Chapter Three: Growth Models and Theories of

Development
3.1. Components of Economic Growth
Three components of economic growth are prime
importance such as:
1) Capital accumulation, including all new
investments in land, physical equipment, and
human resources through improvements in
health, education, and job skills,
2) Growth in population and hence eventual
growth in the labor force, and
3) Technological progress -- new ways of
accomplishing tasks. 1
 Cont….
1. Capital Accumulation
 Capital accumulation: results when some present
income is saved and invested in order to augment
future output and income.
 New factories, machinery, equipment, and materials
increase the physical capital stock of a nation.
 Similarly, investment in human resources
(capital) is analogous (corresponds) to that of
improving the quality and thus the productivity
of existing land resources through strategic
investments.
2
 Cont….
2. Population and Labor Force Growth
Population growth and increase in the labor
force, has been considered as a positive factor
in stimulating economic growth.
Obviously, it will depend on the ability of the
economic system to absorb and productively
employ.
Growth of labor force helps as for capital
accumulation and the availability of related
factors, such as managerial and administrative
3
 Cont….
3. Technological Progress
To many economists; source of economic
growth, technological progress results from
new and improved ways of accomplishing
traditional tasks.
Technological progress are growing crops,
making clothing, or building a house.
There are three basic classifications of
technological progress: Neutral, Labor-saving
and Capital-saving. 4
 Cont….
 Neutral technological progress occurs when
higher output levels are achieved with the same
quantity and combinations of factor inputs.
• In terms of production possibility analysis, a neutral
technological change say that doubling of all productive
inputs is equivalent to double of total output.
 Labour-saving technological progress:
• Technological progress may result in savings of either labor.
• Labor-saving technological progress products or equipments
are computers, Internet, automated looms (weapon), high
speed electric drills, tractors, mechanical ploughs and many
other kinds of modern machinery.
5
 Cont….
 Capital-saving technological progress:
• Capital-saving technological progress is what is needed most.
Such progress results in more efficient, lower-cost and labor-
intensive methods of production.
• For example, hand- or rotary-powered weeders and threshers, foot-
operated bellows pumps, and back-mounted mechanical sprayers
for small-scale agriculture.
 Technological progress may also be labor-augmenting or capital-
augmenting (to increase).
 Labor-augmenting technological progress: Technological
progress raises the productivity of an existing quantity of labor by
general education, on-the-job training programs, etc.
 Capital-augmenting technological progress: Technological
progress that raises the productivity of capital by innovation and
inventions. 6
 3.2. Models and Theories of Economic Growth and Development
3.2.1 Linear Stages of Growth Models
 Linear stages of growth models includes: a. Rostow’s
stage of growth b. Harrod Domar growth model c. Solow
growth model
a. Rostow’s stage of growth
 The most influential was the American economic historian
Walt Whitman Rostow (Oct 7, 1916- Feb 13, 2003).
 According to Rostow doctrine, the transition from
underdevelopment to development can be described in terms
of a series of five stages of economic growth; namely, i.
Traditional society, ii. Pre-conditions for the takeoff, iii.
Take-off, iv. drive to maturity, and v. Age of high mass
consumption. 7
 Cont….
I. The Traditional Society
 The traditional society is developed within a limited
production and backward technology.
 That means, production function is based on pre-
Newtonian science and technology.
 The social structure is hierarchical in which family and
class connections play a dominant role.
 Political power is concentrated in the hands of the landed
aristocracy.
 More than 75% of the population is engaged in
agriculture, which is the main source of income for the
state and the peasants. 8
 Cont….
II. The “Pre-condition for Take-off”
o Rostow calls stage b/n feudalism and take-off as the transition stage & all
the pre-conditions for sustained economic dev’t are created.
o Such, pre-conditions require a number of radical changes, which include:-
a. The main economic requirement in the transition period is that;
1) level of investment should be raised to at least 10% of NI to ensure self-
sustaining growth,
2) Building of social overhead capita, especially transportation and
telecommunication to enlarge the market size,
3) Technological revolution in agricultural sector and a transfer of surplus from
agriculture to industry and
4) An expansion of imports especially capital goods.
b. On the social front
5) A new elite (middle class) must emerge to fabricate the industrial society, and it
must supersede in authority the land-based elite of the traditional society &
6) Surplus must be channeled by the new elite from agriculture to industry.
C) Politically, the establishment of an effective modern government is vital. 9
 Cont….
III) Take Off
o Take-off is defined by Rostow as “an industrial revolution tied directly
to radical changes in the methods of production having their impact
over a short period of time which lasts for two decades.”
o Forces of modernization operate against the habits, institutions, the
values and interest of the traditional society and make a decisive break
through.
o The following are three necessary conditions for take-off:
i. A rise in rate of productive investments to a level in excess of 10% of the NI
in order for PCI to rise sufficiently to guarantee adequate future levels of
saving and investment,
ii. The development of one or more substantial manufacturing sector with a
high growth rate &
iii.The existence of political, social and institutional framework which can foster
economic dev’t.

