NAME: ALIYU MOHAMMED FARID

MAT NO: FAM/ECO/20001743

DEPARTMENT: ECONOMICS
LEVEL: 300
COURSE CODE: EC0 314
COURSE TITLE: DEVELOPMENT ECONOMICS I
LECTURER: DR B.O. ABERE

THE ROSTOW THEORY OF DEVELOPMENT AND IT APPLICATION TO THE

NIGERIAN ECONOMY
&
MODERN THEORIES OF DEVELOPMENT (DUALISM THOERY, SCHUMPETERIAN
THEORY AND HAROLD-DORMER THEORY) AND THEIR EFFECTIVENESS IN
TACKLING THE PROBLEM OF DEVELOPMENT IN NIGERIA I.E., THE VICIOUS
CYCLE OF POVERTY
INTRODOCTION
This paper will discuss the Rostow theory of development/growth which is
model of economic development that has five stages; the traditional society,
the preconditions for take-off, the take-off, the drive to maturity and the age
of high mass consumption. These stages will be discussed in details as well as
some of the challenges which have been posed by challengers like it being too
linear, neglecting the role of culture and institutions as well as neglecting other
factors of development. The paper will also discuss the theories application in
Nigeria.
Some modern theories of development are also discussed in this paper alike
the Schumpeterian theory, Harold-Domar theory and dualistic theory. At the
end of detailed analysis of each theory, it will be discussed whether any of
them is effective in solving the problem of vicious cycle of poverty (in Nigeria)
which will also be discussed in some detail.

ROSTOW THEORY OF DEVELOPMENT

Economic growth is the multidimensional process involving the reorganization
and reorientation of a country’s economic and social system. In 1960,
American economist, Walt Whiteman Rostow, presented his theory in his book
“stages of economic growth” which was an alternative to the Marxist theory.
In his model he mentions 5 stages towards the achievement of economic and
social reorganization and modernization namely; the traditional society, the
preconditions for take-off, the take-off, the drive to maturity and the age of
high mass consumption. Rostow based these stages on the historical
performance of developed countries e.g., Britain. The basic assumption of his
theory is that countries want to “modernize”, modernization was characterized
by the western world and the society agrees to the materialistic norm of
economic growth. Each of the stages will be looked at critically in order to
determine the position Nigeria resides in Rostow’s model of economic
development which is one of the aims of the paper.
1. TRADITIONAL SOCIETY
For a society to qualify into the Rostow model, it has to be a traditional
society. It is a society that is characterized by nature and limitations in
technology. More than 75% of its labour force has to be occupied in
agriculture. They are characterized by the endless changes in scale and
 pattern of trade, level of agricultural output, scale of production and
fluctuation in population (which may be due to war) and income. They
did not lack inventiveness and innovations, some of high productivity.
but they lacked a systematic understanding of their physical
environment capable of making invention a more or less regular current
flow.
A high proportion of income above minimum consumption levels was
spent in non-productive or low productivity outlays: religious and other
monuments; wars; high living for those who controlled land rents; and
for poorer folk, there was a struggle for land or the dissipation of the
occasional surplus in an expensive wedding or funeral. The bulk of
political power tended to reside with the land owners as well as their
soldiers and civil servants.

2. PRE-CONDITION FOR TAKEOFF

It is known as the “transitional stage”. There are three important
dimensions/features to this transition: firstly, the shift from an agrarian
to an industrial or manufacturing society begins, although this process
may happen slowly. Secondly, trade and other commercial activities
broadens the nation’s market reach not only to neighbouring areas but
also to far-flung regions, creating international markets. Lastly, due to
the participation of a country on the international stage, surplus will be
attained. The surplus attained should not be wasted on the conspicuous
consumption of the land owners or the state, but should be spent on the
development of industries, infrastructure and thereby prepare for self-
sustained growth of the economy later on. Furthermore, agriculture
becomes commercialized and mechanized via technological
advancement; shifts increasingly towards cash or export-oriented crops;
and there is a growth of agricultural entrepreneurship.
According to Rostow, the main economic requirement in the transition
phase is the level of investment should be increased at least to 5- 10
percent of national income. Increased investment depends on the
productivity of agriculture and the creation of social overhead capital.
When agricultural productivity is high, the surplus quantity of the
produce is to be utilized to support an increasing urban population of
workers and also becomes a major exporting sector, earning foreign
exchange for continued development and capital formation. Increases in
 agricultural productivity also leads to expansion of the domestic markets
for manufactured goods and processed commodities, which adds to the
growth of investment in the industrial sector. Social overhead capital
(i.e., basic services for the achievement of industrialization) creation can
only be undertaken by government, in Rostow's view. Government plays
the driving role in development of social overhead capital as it is rarely
profitable, it has a long gestation period, and the pay-offs accrue to all
economic sectors, not primarily to the investing entity; thus, the private
sector is not interested in playing a major role in its development.
According to Rostow, transition is also aided by evolution of science and
advancement in innovation. The pre-conditions of take-off closely track
the historic stages of the (initially) British Industrial Revolution.

