Theories and

Models of development
Group 2: Atad, Thea Mae; Bauddin, Al-Princeczar; Bengil,
Adrian Paul; Bernardo, Huda; Buño, Kyla
Historic Growth &
Contemporary Development
Kuznet’s six characteristics of
modern Economic Growth
01
High rates of growth of
02 03
High rates of structural High rates of social and
per capita output and transformation ideological transformation
population growth

04
High rates of increase
05 06
International economic Limited spread of
in total factor outreach economic growth
productivity
 1. High rates of growth
of per capita output
Modern economic growth is and population
characterized by a sustained
increase in per capita income,
growth
which signifies an improvement in
the average standard of living for
individuals within an economy.
2. High rates of
structural
transformation Economic growth involves
significant shifts in the structure of
an economy.
3 High rates of social and
ideological transformation
Economic growth is often
accompanied by profound social
and ideological changes. As
economies modernize, traditional
social structures and roles evolve.
 4. High rates of
increase in total
Total Factor Productivity (TFP)
measures the efficiency with which factor productivity
labor, capital, and other inputs are (TFP)
utilized in the production process.
5. International
economic
outreach Modern economic growth is
characterized by greater
integration into the global
economy.
6 Limited spread of economic
growth
Most of the time, economic growth
only affects a portion of a country.
Classic theories of
development
 Four Approaches of Development
as Growth
Countries develop by passing
Stages of growth model through specific stages of growth.

This approach looked at how

Structural change countries need to change their

theories economic structure to grow.

International- Emphasized the need for policies to reduce poverty,

create jobs, and lessen income inequality, rather than
dependence theory just focusing on economic growth.

Neoclassical Advocated for free markets, open

free-market economies, and privatizing public
enterprises, suggesting that economic
theory freedom would lead to development.
Rostow’s Stages of Growth

All countries could develop by progressing

through five stages, from traditional societies to
advanced economies focused on mass
consumption. To do this, countries need to invest
heavily, both from within and with foreign help, to
jumpstart and sustain economic growth. His
theory and the related Harrod-Domar model
emphasize the importance of investment in
achieving economic progress.
 Traditional society
Five ● Economies are primarily agricultural with

stages limited technology and static structures.

Pre-conditions for Take-off

● Societies start to invest in infrastructure and
build institutions necessary for economic
growth.

take-off
● A critical period where industries expand
rapidly, investments rise, and the economy
begins to grow consistently.
Five
stages Drive to maturity
● The economy diversifies and innovates,
spreading growth across different sectors.

Age of high mass consumption

● Economies shift towards consumer goods and
services, enjoying high living standards and
widespread wealth.
Harrod-Domar Growth Model
To grow, an economy needs to save a
part of its income and invest in new capital
(like buildings, equipment, and materials).
This new investment increases the overall
capital stock, which in turn boosts the
economy's output (GDP).
 There is a direct relationship between the
total capital stock (K) and total GDP (Y).
Capital-Output Ratio For example, if it takes $3 of capital to
produce $1 of GDP annually, the
capital-output ratio (c) is 3 to 1
 ● Savings to Investment: The national net savings
ratio (s) is a fixed percentage of the national output

Growth mechanism (GDP). For instance, if the savings ratio is 6%, this
means 6% of GDP is saved and available for
investment.
● Investment to Growth: Total new investment
comes from these savings. If savings increase,
investments increase, leading to more capital and
higher GDP.
The theory of stages of growth, which emphasizes saving and investment as crucial for
development, didn't always lead to success.

