Theories of Development PDF

Theories of Development  Introduction:  In general the development theory offers the justification for policies. In other words such theory determines which strategies, policies, projects, what type of industry, or what organization of economic activity should be considered to be in...

Theories of Development  Introduction:  In general the development theory offers the justification for policies. In other words such theory determines which strategies, policies, projects, what type of industry, or what organization of economic activity should be considered to be in line with development goals or detrimental to these.  Different positions in development policy are based on differences in underlying development theories. Conventional Theories of Development: The conventional theories of development are classified according to their basic conception of the causes of underdevelopment to the following three groups:  Dualism Theories.  Strategy Theories. In the following some details are given about the development theories under each group:  1. Dualism Theories  Dualism theories assume a split of economic and social structures of different sectors so that they differ in organization, level of development, and goal structures. Usually, the concept of economic dualism differentiates between two sectors of economy:  the traditional subsistence sector consists of small-scale agriculture, handicraft and petty trade, has a high degree of labor intensity but low capital intensity and little division of   the modern sector of capital-intensive industry and plantation agriculture produces for the world market with a capital-intensive mode of production withtwo  The a high division sectors of little have labor.relation and interdependence and develop each according to its own pattern. The modern sector can be considered an economic enclave of industrial countries, and its multiplication and growth effects will benefit the industrial countries but have little effect on the internal market.  Several authors stress the dualism of specific factors. ECKHAUS, for instance, differentiates, in his concept of technological dualism, between labor and capital-intensive sectors.  GANNAGE explains regional dualism as a lack of communications and exchange between regions, the capital sometimes being an island which, in geographical terms, belongs to the developing country, in economic terms, however, to the industrialized country.   Economic, technological, and regional dualism are often the consequence of a social dualism, the absence of relationships between people of different race, religion, and language, which, in many cases, is a legacy of colonialism.  Development in dualism concepts is the suppression of the traditional sector by concentrating on and expanding the modern sector.  In time, it is assumed that the trickle down effects will reduce and abolish dualism. In this line of thinking, the main problem is capital formation because its degree determines the  In general, agriculture has to provide the resources, labor as well as capital, for expanding the modern sector. In details, the strategies vary. Some authors, like LEWIS and FEI/RANIS, assumed that a reduction of the labor force in agriculture, because of the widespread disguised unemployment, would not reduce agricultural production.  The productive employment of these laborers in the modern sector would increase the total production of the economy and hence priority of investment in industry is necessary.  Concentration on the modern sector led to an increasing regional disparity, rural urban migration, urban unemployment, a decrease in agricultural production, and hindrance in industrial development because of a lack of purchasing power in the rural areas. The anticipated trickle-down effects hardly ever happened. In praxis, development plans following this line of thinking led to failures like the early Indian development planning. Therefore, other authors, like JORGENSON, LELE and MELLOR, emphasize the important role of agriculture at the beginning of development, i.e., preceding or parallel to industrial development in order to provide enough internal resources for the development process.  2. Strategy Theories Underdevelopment from the viewpoint of these theories is the result of vicious circles of factors. One example is based on the fact of low real income in developing countries which is the result of low labor productivity. This low labor productivity, in turn, is a consequence of capital shortage which is a result of the population's low saving ability. As the saving rate is determined by the low real income, the circle is closed. Strategy theories intend to break up this cycle at a certain point which they consider critical and which varies according to the different theories. Thus, they want to initiate development and transform traditional subsistence economy into a modern market economy. Their main emphasis is on capital formation and investment (investment theories) and, by and large, they prescribe action for overcoming underdevelopment while they contribute little towards explaining the causes of underdevelopment. 