2. Development as growth and the Linear-stages theory

Question 1

How has theory on development progressed?

Answer 1

(1) the linear-stages-of-growth model
(2) theories and patterns of structural change
(3) the international-dependence revolution,
(4) the neoclassical, free-market counter-revolution

In recent years, an eclectic approach has emerged that draws on all of these classic theories.

Question 2

How did theorists in the 1950s and 60s view development?

Answer 2

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 was primarily an economic theory of development in which the right quantity and mixture of saving, investment, and foreign aid were all that was necessary to enable developing nations to proceed along an economic growth path that had historically been followed by the more developed countries.

Question 3

Why should we not just view development as synonymous with economic growth?

Answer 3

Development encompasses more than the material and financial side of people’s lives, to expand human freedoms. Development should therefore be perceived as a multidimensional process involving the reorganisation and reorientation of entire economic and social systems. In addition to improvements in incomes and output, it typically involves radical changes in institutional, social, and administrative structures as well as in popular attitudes and even customs and beliefs.

Question 4

How did linear stages of growth models develop?

Answer 4

1. Experience of the Marshall plan after WW2 when countries began to get independence
2. Historical evidence from transforming their own economies from poor agricultural subsistence societies to modern industrial science

Question 5

What were early linear growth models known as and why?

Answer 5

Because of its emphasis on the central role of accelerated physical capital accumulation in becoming industrialised, this approach is often dubbed “capital fundamentalism

Question 6

What are Rostow’s stages of economic growth in theory?

Answer 6

According to Rostow, the transition from underdevelopment to development can be described in terms of a series of steps or stages through which all countries must proceed

Question 7

How did Rostow formalise the stages of economic growth?

Answer 7

1. Traditional society
2. Pre-conditions for take-off
3. Take-off
4. Drive to maturity
5. High mass consumption

Question 8

What did Rostow suggest about the rich countries and how could the poor countries catch up?

Answer 8

The advanced countries, it was argued, had all passed the stage of “takeoff into self-sustaining growth,” and the underdeveloped countries that were still in either the traditional society or the “pre-conditions” stage had only to follow a certain set of rules of development to take off in their turn into self-sustaining economic growth.

Question 9

How can stage 1: traditional society be broken down?

Answer 9

In this society a higher proportion of resources is devoted to agriculture

The traditional society is one whose production functions are based upon pre-Newton science and technology

This unchanging technology places a ceiling on productivity

The society is ruled by those who owned or controlled land

Question 10

How can stage 2: Pre-conditions for take-off be broken down?

Answer 10

This society has developed basic financial infrastructure e.g., banks, currency

The production function is still limited and so is output

The concept of manufacturing develops, and an entrepreneurial class emerges

New ideas develop and people start thinking about economic progress and abetter life

Question 11

What 3 conditions must be satisfied to achieve take-off according to Rostow?

Answer 11

1. The rate of investment must rise from 5% to 10% of GNP
2. The development of one or more substantial manufactured sector with high growth rate
3. The existence of social, political and institutional framework which would allow modern sector expansion

Question 12

How can stage 4: Drive to maturity be broken down?

Answer 12

A long period time during which:
▪ The economy experiences a regular growth and modern technology is extended
▪ Due to entrepreneurial and technological development everything is produced which is desired
▪ 10% to 20% of GNP is invested and output grows more than the increase in population

Question 13

How can stage 5: High Mass consumption be broken down?

Answer 13

1. Real incomes continue to rise
2. The leading sectors of the economy produce consumer durables like TVs, fridges and automobiles etc.
3. Society pays more attention to social welfare and social security than economic growth

Question 14

What are the key criticisms of Rostow’s theory?

Answer 14

1. Eurocentric - based on what worked in europe
2. Sequential progression - may go through multiple stages at once
3. Neglect of structural inequalities other factors like access to education or geography
4. Lack of Policy prescriptions

Question 15

What is the Harrod-Domar model?

Answer 15

Developed in the 1930-40s, the Harrod-Domar model explained growth as a function of a country’s savings rate and capital

Question 16

What is the conclusion of the Harrod-Domar model?

Answer 16

The Harrod-Domar theory of economic growth, states simply that the rate of growth of GDP (Δγ/γ) is determined jointly by the net national savings ratio, s, and the national capital-output ratio, c.

Question 17

How is growth related to the savings ratio in the Harrod-Domar model?

Answer 17

In the absence of government, the growth rate of national income will be directly or positively related to the savings ratio (i.e., the more an economy is able to save—and invest—out of a given GDP, the greater the growth of that GDP will be)

Question 18

How is growth related to the capital-output ratio in the Harrod-Domar model?

Answer 18

It is inversely or negatively related to the economy’s capital-output ratio as the more it costs in capital to produce 1 extra dollar of output is reflected in a larger capital output ratio

Question 19

What does a smaller capital-output ratio (c) imply?

Answer 19

The smaller c, the more efficient the use of inputs and therefore the larger the growth rate. (Improving investment efficiency)

Question 20

What are the three main limitations of the Harrod-Domar model?

Answer 20

1. Fixed capital-output ratio (assumes constant returns and no technological advancements)
2. No mention of labour
3. Neglect of structural inequalities

Question 21

What is the issue with no mentioning labour in the Harrod-Domar model?

