1. IIUI/IIIE/FALL2007/PZJ/DE1
Classical Development Theories
The literature on economic development after the II World War can be divided
into four strands of thoughts, namely:
• Linear stages of growth
• Structural change
• International dependency
• Free marker counterrevolution
1. Linear stages of growth:
Theorists of the 1950s and 1960s viewed the process of development as a series
of successive stages of economic growth through which all countries must pass.
It is primarily an economic theory of development in which the right quantity
and mixture of saving, investment and foreign aid were necessary to enable
developing countries to proceed along an economic growth path that
historically had been followed by developed countries. Development thus
became synonymous with rapid, aggregate economic growth.
In fact, after the II World War the economists in developed countries had no
readily available conceptual apparatus with which to analyze the process of
economic development in largely agrarian societies characterized by the virtual
absence of modern economic structures. However, they did have the experience
of so called Marshall Plan, under which massive amount of U.S. financial and
technical assistance enabled the war-torn countries of Europe to rebuild and
modernize their economies in a matter of few years. Moreover, as the modern
industrial nations were once underdeveloped agrarian societies, their historical
experience in transforming their economies from poor agricultural subsistence
societies to modern industrial countries had important lessons for the
“backward” countries of Asia, Africa and Latin America. Due to emphasis on
accelerated capital accumulation this approach is often called as “capital
fundamentalism”.
Rostow’s Stages of Growth:
The “stages of growth model” emerged during the “cold war politics (1950-70)”
and resulting competition for the allegiance of newly independent states.
According to Rostow’s doctrine, the transition from underdevelopment to
development can be described in terms of a series of stages through which all
countries must proceed. It is possible to identify all societies, in their economic
dimensions, as lying within one of five categories: the traditional society, the

2. precondition for take-off into self-sustaining growth, the take-off, the drive to
maturity, and the age of high massive consumption. (Rostow:1960:1f.)
It was argued that advanced countries had all passed the stage of “take-off into
self-sustaining growth”, and the underdeveloped countries that were still in
either the “traditional societies”, or the “preconditions stage”, had only to follow
a certain set of rules of development to take off in their turn into self-sustaining
economic growth.
One of the principal strategies of development necessary for any takeoff was the
mobilization of domestic and foreign saving in order to generate sufficient
investment to accelerate economic growth.
Harrod-Domar Growth Model:
Every economy must save a certain portion of its national income in order to
replace worn-out capital goods (buildings, equipments, materials). However, in
order to grow, new investments representing net additions to the capital stock
are necessary, which will bring about corresponding increases in the national
output (GNP). This relationship is known as the capital-output ratio.
If we define capital-output ratio as “k” and assume national saving ratio “s” is a
fixed proportion of national output and that total new investment is determined
by the level of total saving, we can construct simple model of economic growth:
1. Saving (S) is some proportion, s, of national income (Y)
Thus, we have simple equation S = sY (1)
2. Net investment (I) is defined as the change in the capital stock, K, and can be
represented by ∆K
In this way I = ∆K (2)
Total capital stock, K, has direct relationship to national income or output, Y, as
expressed by the capital-output ratio, k.
It follows that K/Y = k, or ∆K/∆Y = k, or ∆K = k ∆Y (3)
3. Net national saving (S) must equal net investment (I).
We can write this equality as S = I (4)
But from equation (1) we know that S = sY
and from equations (2) and (3) we know that I = ∆K = k ∆Y
Therefore, we can write the identity of saving as sY = k ∆Y (5)
Dividing both sides of equation (5) first by Y and then by k,
we obtain ∆Y/Y = s/k (6)
Note that left side of equation (6) represents the rate of growth of GNP.
Equation (6) is a simplified version of Harrod-Domar Economic Growth Model.
2