10
 Cont….
oThere are two approaches for take-off:
• Aggregate approach - this is based on Harrod model of growth
G=
for growth either s/y must be high or v must be low.
• Leading-sector approach: assumes that simultaneous growth in
all the sectors is not possible because of limitation of resources.
o Some sectors of the economy will play a leading role. Example:
railway, transports industry, iron and steel etc.
o Different industries played leading role in different countries example,
textile in UK; iron and steel, shipbuilding, and textile in Japan etc.
o The take-off period is different for different countries. The take-off
stages for some of the developed countries are: -
o UK 1783-1802, France 1840-60
o USA 1843-60, Germany 1850-73
o Japan 1878-90, Russia 1890-1914 and etc…
11
 Cont….
IV. Drive to maturity stage
o This stage is defined by Rostow as a period when a society has effectively applied the
range of modern technology to develop the bulk of its resources took four decades.
o Rostow sees dev’t of the steel industry as one of the symbols of maturity.
o In this stage, three significant changes take place:
a) The character of the working forces changed . They become skilled and organized. Their real wages start
increasing. People prefer to live in urban areas than in rural areas,
b) The character of entrepreneurship changes . They become polished, polite and efficient and
c) The society becomes more industrialized and it leads to more and more changes.
V. Age of High Mass Consumptions
o During this stage, the balance of attention of society is shifted from supply to demand
for goods and services and from problems of production to consumption and welfare.
o There is a greater tendency towards mass consumption of durable consumer goods,
maintaining full employment and an increasing sense of security which leads to high
rates of population growth.
o It should be pointed out that Rostow’s last two stages – “Drive to Maturity” and “Age
of Mass consumption” describes a developed industrial economy and are the
result of successful take-off.
12
Cont….

13
 Cont….
 All advanced economies have passed the stage of take-off into self sustaining
growth.
 Developing countries are still in the traditional society or the pre-conditions
stage. Why? The financing gap exists and Lack of adequate investment.
 According to Rostow; development requires: Substantial investment in capital.
 For the economies of LDCs to grow; the right conditions for such investment would have
to be created.
 If aid or foreign direct investment occurs at stage 1; the economy needs to have
reached stage 2.
 If the stage 2 has been reached then injections of investment may lead to rapid
growth to stage 3.
 Criticisms of Rostow's Model
 First, it is too rigid, mechanical and deterministic with each stage rigidly
leading to the next. There is no possibility of skipping or merging stages.
 Rostow didn‘t identify what exactly the factors are responsible for take –off.
 Following Rostow’s model, it is very difficult to identify countries at which
stage they are. 14
 b. The Harrod-Domar Growth Model
Developed during the early days of the post-World War II;
Keynesian Revolution in the 1940s: Harrod (1939) and
Domar (1946).
 The model suggests that “the economy’s rate of growth” depends on:
 The level of saving and
 The productivity of investment i.e. the capital output ratio.