Here’s why it didn’t always work:

1. Europe vs. Developing Countries - The Marshall Plan succeeded in Europe because those countries
had the right conditions: well-functioning markets, good infrastructure, educated workforce, and effective
governance. These conditions helped them effectively use new capital to increase output. However, many
developing countries lacked these conditions.
2. Assumptions of Models - Models like Rostow’s and Harrod-Domar assumed that developing countries
had similar conditions and attitudes as developed ones. They assumed countries could efficiently convert
new capital into higher output. But in reality, many developing nations lacked skilled managers, educated
workers, and efficient government systems needed for effective development projects.
3. Other Strategies Ignored - The focus on saving and investment overlooked other important strategies.
One example is reducing the capital-output ratio (c), which means making investments more efficient so
they produce more output. This wasn't emphasized enough in earlier development theories.
Structural change
theory
Focuses on how developing economies shift their
economic structures away from traditional subsistence
agriculture towards more modern, urbanized, and
diverse manufacturing and service sectors.
 It explains how underdeveloped countries move from
Transformation Process relying heavily on farming for basic needs to
developing industries and services. This shift is
crucial for sustained economic growth and
urbanization.
 1. Structural-change theory uses economic principles
Theoretical tools like neoclassical price theory (how prices affect
supply and demand) and econometrics (statistical
methods in economics) to study and describe this
transformation.
Lewis Theory of Economic Development

● The Lewis model, developed by

economist W. Arthur Lewis in the 1950s
and expanded by John Fei and Gustav
Ranis, focuses on how underdeveloped
economies transform.
● It describes a process where surplus
labor from a traditional, rural, and
low-productivity sector moves into a
modern, urban, and high-productivity
sector.
Structural-change theory
How developing economies shift their economic structures away from traditional subsistence
agriculture towards more modern, urbanized, and diverse manufacturing and service sectors.

1. Necessary Conditions for Growth:

○ Savings and investment are seen as crucial but not enough on their own. The model
stresses that along with capital accumulation (both physical like factories and human
like education), there must be broader changes.

The model is based on empirical studies by economists like Hollis B. Chenery, who analyzed
development patterns across different countries. They identified common features such as the
shift from agriculture to industry, urbanization, and changes in population growth.
International-dependence
revolution
● Emerged in the 1970s as a critique of existing
development theories.
● Influential among intellectuals and
policymakers in developing countries.
● Resurged in the early 21st century, partly due
to the anti-globalization movement.
dependence
Developing countries are seen as
entangled in a web of institutional,
political, and economic rigidities that
hamper their progress.
dominance
There is a focus on the unequal power
dynamics between rich and poor
countries, where the former exert
significant influence over the latter.
 NEOCOLONIAL DEPENDENCE MODEL
Three ● Emphasizes the continuation of exploitative
relationships established during colonial times.

major
● Argues that the global economic system
benefits developed countries at the expense of
developing ones.

models FALSE-PARADIGM MODEL

● Suggests that inappropriate advice and models
provided by developed countries and international
institutions mislead developing countries.
● These paradigms fail to address the unique
challenges faced by developing economies.

DUALISTIC-DEVELOPMENT THESIS
● Highlights the coexistence of modern and
traditional sectors within developing countries.
● This dualism leads to persistent inequality and
hinders overall economic progress.
 Four key arguments of dualistic
approach

Different sets of conditions, of which

1) some are “superior” and others
“inferior,” can coexist in a given space

This coexistence is chronic and

2) not merely transitional.

Not only do the degrees of superiority or

inferiority fail to show any signs of
3) diminishing, but they even have an
inherent tendency to increase.