3. The model simply states that the rate of growth of GNP (∆Y/Y) is determined
jointly by the national saving ratio (s), and the national capital-output ratio (k).
In other words it says that in the absence of government, the growth rate of
national income (output) will be directly or positively related to the savings ratio
and inversely or negatively related to the economy’s capital-output ratio.
In order to grow economies must save and invest a certain proportion of their
GNP. The more they can save and invest, the faster they can grow. But the
actual rate at which they can grow for any level of saving and investment – how
much additional output can be had from an additional unit of investment – can
be measured by the inverse of the capital-output ratio (1/k), because this inverse
is simply the output-capital or output-investment ratio. It follows that
multiplying the rate of new investments (s = I/Y) by its productivity (1/k) will
give the growth rate of GNP.
Obstacles and constraints:
What we learn from Harrod-Domar growth model is simply to increase saving
rate (s) of the economy. If we raise this rate in equation (6) we can increase
growth rate (∆Y/Y) of GNP.
For example, if we assume that the national capital-output ratio is 3 and
aggregate saving ratio is 6% (0.06) of GNP, the economy can grow at a rate of
2% per year, because
∆Y/Y = s/k = 0.06/3 = 0.02 = 2% (7)
Now if the national saving rate can be increased from 6% to 15% – through
increased taxes, foreign aid, and/or general consumption sacrifices – the GNP
growth rate can be increased from 2% to 5%, because
∆Y/Y = s/k = 0.15/3 = 0.05 = 5% (8)
In fact, Rostow and others defined the takeoff stage in this way. Countries that
were able to save 15% to 20% of GNP could grow at a much faster rate than
those that saved less. Moreover, this growth would then be self-sustained. The
mechanism of economic growth and development in this theory, therefore, are
simply a matter of increasing national saving and investment.
The main obstacle or constraint on development, according to this theory, was
the relatively low level of new capital formation in poor countries. But if a
country wanted to grow, say, at a rate of 7% per year and if it could not generate
savings and investment at a rate of 21% of national income (assuming that
capital-output ratio is 3) but could only manage to save 15%, it could seek to fill
this “saving gap” of 6% through either foreign aid or private foreign
investment.
3

4. Thus “capital constraint” to growth became a rationale and (in terms of cold war
politics) an opportunistic tool for justifying massive transfer of capital and
foreign assistance from the developed to the less developed countries. It was
also a kind of Marshall Plan for the underdeveloped countries.
Critique on growth model:
More saving and investment are although necessary, yet not sufficient condition
for a rapid economic growth.
The Marshall Plan worked for Europe, because the European countries receiving
aid possessed the necessary structural, institutional, and attitudinal conditions
(i.e. well-integrated commodity and money markets, highly developed transport
facilities, a well-trained and educated work force, the motivation to succeed, an
efficient government bureaucracy) to convert new capital effectively into higher
levels of output. The growth models implicitly assume the existence of these
attitudes and arrangements in underdeveloped countries. These models also
failed to take into account the external forces, which are beyond the control of
underdeveloped countries.
evelopment models - lewis
Lewis Model - An Overview
The Lewis model is structural change model that explains how labour transfers in a dual
economy. For Lewis growth of the industrial sector drives economic growth. The Lewis
Model argues economic growth requires structural change in the economy whereby surplus
labour in traditional agricultural sector with low or zero marginal product, migrate to the
modern industrial sector where high rising marginal product.
Transferring surplus labour from rural to urban areas has no effect on agricultural productivity
as MP of rural workers = 0.
Firm’s profits are reinvested. Growth means jobs for surplus rural labour. Additional workers
in urban areas increase output hence incomes and profits. Extra incomes increase demand for
domestic products while increased profits fund increased investment. Hence rural urban
migration offers self-generating growth.
The ability of the modern sector to absorb surplus works depends on the speed of investment
and accumulation of capital. Where firms invest in new labour saving capital equipment,
surplus workers are not taken on by the formal sector. Recently arrived rural migrants join the
informal economy and live in shantytowns
Given urban growth drives economic growth it can lead to the neglect of agriculture by
government
4

5. Neglect of Agriculture – yet most people live in rural areas where incomes are relatively low
Increased profits may be invested in labour saving capital rather than taking on newly arrived
workers
For many LDC's, rural urban migration levels have been far greater than the formal industrial
sector’s ability to provide jobs. Urban poverty has replaced rural poverty.
http://tutor2u.net/economics/content/topics/development/development_models_l
ewis.htm
Dual Sector model
From Wikipedia, the free encyclopedia
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This article is about the economic model. For the diagram representing atomic bonding, see
Lewis structure.
The Dual Sector model, or the Lewis model, is a model in Developmental economics that
explains the growth of a developing economy in terms of a labour transition between two
sectors, a traditional agricultural sector and a modern industrial sector.
Contents
[hide]
• 1 History
• 2 Theory
• 3 Criticism
• 4 Practical Application
[edit] History
Initially enumerated in an article entitled "Economic Development with Unlimited Supplies of
Labor" written in 1954 by Sir Arthur Lewis, the model itself was named in Lewis's honor.
First published in The Manchester School in May 1954, the article and the subsequent model
were instrumental in laying the foundation for the field of Developmental economics. The
article itself has been characterized by some as the most influential contribution to the
establishment of the discipline.
[edit] Theory
The "Dual Sector Model" is a theory of development in which surplus labor from traditional
agricultural sector is transferred to the modern industrial sector whose growth over time
absorbs the surplus labor, promotes industrialization and stimulates sustained development.
In the model, the traditional agricultural sector is typically characterized by low wages, an
abundance of labour, and low productivity through a labour intensive production process. In
5