15
 Cont…..
 The Harrod- Domar construct the following simple model of
economic growth.
 Solving for the Hrrod- Domar model
1) Investments and savings:
 We assume a closed economy (no trade).
 Then, savings S must be used for investments I, and investments
can only come from savings. Hence, they must be equal:
 S = I…………………………………(1)
 We assume further that; a constant fraction of income is saved. Call
this fraction s; this is the savings rate/ net savings ratio.
 S = sY………………………………(2)
 Net savings ratio: Savings expressed as a proportion of
disposable income over some period of time
 s = S/Y, where s saving rate……………..(3)
16
 Cont…..
2. Capital stock, investment and depreciation
In year t, the stock of capital is Kt. The year after, year t+1,
the capital stock is Kt+1.
Changes in the capital stock come from investments and the
depreciation (wearing out) of the capital stock.
Depreciation occurs at a constant rate d, so an amount dKt
of capital disappears every year. Hence, the change in capital
stock is:
ΔK = I − dK…………………………………(4)
 Where,
 ΔK - annual change in capital stock
 I - Investment,
 d - is depreciation occurs at constant rate and
 K is depreciated capital. 17
 Cont…..
 So, an amount of dK of capital disappear every year.
 Now, we substitute in I = sY because I = S = sY. Then:
ΔK = sY − dK
 The capital output ratio given by:
, where; v is capital output ratio……………. (5)
 Depreciation rate is the percentage rate at which asset is
depreciated across the estimated productive life of the asset.
 Capital-output ratio: A ratio that shows the units of capital
required to produce a unit of output over a given period of time.
 Lets suppose a fraction of K depreciates. Then it must be true
that:  Kt+1 = K + Kt Where K = I + dK

Kt+1 = (1-d)Kt + It -------------------- (6)

18
 Cont…..
 As we are mostly interested in the rate of growth of GDP.
 Solving for a growth rate:
 Now we can use (1); (3); (5); and (6) we can solve for g
 1st S(t) = I(t)
Kt+1 = (1- d)Kt + It
Kt+1 = (1- d)Kt + St ……………………..……..(7)
 2nd Rearrange s and v from (3) and (6) as a function of Y(t);d

……………..……(8)
=  Kt+1 = vYt+1 …....(9)
 3rd Substitute equation 8 and 9 in equation 7 in terms of K
Kt+1 = (1- d)Kt + St
 vY t+1 = (1- d)Yt +sYt

19
 Cont…..
 Divide both sides by vYt

 5th Subtract 1 from both sides

 6th Since g is the overall growth rate

Is Harrode – Domer model.