2.1 Theory of Balanced Growth (NURSKE) This theory sees the main obstacles to development in the narrow market and, thus, in the limited market opportunities. Under these circumstances, only a bundle of complementary investments realized at the same time has the chance of creating mutual demand. The theory refers to Say's theorem and requests investments in such sectors which have a high relation between supply, purchasing power, and demand as in consumer goods industry, food production, etc. The real bottleneck in breaking the narrow market is seen here in the shortage of capital, and, therefore, all potential sources have to be mobilized. If capital is available, investments will be made. However, in order to ensure the balanced growth, there is a need for investment planning by the governments. Development is seen here as expansion of market and an increase of production including agriculture. The possibility of structural hindrances is not included in the line of thinking, as are market  2.2 Theory of Unbalanced Growth (HIRSCHMAN) This Contrary to the theory of balanced growth, in Hirschman's opinion, the real bottleneck is not the shortage of capital, but lack of entrepreneurial abilities. Potential entrepreneurs are hindered in their decision-making by institutional factors: either group considerations play a -great role and hinder the potential entrepreneur, or entrepreneurs aim at personal gains at the cost of others and are thus equally detrimental to development.  In view of the lack of entrepreneurial abilities there is a need for a mechanism of incentive and pressure which will automatically result in the required decisions. According to Hirschman, not a balanced growth should be aimed at, but rather existing imbalances - whose symptoms are profit and losses - must be maintained.  Investments should not be spread evenly but concentrated in such projects in which they cause additional investments because of their backward and forward linkages without being too demanding on entrepreneurial abilities.  Manufacturing industries and import substitutions are relevant examples. These first investments initiate further investments which are made by less qualified entrepreneurs. Thus, the strategy overcomes the bottleneck of entrepreneurial ability. The theory gives no hints as to how the attitude of entrepreneurs and their institutional influence will be changed in time.  Manufacturing industries and import substitutions are relevant examples. These first investments initiate further investments which are made by less qualified entrepreneurs. Thus, the strategy overcomes the bottleneck of entrepreneurial ability. The theory gives no hints as to how the attitude of entrepreneurs and their institutional influence will be changed in time.  2.3 Theory of Stages of Growth (ROSTOW)  This theory tries to explain the long-term processes of economic development from the point of view of economic history by describing five ideal types of stages through which all societies pass:  The 'traditional society' has more than 75 per cent of the population engaged in food production, and political power is in the hands of landowners or of a central authority supported by the army and the civil servants. The 'transitional stage' creates the preconditions for take-off by bringing about radical changes in the non- industrial sectors. Export of raw material gains momentum; a new class of businessmen emerges; and the idea of economic progress coming from outside spreads through the elite. The 'take-off stage' brings a sharp increase in the rate of investment in the per capita output. This stage of industrial revolution is accompanied by radical changes in the production techniques. Expansion takes place in a small group of leading sectors at first and, on the social side, is accompanied by the domination of the modern section of society over the traditional one. The 'drive to maturity* brings a spread of growth from the leading to the other sectors and a broader application of modern technology followed by necessary changes in the society at large.  The 'stage of high mass consumption' can be reached after attaining a certain level of national income and formulating an economic policy giving priority to increased private consumption. The critical phase for development is the 'take-off stage' during which net investment rates have to increase from 5 to 10 per cent of the national product and during which the political, social, and institutional framework has to be built in order to reach a situation of self-sustained growth. The financial resources must be accumulated internally by higher saving rates. Income distribution favoring classes and strata which are willing and able to use capital more productively than others has the same effect.  While this theory became widely known, perhaps because of its author's political post and the fact that it is a counter-position to Marxian approaches, this "time-table of development" does little to explain why some societies go ahead on this ladder and others not. As well, its value for forecasting the results of development activities is limited.  2.4 'Big-push' Theory (ROSENSTEIN-RODAN)  This theory is an investment theory which stresses the conditions of take-off. The argumentation is quite similar to the balanced growth theory but emphasis is put on the need for a big push. The investments should be of a relatively high minimum in order to reap the benefits of external economies. Only investments in big complexes will result in social benefits exceeding social costs. High priority is given to infrastructural development and industry, and this emphasis will lead to governmental development planning and influence.