CHAPTER 3

Classic Theories
of Economics Growth
and Development
A. Classic Theories of Economic
Development: Four Approaches
A.1 Linear Stages of Growth Model
* Focused on theories and
patterns of structural change.
A.2 Theories and Patterns of Structural
Change
* Viewed underdevelopment in
terms of international and domestic power
relationships, institutional and structural
economics rigidities and the resulting
proliferations of dual economies and dual
societies.
A.3 International Dependence Revolution
* Emphasized external and
internal institutions and political
constraints on economic development.

A.4 Neo-classical Free Market Counter

Revolution
* Emphasized the beneficial
role of free markets, open economies and
privatization of inefficient public
enterprises.
B.Development as Growth and the
Linear Stages Theories

B.1 Rostow’s Stages of Growth

* Walt W. Rostow – American
economic historian.
* The transition from under
development to development can be
described in terms of a series of steps or
stages through which all countries must
proceed. (traditional society, pre
conditions for take-off, take-off, drive to
maturity, age of high mass consumption).
Walt Whitman
Rostow's Five
Stages of
Economic
Growth Model
Walt Rostow took a historical
approach in suggesting
that developed countries have
tended to pass through 5 stages to
reach their current degree of
economic development.
1. Traditional society. This is an
agricultural economy of
mainly subsistence farming, little
of which is traded. The size of the
capital stock is limited and of low
quality resulting in very low labor
productivity and little surplus
output left to sell in domestic and
overseas markets
Stage # 1. Traditional Society:

 This initial stage of traditional society signifies a primitive society

having no access to modern science and technology. In other words, it
is a society based on primitive technology and primitive attitude
towards the physical world.
 However, Rostow does not view this traditional society as being
completely static. In this stage of a society output could be increasing
through the expansion of land area under cultivation or through the
discovery and spread of a new crop. But the critical fact about this type
of society is that there is limit to attainable output per head. This limit
arises due to the absence of access to modern science and technology.
 This type of a society allocates a large proportion of its resources to
agriculture and is characterized by a hierarchical social structure in
which there is little possibility for vertical mobility. The value system
that prevails in such a society is what Rostow calls a long-run fatalism.
People of these societies think that not much economic progress is
possible for them and for their future generations.
2. Pre-conditions for take-off.
Agriculture becomes
more mechanized and more output
is traded. Savings and investment
grow although they are still a small
percentage of national income
(GDP). Some external funding is
required - for example in the form
of overseas aid or
perhaps remittance incomes from
migrant workers living overseas.
Stage # 2. Preconditions or the Preparatory Stage:
This covers a long period of a century or more during which the preconditions for take-off are
established. These conditions mainly comprise fundamental changes in the social, political and
economic fields.

For example:
(a) A change in society’s attitudes towards science, risk-taking and profit-earning;
(b) The adaptability of the labor force;
(c) Political sovereignty;
(d) Development of a centralized tax system and financial institutions; and
(e) The construction of certain economic and social infrastructure like railways, ports, power
generation and educational institutions.

It is evident from above that in this second stage of growth foundations for economic transformation
are laid. The people start using modern science and technology for increasing productivity in both
agriculture and industry. Further, there is a change in the attitude of the people who start viewing the
world where there are possibilities of future growth. A new class of entrepreneurs emerges in the
society who mobilize savings and undertake investment in new enterprises and bear risks and
uncertainty. In the sphere of political organization, it is during this stage that an effective centralized
nation state starts emerging.

Thus in the stage of precondition for take-off Rostow views agriculture as performing three roles; first,
agriculture must produce sufficient food grains to meet the demand of growing population and of the
workers who get employment in agriculture. Secondly, increase in agricultural incomes would lead to
the demand for industrial products and stimulate industrial investment. Thirdly, expanding agriculture
must provide much of the savings needed for the expansion of the industrial sector.
3. Take-off. Manufacturing industry assumes
greater importance, although the number of
industries remains small. Political and social
institutions start to develop - external finance
may still be required. Agriculture assumes
lesser importance in relative terms although
the majority of people may remain employed
in the farming sector. There is often a dual
economy apparent with rising productivity
and wealth in manufacturing and other
industries contrasted with stubbornly low
productivity and real incomes in rural
agriculture.
Stage # 3. The “Take-Off’ Stage