 Where, g is H-D growth variable, s is saving ratio to income, v is
capital out-put ratio (K/Y) and d depreciation.
20
 Cont….
 According to this identity, the fundamentals to economic growth are;
 The ability of the economy to save and invest (captured by s),
 The ability of the economy to convert capital into output (v) –
capital efficiency or productivity,
 The rate at which capital depreciates (d) and
 Growth in GDP is given by g.
The equation is simplified by the assumption that depreciation is
near to zero.
The Harod-Domar equation is or the actual growth rate (g) is
defined as: g = s/v
Where, s = the ratio of saving to incomes (S/Y) or MPS
V = the actual increment capital output ratio, that is the ration of
extra capital accumulation or investment to the growth of output.
21
 Numerical illustration:
Suppose, the economy is currently operating at a capacity
production level of (Y) 2000 per year, the capital stock (K)
is 6000 and the marginal propensity to consume out of GDP
(s) is 0.4. This includes business and public saving as well
as household saving. Then, find the equilibrium growth rate
using Harode- Domer growth model.
 Solutions: g = s/v first compute v = K/Y = 6000/2000 = 3
& s or MPS = 1 – 0.4 = 0.6. Then,
g = s/v = 0.6/3 = 0.2 or 20%
 Interpretation: The Harrod-Domar growth model tells that
the equilibrium growth rate is g = 0.6/3 = 0.2; i.e., the
economy can grow at 20 percent per year.
22
 Cont…
The Harrod- Domar model with population growth leads to
small amendment to the Harrod- Domar model allows us to
incorporate the effects of population growth on economic growth.
Let Pt = population at time t.
Pt+1 = Pt + nPt  n = (Pt+1 + Pt)/Pt
Where n= rate of growth of population. Then, after solving the
above relationship by including population the Harrod-Domar
growth model becomes
g* = s/v – n - d
According to this identity, the fundamentals to economic
growth are; Population growth has a negative effect on the rate of
growth of per capita income. As n increases g will be decreases. So,
the rate of population growth (n) is other determinants of economic
growth. 23
 Cont…
The assumptions/ intuition behind the Harrod-Domar model: A larger saving
rate (a higher s) will lead to a larger growth rate (g) because a higher saving rate
leads to greater investment (thus, greater capital formation) and output (Y) grows
faster.
The smaller capital output ratio (v) means less capital is needed to create a
certain amount of output (or that a given amount of capital will create more
output).
As a matter of policy, to increase the growth rate either: raise the saving rate,
use capital more efficiently & do both of them.
Drawbacks Harrod-Domar growth model:
An increase in savings ratio is difficult in LDC because they have very low MPS.
Using capital more efficiently is not very easy in LDC due to shortage of skilled
& educated labour.
Investment and saving are the necessary condition not sufficient condition for
economic growth, i.e. in addition we need managerial capacity and skill to
transform the potentials of capital.
The effect of technological progress has not been incorporated in the models.
24
 c. Solow growth model/ Neoclassical Model
Robert Solow discussed the Solow model and was developed in the
1950s/60s and won Nobel Prize in 1987.
Solow extended the Harrod-Domar model by;
 Adding labor as a factor of production,
 Requiring diminishing returns to labor and capital separately, and
constant returns to scale for both factors combined,
 Introduces technology in the growth equation and
 the capital-output and capital-labor ratios are not fixed as they are in
the Harrod-Domar model.
The Solow growth model is a dynamic model that shows:
• How growth in the capital stock and saving,
• Growth in the population/labour force, and
• how they affect a nation’s total output of G &S. Technological
progresses interact in an economy.
25
 Cont…
The model states:
• The difference in income must come from differences in capital, labor, and
technology.
• The model also identifies some of reasons that countries vary so widely in
their standards of living. We will then examine how economic policy can
influence level and growth of the standard of living.
The neoclassical growth models are based on four propositions:
1. Growth rate is independent of S/Y & I/Y ratio. Accordingly higher S/Y ratio
& I/Y ratio can be offset by high K/Y ratio (COR) and a low productivity of
K.
2. Growth of output in the long run is determined by technological progress and
the rate of growth of labour force indicated by efficiency units.
3. The level of per capita income depends on savings, investment & population.
The level of PCI varies positively with S and I ratios to income and negatively
to population growth.
4. Neoclassical models are based on flexibility (allows substitutability of
factors) where as H-D models are based on rigidity(no substitutability of
26
factors).
 3.2.2. Structural change models
Structural-change theory: 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.
a. Lewis theory of Development (Surplus Labor theory)
Nobel laureate W. Arthur Lewis formulated
structural transformation of economy in mid 1950s.

27
 Con’t,,,
In the Lewis model, Many LDCs/ underdeveloped
economy consist of dual economies like;
o I. Overpopulated rural subsistence sector characterized by:
 Zero marginal labor productivity is a situation that permits Lewis to
classify this as surplus labor, in the sense that it can be withdrawn
from the traditional agricultural sector without any loss of output
 Low incomes,
 Low savings and considerable underemployment.
o II. A high-productivity modern urban industrial sector into which
labor from the subsistence sector is gradually transferred.
 It is technologically advanced with high levels of investment
operating in an urban environment. Surplus labour means the
existence of such a large population in the rural sector; so that; the
MPL has fallen to zero. This condition is also called disguised
unemployment. 28
Con’t,,,