3. TAKE-OFF
Take-off is the achievement of rapid growth in a limited group of sectors,
where modern industrial techniques are applied. Sustained growth must
be maintained of key sectors must be maintained in this stage through
rapid expansion of the product of the market. According to Rostow,
take-off is distinguished from earlier industrial surges by the fact that, in
take-off, the application of modern industrial techniques is a self-
sustained process rather than an abortive process i.e., the application of
industrial process is to make the sector self-sustaining not to bring the
sector into existence.
In Rostow’s words, “Not only must the momentum in the three key
sectors of the preconditions for take-off be maintained but the corps of
entrepreneurs and technicians must be enlarged, and the sources of
capital must be institutionalized in such a way as to permit the economy
to suffer structural shocks; to redispose its investment resources; and to
resume growth. It is the requirement that the economy exhibit this
resilience that justifies defining the take-off as embracing an interval of
about two decades. A result-and one key manifestation-of take-off is the
ability of the society to sustain an annual rate of net investment of the
order of, at least, ten per cent. This familiar (but essentially tautological)
way of defining the take-off should not conceal the full range of
transformations required before growth becomes a built-in feature of a
society's habits and institutions”. There is also a change in social and
political structures because rapidly changing society must tolerate
 unorthodox paths to economic and political power. In take-off, a
definitive social, political, and cultural victory of those who would
modernize the economy over those who would either cling to the
traditional society or seek other goals

4. THE DRIVE TO MATURITY

According to Rostow, it is defined as the period when a society has
effectively applied the range of (then) modern technology to the bulk of
its resources. During the drive to maturity the industrial process is
differentiated, with new leading sectors gathering momentum to
supplant the older leading sectors of the take-off, where deceleration
has increasingly slowed the pace of expansion. Some 10-20% of the
national income is steadily invested, permitting output regularly to
outstrip the increase in population.
There are the main structural changes that occur in this stage; Work
force composition in agriculture shifts from 75% of the working
population to 20%, the character of leadership changes significantly in
the industries and a high degree of professionalism is introduced and
environmental and health cost of industrialization is recognized and
policy changes are thus made. During this stage a country has to decide
whether the industrial power and technology it has generated is to be
used for the welfare of its people or to gain supremacy over others, or
the world in total.
Also, through diversification of the industrial base, multiple industries
expand and lead to increase in income which will shift economy from
producing capital goods to producing consumer goods and also lead to
the large-scale investment in social infrastructure of social
infrastructure.

5. THE AGE OF HIGH MASS CONSUMPTION

It is the “developed stage”. According to Rostow, there have been,
essentially, three directions in which the mature economy could be
turned once the society ceased to accept the extension of modern
technology as a primary, if not over-riding objective: to increase security
and to provide welfare; to increase private consumption on a mass basis
and to seek enlarged power for the mature nation on the world scene.
Each country in this position chooses its own balance between these
 three goals. According to Rostow, a country tries to determine its
uniqueness and factors affecting it are its political, geographical and
cultural structure and also values present in its society. Historically, the
United States is said to have reached this stage first, followed by other
western European nations, and then Japan in the 1950s.