 “The take-off stage” is defined as “the interval during which the

rate of investment increases in such a way that real output per
capita rises and this initial increase carries with it radical
changes in the techniques of production and the disposition of
income flows which perpetuate the new scale of investment
and perpetuate thereby the rising trend in per capita output.”
 Thus, the term “take-off ” implies three things – first, the
proportion of investment to national income must rise from 5%
to 12% and more so as to outstrip the likely population growth;
secondly, the period must be relatively short so that it should
show the characteristics of an economic revolution; and thirdly,
it must culminate in self-sustaining and self-generating
economic growth.
 Thus, during the take-off stage, the desire to achieve economic
growth to raise the living standards dominates the society.
Revolutionary changes occur in both agriculture and industry
and productivity levels sharply increase. There is greater
urbanization and urban labor force increases. In a relatively
short period of a decade or two, both the basic structure of the
economy and social and political structure is changed so that a
self-sustaining growth rate can be maintained.
4. Drive to maturity. Industry
becomes more diverse. Growth
should spread to different parts of
the country as the state of
technology improves - the
economy moves from being
dependent on factor inputs for
growth towards making better use
of innovation to bring about
increases in real per capita
incomes
Stage # 4. Drive to Maturity – Period of Self-Sustained
Growth

 This stage of economic growth occurs when the

economy becomes mature and is capable of generating
self-sustained growth. The rates of saving and
investment are of such a magnitude that economic
development becomes automatic.
 The initial key industries which sparked the take-off
decelerate as diminishing returns set in. But the
average rate of growth is maintained by a succession of
new rapidly-growing sectors with a new set of leading
sectors. The proportion of the population engaged in
agriculture and other rural pursuit’s declines, and the
structure of the country’s foreign trade undergoes a
radical change.
5. Age of mass consumption.
Output levels grow, enabling
increased consumer
expenditure. There is a shift
towards tertiary sector
activity and the growth is
sustained by the expansion
of a middle class of
consumers.
Stage # 5. Mass Consumption

 In this stage of development per capita income of a

country rises to such a high level that consumption
basket of the people increases beyond food, clothing
and shelters to articles of comforts and luxuries on a
mass scale.
 Further, with progressive industrialization and
urbanization of the economy values of people change in
favor of more consumption of luxuries and high styles of
living.
 New types of industries producing durable consumer
goods come into existences which satisfy the wants for
more consumption. These new industries producing
durable consumer goods become the new leading
sectors of economic growth.
Rostow's Stages of Growth
Development Model
B.2 Harrod-Domar Growth Model

* Every economy must save

certain proportion of its national income, if
only to replace worn-out or impaired
capital goods (buildings, equipment and
materials).
* However, in order to grow,
new investments representing net
additions to the capital stock are
necessary.
C. Structural Change Models

* Focuses on the mechanism by

which underdeveloped economies
transform their domestic economic
structures from a heavy emphasis on
traditional subsistence agriculture to a
more modern, more urbanized and more
industrially diverse manufacturing and
service economy.
C.1 The Lewis Theory of Development

* The underdeveloped
economy is consists of two sectors: a
traditional, over populated rural
subsistence sector characterized by zero
marginal labor productivity and a high
productivity modern urban industrial
sector into which labor from the
subsistence sector is gradually
transferred.
C.2 Patterns of Development Analysis
* Focuses on the sequential process through which the
economic, industrial and institutional structure of an
underdeveloped economy is transformed over time to
permit new industries to replace traditional agriculture
as the engine of economic growth.

*Several characteristic features of the development

process
** Shift from agricultural to industrial production
** Steady accumulation of physical and human capital
** Change in consumer demands from emphasis on
food and basic necessities to desires for diverse
manufactured goods and services
** Growth of cities and urban industries
**Decline in family size and over-all population growth
D. The International Dependence
Revolution
D.1 The Neo-colonial Dependence Model
* Attributes the existence and
continuance of underdevelopment primarily to the
historical evolution of a highly unequal international
capitalist systems of rich country – poor country
relationships.
D.2 The False Paradigm Model
* Attributes underdevelopment to
faulty and inappropriate advice provided by well
meaning but often uninformed biased, and
ethnocentric international expert advisers from
developed-country assistance agencies and
multinational donor organizations.
D.3 The Dualistic Development Thesis
* Represents the existence and
persistence of substantial and even
increasing divergences between rich and
poor nations and rich and poor people on
various levels.
* Embraces four key arguments:
different sets of conditions, co-existence is
chronic and not merely transitional, degrees
of superiority or inferiority have an inherent
tendency to increase, existence of the
superior elements does little or nothing to
pull up the inferior elements.
E. The Neoclassical counter revolution
* Favored supply-side macroeconomic policies,
rational expectations theories and the
privatization of public corporations.
*Central argument is that underdevelopment
results from poor resource allocation due to
incorrect pricing policies and too much state
intervention by overly active developing nation
governments.
* Can be divided into three components
namely: free market analysis, public choice
theory and market friendly approach.
 END OF
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