6. contrast, the modern manufacturing sector is defined by higher wage rates than the
agricultural sector, higher marginal productivity, and a demand for more workers initially.
Also, the manufacturing sector is assumed to use a production process that is capital intensive,
so investment and capital formation in the manufacturing sector are possible over time as
capitalists' profits are reinvested in the capital stock. Improvement in the marginal
productivity of labour in the agricultural sector is assumed to be a low priority as the
hypothetical developing nation's investment is going towards the physical capital stock in the
manufacturing sector.
Since the agricultural sector has a limited amount of land to cultivate, the marginal product of
an additional farmer is assumed to be zero as the law of diminishing marginal returns has run
its course due to the fixed input, land. As a result, the agricultural sector has a quantity of
farm workers that are not contributing to agricultural output since their marginal
productivities are zero. This group of farmers that is not producing any output is termed
surplus labour since this cohort could be moved to another sector with no effect on
agricultural output. The term surplus labour here is not being used in a Marxist context and
only refers to the unproductive workers in the agricultural sector. Therefore, due to the wage
differential between the agricultural and manufacturing sectors, workers will tend to transition
from the agricultural to the manufacturing sector over time to reap the reward of higher
wages.
If a quantity of workers moves from the agricultural to the manufacturing sector equal to the
quantity of surplus labour in the agricultural sector, regardless of who actually transfers,
general welfare and productivity will improve. Total agricultural product will remain
unchanged while total industrial product increases due to the addition of labour, but the
additional labour also drives down marginal productivity and wages in the manufacturing
sector. Over time as this transition continues to take place and investment results in increases
in the capital stock, the marginal productivity of workers in the manufacturing will be driven
up by capital formation and driven down by additional workers entering the manufacturing
sector. Eventually, the wage rates of the agricultural and manufacturing sectors will equalise
as workers leave the agriculture for the manufacturing, increasing marginal productivity and
wages in agriculture whilst driving down productivity and wages in manufacturing.
The end result of this transition process is that the agricultural wage equals the manufacturing
wage, the agricultural marginal product of labour equals the manufacturing marginal product
of labour, and no further manufacturing sector enlargement takes place as workers no longer
have a monetary incentive to transition.
[edit] Criticism
The theory is complicated in reality by the fact that surplus labour is both generated by the
introduction of new productivity enhancing technologies in the agricultural sector and the
intensification of work. Also, the migration of workers from the countryside to the cities is an
incentive towards those two phenomena as the relative bargaining power of workers and
bosses varies and thus with it the cost of labour.
The wage differential between industry and agriculture needs to be sufficient to incentivise
movement between the sectors and, whereas the model assumes any differential will result in
a transfer.
The model assumes rationality, perfect information and unlimited capital formation in
industry. These do not exist in practical situations and so the full extent of the model is rarely
6

7. realised. However, the model does provide a good general theory on labour transitioning in
developing economies.
[edit] Practical Application
This model has been employed quite successfully in Singapore. Ironically however it has not
been employed in Sir Arthur Lewis' home country of St. Lucia.
http://en.wikipedia.org/wiki/Dual_Sector_model
Theories
Lewis's Dual Sector Model of Development: The theory of trickle down
Next theory - Rostow's Model >>
Lewis proposed his dual sector development model in 1954. It was based on the assumption
that many LDCs had dual economies with both a traditional agricultural sector and a modern
industrial sector. The traditional agricultural sector was assumed to be of a subsistence nature
characterised by low productivity, low incomes, low savings and considerable
underemployment. The industrial sector was assumed to be technologically advanced with
high levels of investment operating in an urban environment.
Lewis suggested that the modern industrial sector would attract workers from the rural areas.
Industrial firms, whether private or publicly owned could offer wages that would guarantee a
higher quality of life than remaining in the rural areas could provide. Furthermore, as the level
of labour productivity was so low in traditional agricultural areas people leaving the rural
areas would have virtually no impact on output. Indeed, the amount of food available to the
remaining villagers would increase as the same amount of food could be shared amongst
fewer people. This might generate a surplus which could them be sold generating income.
Those people that moved away from the villages to the towns would earn increased incomes
and this crucially according to Lewis generates more savings. The lack of development was
due to a lack of savings and investment. The key to development was to increase savings and
investment. Lewis saw the existence of the modern industrial sector as essential if this was to
happen. Urban migration from the poor rural areas to the relatively richer industrial urban
areas gave workers the opportunities to earn higher incomes and crucially save more
providing funds for entrepreneurs to investment.
A growing industrial sector requiring labour provided the incomes that could be spent and
saved. This would in itself generate demand and also provide funds for investment. Income
generated by the industrial sector was trickling down throughout the economy.
Problems of the Lewis Model
• The idea that the productivity of labour in rural areas is almost zero may be true for
certain times of the year however during planting and harvesting the need for labour is
critical to the needs of the village.
• The assumption of a constant demand for labour from the industrial sector is
questionable. Increasing technology may be labour saving reducing the need for
7