The figure below shows Rostow’s stages of growth

APPLICATION OF ROSTOW’S THEORY TO THE NIGERIAN ECONOMY

After a critical analysis of the stages of development according to Rostow, it
will be fair to say Nigeria is past the “take-off” stage because it already had a
self-sustaining sector which grew rapidly in the 1970’s i.e., the oil and
agricultural sector. And to add to the point Nigeria has already recognized
modernization as its main objective and government has created institutions
which distributes its surplus income in such a way that it is able to bounce back
from periods of recession.
According to Rostow, it is also not safe to say that Nigeria is in the “drive to
maturity” stage. Nigeria has introduced policies over the years with the aim of
diversification of the economy like the SAP and NEEDS but they have been
largely unsuccessful as Nigeria is still heavily reliant on oil and agriculture. The
country also invests a significant amount in its social infrastructure (24% of its
budget) but according the WHO, it is not enough. Nigeria also has a complex
transportation system with the railway system currently in development.
Although its roads are not maintained to a high standard. Nigeria also now has
a high demand for consumer good but only o small portion of the population is
able to afford it so recent government strategies have been geared towards
the production of capital goods.
Nigeria is currently between the take-off stage and drive to maturity stage
because it no longer meets the conditions to be considered in the take-off
stage but has not met the conditions to be considered in the drive to maturity
stage

