Chapter 5 Lecture Slides

7/22/2019 Chapter 5 Lecture Slides

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Theories of Development

and Underdevelopment

DEVELOPMENTALIST

THEORIES

Ch. 5 in Cypher & Dietz


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DEVELOPMENTALIST THEORIES

of ECONOMIC DEVELOPMENT

BASIC CHARACTERISTICS:

Post-WWII Pioneers of Development Economics

Loose school of thought; less theoretical; more historical and practicalapproach to the question of how to develop

Optimistic, believe in the inevitability of development as a linear process that all

nations go through Emphasize large-scale industrialization as the key to the development process

Profound respect for market forces yet support large-scale governmentintervention to force economic growth

Similar to Keynesians in regard to advocacy for government intervention andalso that poor economic performance reflects a lack of aggregate demand

LEADING THEORETICIANS:

Theory of the Big Push: Rosenstein-Rodan

Theory of balanced growth: Ragnar Nurkse

Unbalanced Growth: Hirschman

Growth with Unlimited Supply of Labor: Lewis

Stages of Growth Theory: Rostow


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Theory of the Big Push

Paul Rosenstein-Rodan

hidden potential in developing economies

large-scale industrialization and infrastructuraldevelopmentis key

more investment is needed in many places at one time

but this cannot be left to the market due to information andappropriation failures (externalities)

the big pushneeds to come from the state to escapethe low-level equilibrium trap


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Theory of balanced growth

Ragnar Nurkse

export pessimism: exports cannot be depended upon asthe source of growth

massive injection of new technology, machines, production

processes is the key to development

hence need for domestic industrialization

large scale industrial investments (i.e. expanded supply)would also generate large scale demand, hence leading to:

BALANCED GROWTH


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Industrial Linkages & Unbalanced Growth

A lf red Hirschman

Resource constraints in developing countries necessitateprioritization as to where to invest first;

the big push should be only for a limited no of industries, henceinitially unbalanced growth;

this will initially result in unbalanced growth such that inducingdevelopment in key sectors first will create overcapacity here;cheapening their output due to economies of scale;

this will stimulate upstream investments:

eg. oversupply electric power; as electricity becomes cheaper this willstimulate investments in those sectors that use electric power in bigamounts.

The key sectors for initial investment should be determined on thebasis of industrial backward and forward linkages.


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Growth with unlimited supply of laborArthur Lewis

main difference between North and South: the relative weight of agriculturalversus industrial production and employment.

Hidden potential of developing countries for growth lies in unlimited suppliesof rural laborinherent in their large agricultural sector ready to be pulled intothe modern urban sector.

in the South, coexistence of the two sectors is dualistic such that:

agricultural sector provides labor to industry; and industry buys food from them; butthere is little connection between them

productivity in agricultural sector is so low that there is disguised unemployment; i.e.surplus labor

transformation dynamic lies in the attraction of this rural surplus labor into theindustry such that while industrial production increases, there is no change in

agricultural production.


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The Labor Surplus Model


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Growth with unlimited supply of labor

Arthur Lew is

Distribution of Income:

Higher level of savings and investment in theindustrial sector is key to development; but

only capitalist class is capable of savings andinvestment.

A limit will be imposed on this growth process as Lsurplus is depleted and wages increase undesirable from Lewis perspective.

Hence Lewis advocates income distribution infavor of the capitalist class and against labor.


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Critics of the Lewis Model

Advocacy for pro-capital; anti-labor incomedistribution; hence increasing inequality for thesake of growth

No consideration of Institutional Factors influentialin wage determination such as minimum wagepolicies, labor unions and collective bargaining

practices

Assumption about Capitalist Strataas a source of

investment and growth can be ill founded


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Stages of Growth Theory

Walt Whitman Rostow

The Rostowian take-off modelclaims to be a universalhistorical model of economic growth which wasdeveloped on the basis of the economic history ofBritain.

The model claims that economic modernization

occurs in five basic stages, in changeable timeperiod.

1. Traditional society

2. Preconditions for take-off

3. Take-off

4. Drive to maturity5. Age of high mass consumption

Rostow argues this is a universal historicalcategorization of stages of growth that allsocieties necessarily go through with similar

experiences.


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Traditional Society

output consumed by producers rather than traded

trade carried out by barter; goods exchanged for othergoods

agriculture dominating sector; labor-intensive resource allocation determined by traditional

methods of production than scientific knowledge

pre-Newtonian or pre-scientific societydominated with a perspective of long-term fatalism

landholders plays a dominant and important role in

the determination of political and economic power


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Pre-conditions for Take-off destruction of traditional society through

outside forces such as colonialism

emergence of entrepreneurial and managerial class

development of a financial sector and increase ininvestment

infrastructural development

modern business using new and sophisticated methods ofproduction

emergence of reactive nationalism


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Take-off into sustained growth

increasing industrialization, production

and employment switches from agriculture to manufacturing

growth concentrated in a few regions of the country and inone or two manufacturing industries

investment reaches over 10% of GNP

evolution of new political and social institutions supportingthe industrialization

growth becomes self-sustaining as investment leads toincreasing incomes in turn generating more savings tofinance further investment.


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Drive to Maturity

the economy starts spreading into new areas

technological innovation provides expanded range

of investment opportunities.

the economy starts producing a wide range ofgoods and services and there is less reliance onimports

this diversity leads to greatly reduced rates ofpoverty and rising standards of living, as thesociety no longer needs to sacrifice its comfort in

order to make certain sectors more productive.


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Age of High Mass Consumption

the economy is oriented towards massconsumption

service sector becomes increasinglydominant

society is now devoted to the pleasures ofconsumer choice, the pursuit of security,and the enjoyments of the arts and leisure


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Critics of the Stages of Growth Theory

by Rostow

attempts to universalize the experience of a particularcountry (Britain) in a specific period of time (16th to 20thcentury)

External factors such as colonization / imperialism canhinder the process of development in the colonized nations

descriptive; no analysis of how the pre-conditions for take-

off are to emerge

empirically not validated


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DEVELOPMENTALIST THEORIES

of ECONOMIC DEVELOPMENT

BASIC CHARACTERISTICS:

Post-WWII Pioneers of Development Economics

Loose school of thought; less theoretical; more historical and practicalapproach to the question of how to develop

Optimistic, believe in the inevitability of development as a linear process that all

nations go through Emphasize large-scale industrialization as the key to the development process

Profound respect for market forces yet support large-scale governmentintervention to force economic growth

Similar to Keynesians in regard to advocacy for government intervention andalso that poor economic performance reflects a lack of aggregate demand

LEADING THEORETICIANS: Theory of the Big Push: Rosenstein-Rodan

Theory of balanced growth: Ragnar Nurkse

Unbalanced Growth: Hirschman

Growth with Unlimited Supply of Labor: Lewis

Stages of Growth Theory: Rostow

Chapter 5 Lecture Slides

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