Answer 21

It implies that the supply of labour is completely elastic, for example bringing in agricultural workers may not work as they may not have the same skills for example

Question 22

What is the issue with neglecting structural inequalities in the Harrod-Domar model?

Answer 22

As with Rostow, the model does not consider the role of factors such as governance property rights and the rule of law in shaping economic growth

Question 23

How do we prove the Harrod-Domar model?

Answer 23

1. Show the capital output ratio
2. Define net investment as the change in the capital stock
3. Savings = investment
4. Growth in GDP = Savings rate/ Capital-output ratio

Question 24

In linear growth models, what is therefore the main limitation on development in most poor countries?

Answer 24

The main obstacle to or constraint on development, according to this theory, is the relatively low level of new capital formation in most poor countries.

Question 25

If a country was unable to generate enough savings to grow at a certain level, what would it do in this model?

Answer 25

It could seek to fill the so called ‘savings gap’ through either foreign aid or private foreign investment

Question 26

Why did the Marshall plan work in Europe but aid may not necessarily work in poorer countries?

Answer 26

The Marshall Plan worked for Europe because the European countries receiving aid possessed the necessary structural, institutional, and attitudinal conditions (e.g., well-integrated commodity and money markets, highly developed transport facilities, a well-trained and educated workforce, the motivation to succeed, an efficient government bureaucracy) to convert new capital effectively into higher levels of output. The Rostow and Harrod-Domar models implicitly assume the existence of these same attitudes and arrangements in underdeveloped nations. Yet, in many cases, they are lacking, as are complementary factors such as managerial competence, skilled labour, and the ability to plan and administer a wide assortment of development projects.

Question 27

How can investment lead to more growth in the Harrod-Domar model?

Answer 27

The lower (more efficient) the value of c that an economy can attain, the greater the output that can be gained from additional investment. In other words, the rate of growth depends as much upon the efficiency with which investment is used as the amount of capital invested

Question 28

Why is there no mention of labour in the Harrod Domar model?

Answer 28

Because labour is assumed to be abundant in a developing-country context and can be hired as needed in a given proportion to capital investments (this assumption is not always valid).

Question 29

How is technological growth expressed in the Harrod Domar model?

Answer 29

Technological progress can be expressed in the Harrod-Domar context as a decrease in the required capital-output ratio, giving more growth for a given level of investment.This is obvious when we realise that in the longer run, this ratio is not fixed but can change over time in response to the functioning of financial markets and the policy environment. But again, the focus is on the role of capital investment.

Question 30

How can we increase growth in the Harrod-Domar model?

Answer 30

Increase savings or decrease the capital output ratio (improve efficiency)

Question 31

How can we link the Harrod-Domar model and the Rostow model?

Answer 31

Rostow said that countries need to save a certain percentage of GDP to take off, can be explained in the context of Harrod Domar model

Question 32

How can Rostow’s growth theory be classified?

Answer 32

As a top down approach that emphasises trickle down

Question 33

What is an example of where Rostow’s growth theory is limited?

Answer 33

Singapore

Question 34

Why is Singapore a good case study?

Answer 34

Rostow also assumes that all countries have a desire to develop in the same way, with the end goal of high mass consumption, disregarding the diversity of priorities that each society holds and different measures of development. For example, while Singapore is one of the most economically prosperous countries, it also has one of the highest income disparities in the world. (Jacobs, 2015)

Question 35

Name a country that in part reflects Rostow’s growth theory and how?

Answer 35

South Korea confirms some linear-stages views, albeit in a limited way. South Korea’s ascent has seemed to epitomise Rostow’s notion of an economy in the midst of a “drive to maturity,”. Investment has been consistently high since then, but as a share of GNI, the investment ratio, at 15%, was still below takeoff levels in 1965. Yet it rose dramatically to 37% of GNI by 1990 and remained close to 40% in the 2000–2007 period

Question 36

Name a country that strongly contrasts Rostows growth theory and how?

Answer 36

The history of Argentina poses a strong challenge to the linear-stages approach. In 1870, Argentina ranked 11th in the world in per capita income (ahead of Germany); today, it is not even in the top 60. Argentina had a negative growth rate throughout the 1965–1990 period, and in the 1980s, domestic investment shrank at a -8.3% rate, falling back well below Rostow’s threshold takeoff investment levels. Although output in Argentina grew at 4.3% in 1990–2000, it defaulted on its debt in 2002, and the economy shrank 11%, followed by a recovery and resumed (if erratic) growth. Output grew at 3.4% in 2000–2017, still lower than South Korea. Argentina had a negative growth rate throughout the 1965–1990 period, and in the 1980s, domestic investment shrank at a -8.3% rate, falling back well below Rostow’s threshold takeoff investment levels. Although output in Argentina grew at 4.3% in 1990–2000, it defaulted on its debt in 2002, and the economy shrank 11%, followed by a recovery and resumed (if erratic) growth. Output grew at 3.4% in 2000–2017, still lower than South Korea.

Question 37

What did Rostow define takeoff as?

Answer 37

Rostow defined takeoff as “the interval when the old blocks and resistances to steady growth are finally overcome. . . .Growth becomes its normal condition.”

Question 38

Why did linear stage growth models not work?

Answer 38

And the basic reason they didn’t work was not because more saving and investment isn’t a necessary condition for accelerated rates of economic growth, but rather because it is not sufficient condition