VICIOUS CYCLE OF POVERTY

To be able to know whether modern theories of development are well planned
theories to take care of the problem of vicious cycle of poverty in Nigeria, the
term “vicious cycle of poverty” has to be discussed.
DEFINITION
The concept of ‘Vicious Circle of Poverty’ was developed by prof. Ragnar
Nurkse. His book, “Problem of Capital Formation in underdeveloped Country”,
analysis the problem of development of countries. According to Nurkse, vicious
circle refers to a circular constellation of forces tending to act and react one
another in such a way as to keep a poor country in a state of poverty.
According to doctrine of vicious circle in under developed countries level of
income is low; which leads to low level of saving and investment. Low level of
saving and investment leads to low productivity which again results in low
income.
CAUSES OF VICIOUS CIRCLE
Economists have given many causes for the vicious circle of poverty. According
to Nurkse, lack of capital formation is cause of vicious circle of poverty.
According to Kindleberger, vicious circle is caused by the small size of market.
The causes for vicious circle have been classified into three groups;
  Supply side of vicious circle: It shows that in underdeveloped
countries productivity is so low that it is not enough for capital
formation. Production is low due to low level of capital formation,
and capital formation is low due low level of savings and
investment. Again, the reason for the low level of saving is the low
level of income.
 Demand side vicious cycle: According to Nurkse, on the demand
side, the inducement of investment is low because of the small
purchasing power of the people, which is due to low productivity.
The level of productivity however, is the result of lower level of
capital used in production. The extent of capital formation is low
because of lower inducement to invest. In demand side of vicious
circle, the main reason for poverty is the low level of demand. This
consequently leads to a small market size which becomes as an
obstacle in the path of induced investment. Thus, the investors do
not establish industries on large scale. The productivity remains
low and so the income.
 Vicious circle of market imperfections: The existence of market
imperfection prevents optimum utilization and allocation of
resources. This leads to underdevelopment which paves to
economic backwardness. Human capital plays an important role in
the development of natural resources. But in underdeveloped
countries, because of lower level of knowledge and skills the
resources remain underdeveloped and underutilized. Thus, the
vicious circle of poverty is a result of both sides i.e. supply of and
demand for capital. As a result, capital formation remains low,
leading to low productivity and low income. The economy is
caught in a vicious circle of poverty which is mutually aggravating
and it is very difficult to break it.
Nigeria has a case of vicious cycle of poverty due to market imperfections. It
has abundant resources to be capable of breaking out of the vicious cycle of
poverty but the country is riffed with corruption and lack of expertise in certain
key fields, amongst other things, which prevents it from getting the most out
of its resources and achieving development.
MODERN THEORIES AS A WELL PLANED THEORIES TO SOLVE THE PROBLEM
OF VICIOUS CYCLE OF POVERTY IN NIGERIA
SCHUMPETER’S THEORY OF GROWTH
Schumpeter’s theory of development is also known as the innovation theory of
development. This theory assigns paramount role to the entrepreneur and
innovations in the process of economic development. According to
Schumpeter, the process of production is marked by a combination of material
and immaterial productive forces. The material productive forces arise from
the traditional factors of production, viz., land and labour, etc., while the
immaterial set of productive forces are conditioned by the ‘technical facts’ and
‘facts of social organization’. The Schumpeterian production function can be
written as Q = ƒ [k, r, I, u, ν).
Where, Q stands for the output, k for capital, r for natural resources, and l for
the employed labour force. The symbol u represents the society’s fund of
technical knowledge and ν represents the facts of social organization, i.e., the
socio-cultural environment of the economy.
The above function shows that the rate of growth of the output depends upon
the rate of growth of productive factors, the rate of growth of technology and
the rate of growth of investment friendly socio-cultural environment.
Schumpeter held that the alterations in the supply of productive factors can
only bring about gradual, continuous and slow evolution of the economic
system. On the other hand, the impact of technological and social change calls
for spontaneous, discontinuous change in the channels of output flow.
Schumpeter regarded land to be constant. The growth component will,
therefore, include only the effects of changes in population and of increase in
the producer goods. But Schumpeter further maintains that there does not
exist any a priori relationship between the changes in population and the
changes in the flow of goods and services. In other words, Schumpeter
considers the population growth to be exogenously determined. The increase
in producer goods results from a positive rate of net savings. The major part of
savings and accumulations are attributed by Schumpeter to profits. According
to him, the profits can arise if innovations are introduced. Hence ultimately it is
the change in the technical knowledge (i.e., variable u) which is responsible for
any change in the stock of producer goods, i.e., the rate of capital
accumulation directly depends on the rate of technical change. In other words,
according to Schumpeter, the growth of output is geared by the rate of
innovations.
No doubt, Schumpeter holds that the trend of economic growth shall be fixed
by the exogenous variable of population growth, yet according to him, the