The existence of the superior

elements does little or nothing to
4)
pull up the inferior element
conclusion and implications
● Dependence, false-paradigm, and dualism theorists place more emphasis on
international power imbalances and on needed fundamental economic, political,
and institutional reforms, both domestic and worldwide.
● Dependence theories have two major weaknesses: First, although they offer an
appealing explanation of why many poor countries remain underdeveloped,
they give little insight into how countries initiate and sustain development.
Second, and perhaps more important, the actual economic experience of
developing countries that have pursued revolutionary campaigns of industrial
nationalization and state-run production has been mostly negative.
● Majority recognize that the most effective way to deal with these diverse social
problems is to accelerate the pace of economic growth through domestic and
international reforms, accompanied by a judicious mixture of both public and
private economic activity.
00 Neoclassical
counter-revolution:
Market fundamentalism
Neoclassical
counter-revolution
The 1980s resurgence of neoclassical free-market
orientation toward development problems and
policies, counter to the interventionist dependence
revolution of the 1970s.
Free markets
approach
The system whereby prices of
commodities or services freely
rise or fall when the buyer’s
demand for them rises or falls
or the seller’s supply of them
decreases or increases.
● Neoclassical economists argue that free markets, driven by supply and
demand, allocate resources more efficiently than government
interventions.
● Market mechanisms are seen as the most effective way to drive
innovation, productivity, and economic growth.
● Advocates for free markets believe that government intervention often
leads to inefficiencies and distortions.
● Policies should focus on removing barriers to trade and investment,
allowing the market to function without excessive regulation or control.
Public-choice
theory
The theory that self-interest
guides all individual behavior
and that governments are
inefficient and corrupt because
people use government to
pursue their own agendas.
●
●
Governments can do (virtually) nothing right.
It argues that politicians and bureaucrats often act in their own
self-interest, leading to policies that do not necessarily benefit the
public.
● Individuals, including government officials, are viewed as rational actors
who seek to maximize their own utility.
Market friendly
approach ● While markets are seen as the primary drivers of growth, there is recognition
that certain market-friendly policies can enhance market functioning.
● These policies include creating a stable macroeconomic environment, ensuring
The notion historically
property rights, and providing basic public goods such as infrastructure and
promulgated by the World Bank education.
that successful development ● This approach also differs from the free-market and public-choice schools of
thought by accepting the notion that market failures are more widespread in
policy requires governments to
developing countries in areas such as investment coordination and
create an environment in which environmental outcomes.
markets can operate efficiently ● Market failure - A market’s inability to deliver its theoretical benefits due to the
and to intervene only existence of market imperfections such as monopoly power, lack of factor
mobility, significant externalities, or lack of knowledge.
selectively in the economy in
areas where the market is
inefficient.
traditional Neoclassical
growth theory
Liberalization of national markets draws additional
domestic and foreign investment and thus
increases the rate of capital accumulation.
Solow neoclassical
growth model
Growth model in which there
are diminishing returns to each
factor of production but
constant returns to scale.
Exogenous technological
change generates long-term
economic growth.
● The core of the neoclassical growth model is the aggregate production
function, often represented as where Y is gross domestic
product, K is the stock capital, L is labor, and A represents the
productivity of labor.
● This function demonstrates how output is generated from the
combination of inputs (capital and labor) and technological
advancements.
● This formulation of neoclassical growth theory yields diminishing
returns both to capital and to labor. Which means that each additional
unit of capital contributes less to output than the previous unit.
conclusion and implications
● Neoclassical revisionists saw the problem as an internally induced phenomenon of
developing countries, caused by too much government intervention and bad economic
policies.

