2. GROWTH AND DEVELOPMENT THEORIES

ROSTOW'S STAGES OF GROWTH

the transition for development comes from a series of steps or stages in which all countries must proceed to achieve economic growth.

TRADITIONAL SOCIETY

An economy based on agriculture with limited technology, low productivity, and resistance to change.

PRE-CONDITIONS FOR TAKE OFF

A transition phase where infrastructure, education, and investments begin to develop, preparing the economy for growth.

TAKE-OFF

A short period of rapid industrialization and economic growth where investment rates rise significantly and industries expand.

DRIVE TO MATURITY

The economy diversifies and adopts advanced technology, leading to sustained growth across many sectors.

AGE OF HIGH MASS CONSUMPTION

A stage where income is high, basic needs are met, and people focus more on consumer goods and services.

ADVANCED COUNTRIES

These are in the Drive to Maturity or Age of High Mass Consumption stages, meaning they have diversified industries, advanced technology, high productivity, strong infrastructure, and higher standards of living.

UNDERDEVELOPED COUNTRIES

These are typically in the Traditional Society or Pre-conditions for Take-off stages, meaning they rely more on agriculture, have limited industrialization, lower income levels, and are still building the foundations for sustained growth.

HARROD-DOMAR GROWTH MODEL

Economic growth depends on how much a country saves and invests, and how efficiently that investment turns into output.

LEVEL OF SAVINGS

The proportion of a country’s income that is set aside and invested rather than consumed, which fuels economic growth.

CAPITAL-OUTPUT RATIO

The amount of capital needed to produce one unit of output, indicating how efficient an economy is in using its resources (lower is better).

MARGINAL EFFICIENCY OF CAPITAL

The expected rate of return (profit) from investing in one additional unit of capital, which helps determine whether firms will invest more or not (higher MEC encourages more investment).

LOW SAVING RATES

Low rates of economic growth and development; low investment, low output.

HIGH SAVING RATES

Boost economic rates; creates a vicious cycle of self-sustaining growth.

STRUCTURAL CHANGE MODEL

Focuses on the transformation of domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, more urbanized, and more industrially diverse manufacturing and service economy.

LEWIS THEORY OF DEVELOPMENT (DUAL-SECTOR MODEL)

It explains development as the transfer of surplus labor from a low-productivity agricultural sector to a high-productivity industrial sector, leading to economic growth.

TRADITIONAL (AGRICULTURAL) SECTOR

Characterized by excess labor, low wages, and low productivity where workers can be moved without reducing output.

MODERN (INDUSTRIAL) SECTOR

A growing sector with higher wages and productivity that absorbs labor from agriculture and reinvests profits to expand.

PATTERNS OF DEVELOPMENT (HOLLIS B. CHENERY)

Economic development follows common patterns where countries shift from agriculture to industry and services, alongside changes in income, urbanization, and trade.

NEO-COLONIAL DEPENDENCE MODEL

Attributed the existence and continuance of underdevelopment due to the historical evolution of a highly unequal international capitalist system of rich country-poor country relationships.

FALSE-PARADIGM MODEL

Attributes underdevelopment to faulty and inappropriate advice provided by well-meaning but often uninformed, biased, and ethnocentric international “expert” advisers from developed-country assistance agencies and multinational donor organizations.

DUALISTIC-DEVELOPMENT THESIS

Represents the existence and persistence of substantial and even increasing divergences between rich and poor nations and rich and poor peoples on various levels.

NEOCLASSICAL COUNTERREVOLUTION: MARKET FUNDAMENTALISM

Underdevelopment results from poor resource allocation due to incorrect pricing policies and too much state intervention by overly active developing-nation governments.

FREE-MARKET ANALYSIS

A view that economic development is best achieved when markets operate freely with minimal government intervention, because prices and competition efficiently allocate resources.

PUBLIC-CHOICE THEORY

Known as the new political economy approach argue that the governments can do nothing right. This theory assumes that politician, bureaucrats’ citizens, and states act solely from a self-interested perspective.

MARKET-FRIENDLY APPROACH

A perspective that supports free markets but recognizes a limited, supportive role for government in correcting market failures and providing essential services like education, health, and infrastructure.

ENDOGENOUS GROWTH THEORY

It explains that a country’s economic growth is driven by internal factors, especially knowledge, innovation, and human capital—not just external forces.

SOLOW NEOCLOCLASSICAL GROWTH MODEL

Sometimes called as exogenous growth model. It explains long-run economic growth as a result of capital accumulation, labor growth, and technological progress, with diminishing returns to capital leading economies toward a steady state.

CLOSED ECONOMIES

An economy that has no interaction with other countries, meaning no international trade (imports/exports) or financial flows.

OPEN ECONOMIES

An economy that interacts with other countries through international trade (imports and exports) and financial transactions.

STEADY STATE

According to the Solow Growth Model, it is reached when Investment equals Depreciation.