process of economic development is synonymous with discontinuous technical
change, i.e., innovations. The agent which brings about innovations is called by
Schumpeter as entrepreneur. Thus, entrepreneur becomes the pivot of
Schumpeter’s model.
According to Schumpeter, the entrepreneurs play a key role in economic
development. The credit for innovations and the outburst of economic activity
goes entirely to the entrepreneur. According to him innovation may be of five
types:
 Introduction of a new good
 Introduction of a new method of production
 The opening of a new market
 The discovery of a new source of supply of raw materials or semi-
manufactured goods
 Introduction of a new organisation in an industry.
In a world characterised by a high degree of risk and uncertainty, only a few
people have the exceptional ability and daring will be able to undertake
innovations and launch enterprises and exploit opportunities for profit. But
these entrepreneurs are not only lured by profit but are also motivated with a
desire to found a dynasty in the business world or a desire for conquests in the
competitive world or have the joy of creating. Thus, in the Schumpeterian
analysis, the role of the entrepreneur is a determining factor of the rate of
economic growth. In his absence the growth rate is bound to be slow.
The supply of entrepreneurs depends not only on the rate of profits (which is
obvious) but also on the favourable social climate. They will appear and
continue only in a society which honours them, where prestige is attached to
them and the social rewards or recognition, they are able to earn. Any
tendency to squeeze profits, increase taxes, intensify welfare programmes,
strengthening of the trade union movement or measures of redistribution of
income will deteriorate the climate for investment and so for economic
development. Schumpeter’s starting point in the “circular flow” is a stationary
equilibrium in which there is no investment, population growth is at a standstill
position and there is full employment. But there are numerous opportunities in
business which the entrepreneurs are quick to exploit and innovations are
undertaken. As the economy is in equilibrium, saving is equal to investment.
So, when the innovators make investment, he does it bank loan. The banks
provide loans to the innovators through credit creation. Thus, according to
Schumpeter credit creating plays an important role in economic development.
The success of the original innovators attracts many others who follow them.
Economic activity becomes more and more brisk and the boom gathers
momentum with the result that prices and money incomes rise. There is then
the secondary economic wave ‘imitative investment’ superimposed upon the
earlier one, i.e., ‘innovational investment’. But soon follows the process of
creative destruction. The boom gives way to slump or recession. Completion of
innovations brings in a large supply of goods which cannot be marketed at
profitable price. There are forced bankruptcies since the banks call back loans.
The repayment of bank loans accentuates deflationary forces. Business risks
scare away the prospective entrepreneurs. In this unfavourable climate, the
innovational activity comes to a halt. After this painful process of adjustment in
which weak enterprises are liquidated, the businessmen find conditions again
ripe for a further spurt of entrepreneurial activity. The economic activity is
resumed at a higher equilibrium. This is how the circle of development process
is completed. There is a new wave of innovations and the development cycle
repeats itself.
APPLICATION OF THE SCHUMPETERIAN THEORY TO THE VICIOUS CYCLE OF
POVERTY IN NIGERIA
After analysing Schumpeter’s theory, it is evident that it provides a good
solution to Nigeria’s problem of vicious cycle of poverty caused by imperfect
forces referenced in the previous topic. According to him growth is a function
of rate of growth of productive factors, the rate of growth of technology and
the rate of growth of investment friendly socio-cultural environment.
Schumpeter held that the alterations in the supply of productive factors can
only bring about gradual, continuous and slow evolution of the economic
system, which is the case in Nigeria as evident by her abundant natural
resources and manpower. Where his solution comes in is when he says the
impact of technological and social change calls for spontaneous, discontinuous
change in the channels of output flow. He argues that impact of technological
change i.e., entrepreneur, is what will bring about rising profits leading to
increased savings thereby causing increased productivity. An entrepreneur is
one who brings innovative ideas by introducing a new method of production or
discovering a new source of supply of raw materials or semi-manufactured
goods which is particularly what Nigeria needs to overcome the vicious cycle of
poverty caused by underutilization of resources.
He also highlights some key factors which will affect the thriving of the
entrepreneur i.e., investment friendly socio-cultural environment. Some of the
factors are; tendency to squeeze profits, increase taxes, intensify welfare
programmes, strengthening of the trade union movement etc. What his theory
fails to recognise, however, is Nigeria is not purely a capitalist system and key
sectors where innovative ideas can be applied so that significant changes can
be made are controlled by the government and Nigeria is plagued with non-
economic problems like corruption makes application of innovative ideas
fruitless. So, unless privatization is done on some key sectors., this theory is
hardly applicable.
Furthermore, Schumpeter assumes that the starting point of the economy is
there is no investment, population growth is at a standstill position and there is
full employment which is not the case in Nigeria which has significant
investment, a growing population and no full employment due to
governmental issues.

