Linear Stages of Growth Model

Linear-Stages-of-Growth Model

• American economic historian Walt W. Rostow is associated with this theory of economic development.
• Development is achieved as countries pass through sequential stages.
• The shift from underdevelopment to development involves a series of steps or stages applicable to all countries.
• Advanced countries have theoretically passed the "takeoff" stage into self-sustaining growth.
• Underdeveloped countries in the traditional society or pre-conditions stage need to follow specific development rules to achieve their own takeoff into self-sustaining growth.

Necessary Condition

• It is a prerequisite for an event, but not sufficient on its own.
• Capital formation is a necessary condition for sustained economic growth since tools are needed to produce output.
• Social, institutional, and attitudinal changes must occur for growth to continue.

Sufficient Condition

• Guarantees that an event will occur when it is present.
• Logically requires a statement to be true given other assumptions in economic models.

Theories and Patterns of Structural Change

• These theories concentrate on how underdeveloped economies transform their domestic structures.
• The transformation shifts focus from subsistence agriculture to a modern, urbanized, and industrially diverse economy.
• The manufacturing sector's contribution to national income eventually surpasses agriculture.
• Economic structure experiences a major alteration.

Lewis Two-Sector Model

• It became the general theory for the development process in surplus-labor developing nations during the 1960s and early 1970s.
• It is still applied to study growth in China and labor markets in other developing countries.
• Development occurs as surplus labor from agriculture moves to industry.
• Growth in the industrial sector absorbs surplus labor, promotes industrialization, and stimulates sustained development.
• Underdeveloped economies consist of a traditional, overpopulated rural subsistence sector defined by zero marginal labor productivity.
• The model primarily focuses on labor transfer and the growth of output and employment in the modern sector.

Surplus Labor

• It is the excess supply of labor exceeding the quantity demanded at the free-market wage rate.
• It's also the portion of the rural labor force with zero or negative marginal productivity.

Criticisms of the Lewis Model

• The model assumes labor transfer and employment creation in the modern sector is proportional to capital accumulation within said sector.
• Reinvestment of capitalist profits may go into labor-saving equipment.
• Surplus labor exists in rural areas with full employment in urban areas.
• Modern-sector labor markets ensure constant real urban wages until the supply of rural surplus labor is exhausted.

International-Dependence Revolution

• It views underdevelopment with respect to international and domestic power dynamics, as well as institutional and structural economic rigidities, leading to dual societies both within and among nations.

Dependence

• This refers to the reliance of developing countries on developed-country economic policies to stimulate their own economic growth.
• The reliance can manifest through adoption of developed-country systems, technology, attitudes, and preferences.

Dominance

• In international affairs, developed countries have greater power in decisions regarding international economic issues.
• These issues include the prices of agricultural commodities and raw materials in global markets.

Neocolonial Dependence Model

• Claims that underdevelopment in developing countries is due to continued exploitative policies by former colonial rulers.

Underdevelopment

• An economic situation of persistent low living standards, absolute poverty, low income per capita, low growth rates, low consumption, poor health, high death and birth rates, foreign dependence, and limited freedom to choose activities that satisfy human wants.

False-Paradigm Model

• Developing countries have failed because their development strategies are based on an incorrect model.
• The incorrect model may overstress capital accumulation or market liberalization without considering social and institutional changes.

Dualistic-Development Thesis

• Coexistence of desirable and undesirable situations that are mutually exclusive to different groups of society.
• Examples can include extreme poverty versus affluence or modern versus traditional economic sectors.

Four Key Arguments

• Different sets of conditions, some superior, some inferior, can exist in the same space.
• This coexistence is chronic, not transitional.
• The degrees of superiority or inferiority do not diminish, and tend to increase.
• Interactions between superior and inferior elements do little to improve the inferior element.

Neoclassical, Free-Market Counter-Revolution

• Emphasized free markets, open economies, and privatization.
• Failure to develop is due to too much government intervention, not exploitative forces.

Free-Market Analysis

• Focuses on how an economic system operates with free markets.
• Assumes an unregulated market performs better than one with government regulation.
• Markets alone are efficient; product markets provide the best signals for investments.

Public-Choice Theory

• Self-interest guides all behavior, leading to inefficient and corrupt governments.

Market-Friendly Approach

• The World Bank advocated that successful development requires creating an environment for markets to operate efficiently.
• Governments should only intervene selectively in the economy where the market is inefficient.

Market Failure

• It is the market's inability to deliver theoretical benefits due to imperfections.
• These imperfections include monopoly power, lack of factor mobility, externalities, or lack of knowledge.
• Market failure often justifies government intervention to alter the working of the free market.

Solow Neoclassical Growth Model

• Growth model involves diminishing returns to each factor of production but constant returns to scale.
• Exogenous technological change is what generates long-term economic growth.