29
 Cont…
People moved away from the rural /Agricultural sectors to
industrial/towns would earn increased incomes:
 Higher incomes generate more savings.
 Increased savings meant more fund available for investment.
 Increased investment meant more capital and increased productivity in
the industrial sector, higher wages, more incentive to move from low
productivity agriculture to high productivity industry, the circle
continue.
 Lewis suggested that the modern industrial sector would attract workers
from the rural areas. Both, labor transfer and modern-sector employment
growth result in output expansion in the sector.
According to Lewis; Economic development takes place:
1. When capital accumulates as a result of transfer of labour resources from
the agricultural sector where they add nothing to production to the more
in modern industrial sector.
2. Switch from agriculture to industry (and services). 30
 Criticisms of Surplus Labor Theory
1. The wage rate remains constant in the urban sector for a
long time.
2. If the method of production in the industrial sector is capital
intensive and labour saving, this theory will not work.
3. lack of skilled labourers, is a serious problem
4. Entrepreneurial initiative, one factor expansion of industry
5. It is unrealistic to assume that there is high unemployment
in rural areas and full employment in urban areas.
6. Mobility of labour from agriculture to industrial sector is
not easy.
7. It is a one sided theory because the theory does not consider
the possibilities of progress in the agricultural sector.
31
 3.2.3. Dualistic Theories
Dualism indicates a situation where types of parallel phenomena
co-exist.
It represents the existence and persistence of increasing
divergences between rich and poor nations and on various levels.
Specifically, the concept of dualism embraces four key elements.
1. Different conditions of which some are “superior” and others “inferior,”
can coexist in a given space.
2. This co-existence is chronic and not merely transitional (coexistence
continues forever). It is not due to a temporary phenomenon.
3. Dualism has an inherent tendency to increase (not diminishing).
4. The existence of the superior elements does little or nothing to pull up
the inferior element & to push it down—to “develop its
underdevelopment.”
Dualism has been perceived in different ways such as: social,
technological, financial, and geographic dualism.
32
 Cont…
a) Social Dualism
 Social dualism was developed by a Dutch economist Julius
Hermana Bocke.
 Theory of social dualism is based on economic & social dev’t of
UDCs. It is based on Indonesian Economy.
 Dual society is furnished with the existence of an advanced
imported western system on the one side and endogenous pre
capitalistic agricultural system on the other side.
 Western system: uses the advance techniques and where
standard of living is high.
 Pre capitalistic: agricultural system is native and it is furnished
with the outdated techniques and low social and economic life.
 On economic basis the dualistic society is classified as by giving
the names: Eastern Sector and Western Sector. 33
 Cont…
 Characteristics of eastern sector of a dualistic economy
which distinguishes it from western sector are:
1. The needs of eastern sector are limited. People pass a contented
life.
2. People work for social needs rather for economic needs. For
example, if a three hectares/acres are enough to supply the needs
of a household he will not cultivate six acres.
3. Goods are cultivated according to their prestige value rather on
their use value.
4. The eastern economies are characterized with backward bending
supply curves of effort and the risk taking.
5. They do not take risk by making productive investment.
6. Labor is unorganized, passive and unskilled. They are reluctant to
leave their village and community. They are fatalist/pessimist.
7. The urban development takes place at the cost of rural life. 34
 Cont…
 Criticisms of Social Dualism (discussed by Prof.
Benjamin Higgins):
o It is argued that Bocke’s contention that people in UDCs
have limited wants is unrealistic.
o It is argued social dualism is not peculiar to UDCs alone.
It exists in DC too.
o Higgins said that Bocke fails to provide a distinctive
economic and social theory for UDCs. His dualistic
theory is merely a description of the eastern society.
o Bocke’s theory centers more on socio-cultural aspects
rather than economics.
o So it fails to provide solutions to economic problems of
UDCs. 35
 Cont…
b. Technological Dualism
 Developed by Prof. Benjamin Higgins.
 Technological dualism implies the use of different
production functions in the advanced sector and the
traditional sector of the economies of LDC.
 Looks over the problems of unemployment's in industrial
sector and disguised unemployment in rural sector.
 Prof. Higgins builds his theory on two sectors:
 The industrial sector is engaged in plantations, miners, refineries,
large scale industries etc. (fixed technological co-efficient)
 The rural sector is engaged in producing food stuffs, handicrafts
and it consists of very small industries. Variable tech. coefficient