DUALISM THOERY OF ECONOMIC GROWTH

A dual economy is the existence of two separate economic sectors within one
country, divided by different levels of development, technology, and different
patterns of demand. There have been theories of dualism proposed over the
years in order to analyse the economic problems facing the world spoor
countries and provide policy action. Some theories have been proposed like
sociological dualism associated with Boeke and technological dualism
associated with Higgins and Eckaus but the focus of this paper will be the
theory of development proposed by Sir Arthur Lewis, which has been the
subject of attention of economists and economic policy makers in less
developed countries.
The Lewis dualism theory of development assumes that the economy consists
of two sectors; an agricultural, rural and subsistence sector and an industrial,
urban and capitalist sector. In the subsistence sector, population is so large
relative to products and natural resources that the marginal productivity of
labour in the subsistence sector is very low or zero. This is to say that there is
‘disguised unemployment’ or underemployment, which is a potential reservoir
of labour supply to the capitalist sector. This labour could be reduced without
decreasing output. Besides there are some other factors for an affluent supply
of labour; huge population growth due to low mortality and high birth rate, the
daughters and wives released from domestic work, and workers from various
kinds of casual jobs and the unemployment generated by increasing efficiency.
Therefore, labour supply exceeds demand. Then, the labour market is in favour
of capitalists, and capitalists can keep the wage constant. Lewis assumes that
the supply of labour is ‘unlimited’ on the grounds that the capitalist can have a
good supply of labour at the same wage.
The level of wages in the capitalist sector is determined by that in the
subsistence sector. Because if the wage in the capitalist sector is less than the
consumption in the subsistence sector, no peasant leaves the land to seek a
job in the capitalist sector. According to Lewis, the capitalist wage is
approximately 30% more than subsistence earnings. This gap is considered
necessary to induce the transformation from the subsistence sector to make
up for the higher cost of living in an urban area or the psychological cost of
transfer. As the marginal product of labour is negligible or zero, the wage in
the subsistence sector remains constant at a subsistent level. Therefore, the
wage in the capitalist sector also remains constant. Even though it is higher
than the wage in the subsistence sector because of a little inducement, it is no
more than subsistence level in urban life.
In the capitalist sector, labour is hired up to the point where the marginal
product is equal to the wage in order not to reduce the capitalist surplus. Since
labour supply exceeds demand and the wage remains constant at subsistence
level, the rate of profits is maximised. Profit minded capitalists are assumed to
reinvest all profits to create new capital at a maximum rate. Then capital
expansion leads to new employment. The capital accumulation becomes larger
but the wage is still constant so that the surplus becomes greater. Full
investment and an unlimited labour supply guarantee that both capital
accumulation and employment expand at the maximum rate.
As it absorbs more labour, the capitalist sector keeps expanding. This process
continues until the labour surplus disappears. From this point, the extraction of
additional workers from the subsistence sector leads to the rise of the marginal
productivity of labour in this sector. So, labour transfer is accompanied by lost
food production. However, before the surplus of labour is exhausted, the
increase in earnings in the subsistence sector may occur and affect the
expansion of the capitalist sector. Lewis explains this with the terms of trade
between the two sectors on the assumption that they are producing and
exchanging different things. Firstly, the change of absolute numbers of
population by labour transfer will lead to the two situations given below: One
is that due to the reduction of the absolute number of people in the
subsistence sector, even if there is surplus labour and total productivity does
not rise, the average production per head may possibly increase. This increase
in earnings in this sector pushes up the wage in the capitalist sector. The other
situation is that as the size of the capitalist sector increases relative to the
supply of subsistence goods, it brings about the higher price of the subsistence
goods. Therefore, the terms of trade move against the capital sector and
capitalists’ profits are diminished. Secondly, if the increase in productivity of
the agriculture sector occurs, by introducing new technology or more efficient
farming rotation, it will directly increase the average earning per head in this
sector, and indirectly, the capitalist workers wage will rise. In any case given
above, the result is the reduction of the capitalist surplus and, therefore, the
retarding of the rate of capital accumulation.
Lewis, then, expands his theory beyond one country. Using the classical
framework which assumes that all countries have surplus labour, he suggests
that the capitalist might avoid retarding the capital accumulation by importing
labour from, or by exporting capital to, countries where surplus labour is still
available at a subsistence wage.
Lewis believes that only capitalist can save and invest their income. The notion
behind the model is now obvious. The income distribution favours the saving
class, that is for Lewis, the capitalist class, in order to facilitate rapid economic
growth. This is attainable by keeping the wage in the subsistence and the
capitalist sector constant. This will lead us into a further consideration of two
implications behind the model ; unequal distribution and labour exploitation.
Firstly, the gap between the rich and the poor in LDCs at the outset of
