government’s for market friendly interventions(social services & climate for private enterprise), acceptance of market failures.

Contemporary theories

Those are kind of modern theories of economic development;

   1.New growth theory

   2.Theory of coordination failure

      1.New growth theory

Endogenous growth or the new growth theory emerged in the 1990 s to explain the poor performance of many less developed countries, which have implemented policies as prescribed in neoclassical theories.  

This model notes that technological change has not been equal or nor has it been exogenously transmitted in most developing countries.

It emphasizes that economic growth results from increasing returns to the use of knowledge rather than labour & capital.

If country become a growth level, should focus on more knowledge workers rather than technical skills workers.

The new growth models therefore promote the role of government & public policies in complementary investment in human capital formation & the encouragement of foreign private investments in knowledge intensive industries.

    Ex: Computer software & telecommunications

Therefore government need to continuously invest in human capital, then only have knowledge workers & getting level of growth. 

    Ex: Training programs, science laboratory etc. 

     2.Theory of coordination failure

The foundation of the theory of coordination failure is the idea that the market may fail to achieve coordination among complementary activities.

Coordination failure occurs when a group of firms could achieve more desirable equilibrium but fail to because they do not coordinate their decision making.

Here coordination is about decisions of investments. To have return on one investment, there should be presence on another investment.

Therefore there should be a good coordination or good combination in between investments.

Otherwise investments will fail & ultimately it will affect to the economic growth.

    Ex: If have to good return from slippers, firstly there should have good base for rubber. 

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