36
 Cont…
Criticisms of Technological Dualism
1. Technical co-efficient are not fixed in industrial
sector,-ther is possibility to substitute
2. Factor prices do not depend on factor
endowments alone,
3. Higgins theory neglects institutional and
psychological factors,
4. Higgins neglects the possibilities to use labour
absorbing techniques in urban sector, and
5. He failed to explain the nature and size of
disguised unemployment. 37
 Cont…
c. Financial Dualism
 Developed by Prof. Myint.
 Financial dualism refers to the co-existence of different
interest rates in the organized and unorganized money
markets in the LDCs.
 The rate of interest in the unorganized money market is
higher than that in the organized money market in the
modern sectors.
 The unorganized money market consists: non-institutional lenders
such as village money lenders, land lords, shopkeepers, traders,
etc. They charge very high interest rates on loans.
 The organized money market consists of the commercial banks
and other financial institutions which lend short term credit at low
interest rate in the modern business sector. 38
 3.2.4. A Model of Low Level of Equilibrium trap
 There are two major interrelated reasons why rapid
population growth may be regarded as a retarding (bad)
influence on development.
 I. Rapid population growth may not permit (brings) a rise in per
capita incomes sufficient to provide savings.
 II. If population growth outstrips the capacity of industry to
absorb new labour, either urban unemployment will develop or
rural underemployment will be exacerbated, depressing
productivity in the agricultural sector.
 Models attempt to integrate population and development
theory. Its focus is on the interdependence between
population growth, per capital income and national income
growth. (rise in per capita income accompanied by inducing
pop growth in excess of income growth.
39
 3.2.5. The Big-Push Theory
 Developed by Paul N. Rosentem Rodan.
 UDCs Big push program state that large
comprehensive is needed in the form of a high
minimum amount of investment to overcome the
obstacles for development in UDCs.
 A poor country can be caught in a low-equilibrium
“poverty trap”, government intervention can
potentially solve the coordination problem, and
“push” the economic into the better equilibrium
allowing a “take-off” into sustained growth.
 For sustained development, a minimum amount of
investment is necessary. 40
 Cont…
 Rodom distinguished three types of indivisibilities
and external economies;
1) Indivisibilities in the Production Function
 Rosentein Rodan stated that indivisibility of inputs, outputs or
processes of production lead to increasing returns. Increasing
returns play a significant role in lowering the capital output ratio.
2) Indivisibilities of Demand
 This requires a simultaneous setting up of interdependent
industries in UDCs. If the entire investment is made only in one
industry, lack of demand may result in overproduction.
3) Indivisibilities in the Supply of Saving
 High investment leads to high level of employment, increased
income, and increased saving which again leads to increased
investment. MPS>ALS 41
 Applicability to Less Developed Countries (LDCs)
 The development of complementary industries and
basic industries are important in LDCs. But the problem
is that there is no sufficient capital and skilled
manpower to develop them.
 Limitation of the theory
• It neglects investment in agricultural sector. In fact developing
economies are agrarian economies. Thus a large amount of
investment is needed in agriculture in such projects as irrigation.
• It generates inflation since the high investments in the basic
industries do not directly increase goods and services.
• In a poor country there are so many administrative and
institutional difficulties.
• Rosenstain Rodan’s theory is not a historical explanation of how
development takes peace. 42
 3.2.6. The Balanced Growth Theory
 Advocated mainly by Rosenstein-Rodan (1943), Ragnar
NurKse (1953) and Arthur Lewis (1954).
 Many writers view balanced growth differently.
• To some writers, balanced growth means investing in a lagging
sector of the national economy.
• To others, balanced growth implies that investment takes place
simultaneously in all sectors of the national economy.
• Still to others, it implies the balanced development of agricultural
and industrial sectors of the economy.
• To this extent, balanced growth helps for maintaining the balance
between: the different consumer and capital goods industries.
• It also calls for ensuring balance between agriculture and industry
and between the domestic and export sectors of the national
economy.
43
 3.2.6. The Balanced Growth Theory
Moreover, the economists in favour of the balanced growth
postulated the balance between supply side(., intermediate
goods, raw materials, power, agriculture, transport, and
consumer goods industries.) and demand side (provision of
employment opportunities which increase income ).
Rodan- social marginal product (SMP) of an investment is >
private marginal product (PMP).
Nurkse, Vicious circles of poverty are at work in UDCs.-
According to him, “More or less synchronized application of
capital to a wide range of different industries” will help to
break the vicious circles.
Lewis, “in development programme all sectors of the
economy should grow simultaneously so as to keep a proper
balance between industry and agriculture and between 44
 Criticisms of Balanced Growth
1. Raise money and real cost of production.
2. Beyond the capability of UDCs. Resource limitation
3. The doctrine of balanced growth presupposes increasing
returns. But this is a wrong assumption.
4. Dis-proportionalities in factors of production and shortage
of resources make the theory unrealistic in LDCs. This
theory is applicable in a developed country.