8. labour. In addition if the industry concerned declines again the demand for labour will
fall. http://kegsnet.org.uk/mod/resource/view.php?id=4032
• The idea of trickle down has been criticised. Will higher incomes earned in the
industrial sector be saved? If the entrepreneurs and labour spend their new found gains
rather than save it, funds for investment and growth will not be made available.
• The rural urban migration has for many LDCs been far larger that the industrial sector
can provide jobs for. Urban poverty has replaced rural poverty.
http://www.bized.co.uk/virtual/dc/copper/theory/th8.htm
http://www.associatedcontent.com/article/234339/william_arthur_lewiss_twosec
tor_economic.html
Home Field Trips Copper Tour The Dependency Ratio
Theories
Dependency Theory
Next theory - Economic Efficiency >>
Underdevelopment is seen as the result of unequal relationships between rich developed
capitalist countries and poor developing ones. In the past colonialism embodied the inequality
between the colonial powers and their colonies. As the colonies became independent the
inequalities did not disappear. Powerful developed countries such as the US, Europe and
Japan dominate dependent powerless LDCs via the capitalist system that continues to
perpetuate power and resources inequalities.
Dominant MDCs have such a technological and industrial advantage that they can ensure the
global economic system works in their own self-interest. Organisations such as the World
Bank, the IMF and the WTO have agendas that benefits the firms, and consumers of primarily
the MDCs. Freeing up world trade, one of the main aims of the WTO, benefits the wealthy
nations that are most involved in world trade. Creating a level playing field for all countries
assumes that all countries have the necessary equipment to be able to play. For the world's
poor this is often not the case.
In this model the responsibility for lack of development within LDCs rests with the MDCs.
Advocates of the dependency theory argue that only substantial reform of the world capitalist
system and a redistribution of assets will 'free' LDCs from poverty cycles and enable
development to occur. Measures that the MDCs could take would include the elimination of
world debt and the introduction of global taxes such as the Tobin Tax. This tax on foreign
exchange transactions, named after its proponent, the American Economist, James Tobin,
would generate large revenues that could be used to pay off debt or fund development
projects.
Problems
• Power is not easily redistributed as countries that possess it are unlikely to surrender it
8

9. • It may be that it is not the governments of the MDCs that hold the power but large
multinational enterprises that are reluctant to see the worlds resources being
reallocated in favour of the LDCs
• The redistribution of assets globally will result in slower rates of growth in the MDCs
and this might be politically unpopular
http://www.bized.co.uk/virtual/dc/copper/theory/th3.htm
Theories
Lewis's Dual Sector Model of Development: The theory of trickle down
Next theory - Rostow's Model >>
Lewis proposed his dual sector development model in 1954. It was based on the assumption
that many LDCs had dual economies with both a traditional agricultural sector and a modern
industrial sector. The traditional agricultural sector was assumed to be of a subsistence nature
characterised by low productivity, low incomes, low savings and considerable
underemployment. The industrial sector was assumed to be technologically advanced with
high levels of investment operating in an urban environment.
Lewis suggested that the modern industrial sector would attract workers from the rural areas.
Industrial firms, whether private or publicly owned could offer wages that would guarantee a
higher quality of life than remaining in the rural areas could provide. Furthermore, as the level
of labour productivity was so low in traditional agricultural areas people leaving the rural
areas would have virtually no impact on output. Indeed, the amount of food available to the
remaining villagers would increase as the same amount of food could be shared amongst
fewer people. This might generate a surplus which could them be sold generating income.
Those people that moved away from the villages to the towns would earn increased incomes
and this crucially according to Lewis generates more savings. The lack of development was
due to a lack of savings and investment. The key to development was to increase savings and
investment. Lewis saw the existence of the modern industrial sector as essential if this was to
happen. Urban migration from the poor rural areas to the relatively richer industrial urban
areas gave workers the opportunities to earn higher incomes and crucially save more
providing funds for entrepreneurs to investment.
A growing industrial sector requiring labour provided the incomes that could be spent and
saved. This would in itself generate demand and also provide funds for investment. Income
generated by the industrial sector was trickling down throughout the economy.
Problems of the Lewis Model
• The idea that the productivity of labour in rural areas is almost zero may be true for
certain times of the year however during planting and harvesting the need for labour is
critical to the needs of the village.
• The assumption of a constant demand for labour from the industrial sector is
questionable. Increasing technology may be labour saving reducing the need for
labour. In addition if the industry concerned declines again the demand for labour will
fall.
9

10. • The idea of trickle down has been criticised. Will higher incomes earned in the
industrial sector be saved? If the entrepreneurs and labour spend their new found gains
rather than save it, funds for investment and growth will not be made available.
• The rural urban migration has for many LDCs been far larger that the industrial sector
can provide jobs for. Urban poverty has replaced rural poverty.
10