economic development can be explained clearly by this model. As the model
shows, the capitalists’ profits increase more and more while workers’ wages
are kept constant despite the privilege of economic development. The more
the gap between them widens, the more capital is accumulated. Total profits
are only used for more capital formation and are never redistributed to
workers. Redistribution is merely the obstruction of the process of economic
growth. Secondly, unequal distribution is open to further explanation of labour
exploitation. Lewis assumes that agricultural income is distributed equally in
the subsistence sector so that the earnings in this sector is the average
productivity per head. With this assumption, the labour transfer would soon
provoke the rise of earnings in the subsistence sector because the same output
is divided by fewer peasants. The rise in the earnings of peasants may occur
through the exchange between two sectors. If the intersectoral commodity
market occurs to provide subsistence foods to the industrial workers, the more
labour transfers, the more the remaining peasants can make profits from
selling the surplus products which the transferred workers are supposed to
consume before transfer. To avoid this situation, in other words, to keep
peasants wages the same, the existence of the landowner class which
appropriates the surplus in the agricultural sector and keeps the earnings of
peasant’s constant, is implicitly behind the Lewis model. What the Lewis model
provides for us, is the structure of exploitation based on two classes (the
exploiters and the exploited) rather than two sectors (agricultural and
industrial). Mechanisms of the model work not through surplus labour but
through labour exploitation (Weeks; 1971). Without the appropriation of the
surplus by the capitalist and landlord class, labour transfer, that is to say,
economic development can never occur in the Lewis model. In addition, it
should not be overlooked that labour exploitation is even truer when the
model is expanded to the world−wide economy. The capitalist sector can keep
enjoying the more rapid capital formation with the world−wide supply of
surplus labour which is kept underdeveloped. The Lewis model theoretically
explains Marxist labour exploitation, which leads to the coexistence of great
wealth in minor hands and mass poverty without using Marxist language.
Having observed the structure of exploitation, we may further consider the
assumptions on which the Lewis model is constructed in order to examine
whether the model is entirely valid for explaining general economic
development.
APPLICATION OF DUALISM THEORY OF ECONOMICDEVELOPMENT TO THE
VICIOUS CYCLE OF POVERTY IN NIGERIA
After a detailed analysis of the Lewis dualism theory, it is clear it is not
applicable for two reasons;
Firstly, it assumes that the is zero or negligent marginal productivity in the
agricultural economy which is hardly the case in Nigeria. There is incentive to
engage in agriculture. This initiative, which is provided by God and government
agencies, include abundant arable land and loans and grants provided at a
subsidized rate which makes agriculture very lucrative for people. This
incentive may cause a decrease in supply of labour and ultimately a decrease
in capital formation which will hinder growth and ultimately keep the Nigerian
economy in poverty.
Secondly, in reality, the wage in the industrial sector remarkably rises long
before the labour surplus is absorbed. So, the assumption that the wage in the
capitalist sector is kept constant in a competitive labour market in a situation
of the unlimited supply of labour, appears to be wrong. Nigeria which has a
robust trade union, standard minimum wage and public service scale will cause
the wages to go up, ultimately affecting capital formation for growth. Also, as
companies expand in Nigeria, they tend to employ labour saving equipment
which require skilled labourers to operate and thereby reduce the supply of
labour from the agricultural sector thereby leaving the country in its previous
state of poverty.
For these reasons, this model will not be effective in tackling the vicious cycle
of poverty in Nigeria caused by market imperfections.
HARROD-DOMAR THEORY OF DEVELOPMENT
The Harrod–Domar model is a Keynesian model of economic growth. It is used
in development economics to explain an economy's growth rate in terms of
the level of saving and of capital. It suggests that there is no natural reason for
an economy to have balanced growth. The model was developed
independently by Roy F. Harrod in 1939, and Evsey Domar in 1946, although a
similar model had been proposed by Gustav Cassel in 1924. The Harrod–Domar
model was the precursor to the exogenous growth model.
The Harrod-Domar models of economic growth are based on the experiences
of advanced capitalist economies to analyse the requirements of steady
growth in such economy. The Harrod-Domar economic growth model stresses
the importance of savings and investment as key determinants of growth. The
model emphases on the dual character of investment:
1. It creates income which is regarded as the ‘demand effect’.
2. It augments the productive capacity of the economy by increasing its capital
stock which is regarded as the ‘supply effect’ of investment.
The main assumptions of the Harrod-Domar models are as follows:
1. A full-employment level of income already exists.
2. There is no government interference.
3. The model is based on the assumption of closed economy.
4. There are no lags in adjustment of variables.
5. The average propensity to save (APS) and marginal propensity to save (MPS)
are equal to each other. Symbolically, S/Y= ∆S/∆Y
6. Both propensities to save and “capital coefficient” (i.e., capital-output ratio)
are given constant.
7. Income, investment, savings are all defined in the net sense and hence they
are considered over and above the depreciation.
8. Saving and investment are equal in ex-ante as well as in expost sense.
Given the above main general assumptions, we shall discuss both models