45
 3.2.7. Unbalance Growth
 The theory of unbalanced growth is the opposite of the
doctrine of balanced growth.
 Walt Rostow and more particularly Albert Hirschman were
who propounded the theory in a systematic manner.
 Hirschman regards economic development by selecting social
overhead capital investment (SOC) or by selecting directly
productive activities (DPA).

46
 Criticisms of Unbalanced Growth
1. Theory failed to say what is the optimum degree of
imbalance,
2. He neglected the influence of the growth retarding forces
3. Lack of basic facilities : technical personnel, raw materials
and basic facilities like transport, power and even markets
for the products produced.
4. Technical flexibility (factor mobility) of resources is limited
in the underdeveloped countries.
5. Theory is largely related to maximizing investment
decisions. In an UDC, administrative, managerial and
policy decisions are important.
6. The investment may lead to inflationary problems.
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 3.3.9. The International- Dependence Revolution
 International dependence models gained increasing
support among third world intellectuals in 1970s.
 The international dependence models view developing
counties as beset (threatened) by institutional, political and
economic rigidities and caught up in dependence and
dominance relationships with the rich countries.
 They argue that the main reason for lack of development in
LDCs is the dominance and dependence relationship among
rich and poor countries.

48
 3.3.9. The International- Dependence Revolution
Within this approach there are three streams:
1. Neoclassical Dependence Model
2. The False- Parading Models and
3. The Dualistic Development Thesis.
1. The Neoclassical Dependence Model.
The main proposition of the model is that
underdevelopment exists in LDCs because of
continuing exploitative economic, political and
cultural powers of former colonial rulers towards less
developed countries.

49
 3.3.9. The International- Dependence Revolution
2. The False - Paradigm Model
This model argues that LDC failed to develop because their
development strategies --incorrect model of development,
one that, for example, overstressed capital accumulation
without due consideration to needed social and institutional
changes.
this argument leading University intellectuals, trade
unionists, high level government economists and
others get training in developed country institution
where they gain unhealthy dose of alien concepts and
inapplicable theoretical models.

50
 3.3.9. The International- Dependence Revolution
3. The Dualistic Development Thesis
It represents the existence and persistence of
increasing divergence between the rich and the poor
nations and rich and poor peoples on various levels.
the superior elements does little of nothing to pull up
the interior element, let alone trickle downs to it.
Conclusions and Implications
1. All of them offer a little formal or informal
explanation of how countries initiate and sustain
devnt.
2. All of them didn’t mention role of gov’t
51
9. The Neoclassical Counterrevolution
The central argument under development results
from poor resource allocation due to incorrect pricing
policies and to much government intervention.
To stimulate both economic efficiency and growth the
following should be permitted;
1. Competitive free market to flourish
2. Privatizing state owned enterprises
3. Promoting free trade and exports
4. Welcoming foreign investment
5. Eliminating excessive government regulation and
price distortions in different markets.
52
9. The Neoclassical Counterrevolution
The neoclassical challenge to development can be
divided into three approaches:
1. Free markets, - markets alone are efficient
2. Public Choice (or new political economy) _
governments can do nothing right. Politicians,
bureaucrats, citizens and states act solely from a
self-interested perspective. minimal government is
the best
3. Market Friendly Approaches: recent and it says
there are many imperfections. Governments do
have a key role to play . But in friendly way. Invest
on SOC and provide suitable env’t for private. 53
10. The New Growth Theory
The new growth theory is a modification of the
traditional growth theory.
According to traditional neoclassical growth theory,
output growth results from three factors:
1. Increase in labor quantity and quality (through
population growth and education)
2. Increase in capital (through saving and investment)
3. Improvement in technology
New growth theory emerge from the inabilities of the
traditional growth theories

54
10. The New Growth Theory
Models of endogenous growth discard the
neoclassical assumption of DMR to capital
investments, and permit increasing returns to scale in
aggregate production, by assuming that public and
private investment in human capital.
Support knowledge-intensive industries through
direct and indirect investment in human capital
formation
Didn’t support huge importing of capital goods

55
•End of Chapter 3

•Thank you
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