Understanding these theories provides valuable insights into the diverse perspectives on
economic development. The International-Dependence Revolution highlights the challenges posed
by historical and structural inequalities, while the Neoclassical Counter-Revolution emphasizes the
role of free markets and minimal government intervention. Both perspectives offer important
lessons for shaping policies that can foster sustainable and inclusive growth in developing
countries.
 Contemporary Models of
Development and Underdevelopment
The New Growth theory : Endogenous growth theory
Underdevelopment as a Coordination Failure
Michael Kremer’s O-Ring Theory of Economic Development
Endogenous growth theory
- is the concept that economic growth is due to
factors that are internal to the economy and not
because of external ones. The theory is built on
the idea that improvements in innovation,
knowledge, and human capital lead to
increased productivity, positively affecting the
economic outlook.
 ❏ Invest in Human
Capital
❏ Support Research
and Development
(R&D)
Goals to achieve
endogenous ❏
growth theory ❏ Promote
Entrepreneurship
❏ Strengthen Intellectual
Property Rights
 Neoclassical theory
Drivers of ● Emphasizes physical capital and
labor as primary growth drivers,
Long-Term Growth with growth subject to
diminishing returns.
Comparison Role of ● Externalities (spillover effects
from economic activities) are
with Externalities typically not central to the
model.
Traditional
(Neoclassical) Policy Implications ● Advocates for minimal
government intervention and
Growth relies on market mechanisms to
achieve economic efficiency
Theory:
Roles in the ● Focuses on capital and labor for
growth, supports savings and
Economy investment, and predicts
convergence to a steady state
with external technological
progress.
Endogenous growth theory
● Highlights human capital and
innovation, allowing increasing returns
to scale and greater productivity from
investments in knowledge.
● Acknowledges positive externalities
from investments in education and
R&D, which contribute to overall
economic growth.
● Supports government policies for
education, R&D, infrastructure, and
innovation, recognizing government's
role in correcting market failures and
fostering growth.
● Integrates human capital, innovation,
and technology, supports government
interventions in R&D, education, and
infrastructure for sustained
development and explains
cross-country growth differences
internally.
 Underdevelopment as a
Coordination Failure
An action taken by one firm, worker, or
complementarities organization that increases the incentives for
other agents to take similar actions.
 Coordination failure
A situation in which the inability of agents to
coordinate their behavior (decision-making)
leads to an outcome (equilibrium) that
leaves all agents worse off than in an
alternative equilibrium.
Underdevelopment trap
A poverty trap at the regional or
national level in which
underdevelopment tends to perpetuate
itself over time.
 Deep interventions
A government policy that can move the
economy to a preferred equilibrium or even
to a higher permanent rate of growth, which
can then be self-sustaining so that the policy
need no longer be enforced because the
better equilibrium will then prevail without
further intervention.

congestion
the opposite of a
complementarity; an action
taken by one agent that
decreases the incentives for
other agents to take similar
actions
Where-to-meet dilemma
A situation in which all parties would be better off cooperating than
competing but lack information about how to do so. If cooperation
can be achieved, there is no subsequent incentive to defect or
cheat.
Prisoner’s dilemma
A situation in which all parties would be better off cooperating
than competing, but once cooperation has been achieved, each
party would gain the most by cheating, provided that others stick
to cooperative agreements—thus causing any agreement to
unravel.
Michael Kremer’s O-Ring Theory
of Economic Development
● modern production (especially in contrast to
traditional crafts production) requires that many
activities be done well together in order for any of
them to amount to a high value.
● The name for Kremer’s model is taken from the
1986 Challenger disaster.
 The o-ring model
- The way it models production with strong
complementarities among inputs.

- The higher the skill, the higher the probability that

the task will be “successfully completed” (which may
mean, for example, that the part created in this task
will not fail)
O-ring production function
- a production function with strong complementarities
among inputs, based on the products (i.e.,
multiplying) of the input qualities.
- production depends on completing a series of task
-failure of any one task reduces value of the entire
product, perhaps to zero
- cannot substitute quantity or quality
Positive assortative matching
- workers with high skills will work together and
workers with low skills will work together

- this type of matching means that high-value products

will be concentrated in countries with high-value skills.
 • Firms tend to employ workers with similar skills for their various tasks.

• Workers performing the same task earn higher wages in a high-skill firm than in
a low-skill firm.

• If workers can improve their skill level and make such investments and if it is in

Implications their interests to do so, they will consider the level of human capital investments
made by other workers as a component of their own decision about how much
skill to acquire.

of the O-Ring • One can get caught in economy-wide, low-production-quality traps.

• O-ring effects magnify the impact of local production bottlenecks because such

Theory bottlenecks have a multiplicative effect on other production.

• Bottlenecks also reduce the incentive for workers to invest in skills by lowering
the expected return to these skills.

• The model also has implications for the choice of technology. When skill is
scarce, a firm is less likely to choose a technique with higher value but
complicated production technology with many tasks.
Thank YOU!

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