separately as below. Although Harrod and Domar models differ in some
aspects, they are similar in substance as both the models stress the essential
conditions of achieving and maintaining steady growth.
Neoclassical economists claimed shortcomings in the Harrod–Domar model in
particular the instability of its solution and, by the late 1950s, started an
academic dialogue that led to the development of the Solow–Swan model.
According to the Harrod–Domar model there are three kinds of growth:
warranted growth, actual growth and natural rate of growth.
Warranted growth rate is the rate of growth at which the economy does not
expand indefinitely or go into recession.
Actual growth is the real rate increase in a country's GDP per year.
Natural growth is the growth an economy requires to maintain full
employment. For example, If the labour force grows at 3 percent per year,
then to maintain full employment, the economy’s annual growth rate must be
3 percent.
Domar proposed the model in the aftermath of the great depression, intending
to model economies in the short-run, during a period where there is high
enough unemployment such that any additional machine may be fully utilized
by labour. Consequently, production can be modelled as a function of capital
only. Although the Harrod–Domar model was initially created to help analyst
the business cycle, it was later adapted to explain economic growth. Its
implications were that growth depends on the quantity of labour and capital;
more investment leads to capital accumulation, which generates economic
growth. The model carries implications for less economically developed
countries, where labour is in plentiful supply in these countries but physical
capital is not, slowing down economic progress. LDCs do not have sufficiently
high incomes to enable sufficient rates of saving; therefore, accumulation of
physical-capital stock through investment is low. The model implies that
economic growth depends on policies to increase investment, by increasing
saving, and using that investment more efficiently through technological
advances.
The model concludes that an economy does not "naturally" find full
employment and stable growth rates. Economic growth refers to an increase in
the goods and services produced by an economy over a particular period of
time. It is measured as a percentage increase in real gross domestic product
which is GDP adjusted to inflation. GDP is the market value for all the final
goods and services produced in an economy
With the abstraction method, Harrod-Domar has fixed the technology, so
economic growth depends on three factors: capital (K), labour (L), and
resources (R)
Y = f (K, L, R)
R, L are the resource factors used on the basis of creating an increase in
production capital (K).
Here the relationship between growth and capital needs to be considered.
Addressing this relationship needs to address the relationship between savings
(S), investment (I), productive capital (K) and production capacity (Y).
According to Harrod-Domar, the relationships are as follows:
+ S is the source of the investment (I)
+ I creates the ΔK of the later period
+ ΔK directly creates ΔY of that period
The basic argument in this model is: Saving and investing creates increased
capital and production capital is the source of economic growth or a
determinant of economic growth. As capital changes, national output changes
accordingly
(K)  (Y)
Increased capital is due to investment activities: I = DK
The Relationship between Capital Increase and Output
For this relationship, one uses the ICOR (Incremental Capital - Output Rate)
increment. Then,
kt (ICOR) = ΔKt /ΔYt –
Factors affecting the ICOR: (i) Technical characteristics of production capital;
(ii) Level of resource scarcity; (iii) effective management and use of capital; ...
3The Relationship between Growth Rate (G) and Saving Rate (S) and
Investment (I)
gt = ΔYt / Yt−1
gt = ΔKt / (k. Yt−1)
ΔKt = It−1 = St−1
gt = It−1 / (k. Yt−1) = St−1 / (kt. Yt−1)
s is the cumulative rate in GDP and the cumulative level is S:
s = S/Y should be gt = st−1 / kt
Conclusions from the Harrod-Domar model:
Simultaneous economic growth with a saving rate and an inverse with the
ICOR.
In other words: growth rate always depends on saving and ICOR.
Here are three growth rates:
- Guaranteed speed: gw = s (expected) / k (expected)
- Actual speed: gr = s (expected) / k (actual)
- Natural speed (gf) in terms of reaching the potential level.
From that reasoning, in the growth model Harrod-Domar, it refers to the
concept of the golden age:
gw = gr = gf
That is the balance between the three growth rates mentioned above.
APPLICATION OF THE HAROLD-DOMAR MODEL TO THE VICIOUS CYCLE OF
POVERTY PROBLEM IN NIGERIA
Although analysts have argued that the Harold-Domar model is applicable to
less developed countries, in reality it is not. Firstly, Nigeria does not follow the
basic assumptions of the model principally because the model was specifically
made for developed capitalist economies. There is frequent government
intervention in Nigeria, it does not have full employment and it is an open
economy.
Secondly, specifically focusing on the vicious cycle of poverty, investment
(which was proposed by the theorists as the key to development) is not
enough to solve this problem because there will be inefficient investment by
corrupt government officials, the model does not provide any solution to this
scenario.
Furthermore, the model was not specific about where Nigeria can get the
initial source oof investment to sustain growth and thus, will have to rely on
consequential ways of getting income like borrowing from other countries
which will cause it to become a debtor and ultimately not solve any problem.

REFRENCES
The Economic History Review, New Series, Vol. 12, No. 1 (1959)
Session 4: University of Kelaniya, Eon 53045, Dr.G. M. Henegedara
Meier, Gerald M. and Rauch, James E (eds.) (2000). Leading Issues in Economic
Development (7th edition). Oxford University Press, Oxford.
Jhingan, M.L., The Economics of Development and planning, Vrinda Publication