MODULE 2: CLASSICAL THEORIES OF ECONOMIC GROWTH AND DEVELOPMENT

Linear stages of growth model

This theory suggests that countries grow in predictable stages, starting from agricultural societies and moving towards modern industrial economies. The key to progress is saving and investing money, which helps build up capital.

Walt W. Rostow

most influential advocate of stages-of-growth model — American economic historian. He said the transition from underdevelopment to development can be described in terms of a series of steps or stages through which all countries must proceed.

Stage 1: Traditional Society

• Economy based on local consumption (subsistence).

• Majority of people work in agriculture with basic tools.

• Limited technology and infrastructure.

• Little surplus production and capital investment.

• Mostly cottage-based industries (home production).

• Minimal, often local, trade.

Stage 2: Preconditions for Take-off

• Agriculture shifts from subsistence to commercial production.

• Mechanisation boosts agricultural efficiency.

• Extractive industries like mining and oil begin to develop.

• Technology and science start being applied.

• Infrastructure (roads, ports, communication) improves, supporting trade.

• One main industry (e.g., textiles or sugar) often dominates.

• Investment rises to about 5% of GDP.

Stage 3: Take-off

• Rapid growth in manufacturing, usually in a few key sectors.

• Expansion of transport systems (airports, highways, railways) linking industrial areas.

• Political and social changes support industrialisation and urbanisation.

• Big drop in agricultural jobs as people move to factory work.

• Investment increases to 10–15% of GDP, often with foreign funding or loans.

Stage 4: Drive to Maturity

• Economic growth becomes self-sustaining and widespread.

• Diverse industries develop due to the multiplier effect.

• Older industries may decline as new ones rise.

• Rapid urbanisation and expansion of city infrastructure.

• Education improves to provide skilled workers.

Stage 5: Age of High Mass Consumption

• Service sector becomes dominant; welfare systems expand.

• Manufacturing declines, focusing on durable consumer goods.

• High disposable income leads to widespread consumerism.

• Most jobs shift to services like banking, education, tourism, and healthcare.

The Harrold-Domar Growth Model

• GDP growth depends on how much a country saves (savings rate, s) and how efficiently it uses capital (capital-output ratio, c).

• Saving part of the GDP (instead of spending it all) allows for investment in things that boost future production.

• For an economy to grow, it needs to save and invest.

• Growth also depends on more workers and better technology.

• Countries that save 15–20% of their GDP can grow more quickly

Structural Change

• This approach focuses on how a country’s economic structure changes as it develops. 

• It looks at the shift from agriculture to industry and services, and how labor and resources are reallocated to more productive sectors.

• The theory assumes that development involves modernizing institutions, urbanization, education, and technological progress.

The Lewis two-sector model (Dual Sector Model)

This model assumes the presence of the sectors in an economy: Traditionsl Agriculture Economy and Modern Industrial Sector.

Traditional Agriculture Economy

• Has too many workers, very low productivity, and low wages. 

• Adding more workers doesn't increase output.

Modern industrial sector

Focuses on manufacturing with higher productivity and better wages.

Patterns of Development Analysis

• This model says that changing a country's economy, industry, and institutions can create new industries that drive growth.

• Growth needs both capital accumulation and structural changes.

Internal

population size and government policies.

External

access to money, technology, and trade opportunities.

Population size

A rapidly growing population can strain resources and limit the benefits of growth.

Government policies

Poor governance, corruption, or inconsistent economic policies can discourage investment and slow transformation.

Access to capital

Developing countries often rely on foreign loans or investments to grow industries. Limited access to global capital markets can slow their development

Access to technology

Without modern technology, industries struggle to compete globally. Many countries depend on imported technology, making them reliant on developed nations.

Trade opportunities

Countries with trade barriers or poor infrastructure may find it difficult to export goods and earn foreign exchange.

Legacy of Colonialism

During the colonial period, powerful Western countries like Spain, Britain, and the U.S. controlled colonies in Asia, Africa, and Latin America. They exploited these colonies for raw materials and agricultural products while selling finished goods back to them.

Unequal Power Relations and the Core–Periphery Structure

The world economy is divided into two parts: the core (developed countries) and the periphery (developing countries).

“Front Yard–Backyard” or “North–South” Divide

• This metaphor shows the inequality between the Global North (developed countries) and the Global South (developing countries). The North is like the “front yard”—clean, wealthy, and powerful—while the South is like the “backyard”—less developed and dependent.

The false Paradigm Model

This view focuses on the problems of using foreign “experts” who apply development models from rich countries to poor countries without understanding local realities.

Dualism

divergence between rich and poor nations, rich and poor peoples on various levels

Neoclassical, Free Market Counterrevolution

Underdevelopment is caused by poor resource use due to wrong pricing policies and too much state intervention, which often leads to corruption, inefficiency, and lack of incentives.

Free Market Approach

Markets work best when left alone—they are self-regulating and efficient. Government intervention is seen as unnecessary and often harmful.

Public Choice Approach

Also known as the new political economy approach, this view criticizes government inefficiency. 

• It argues that politicians and bureaucrats act in their own self-interest, not for the public good. This can lead to corruption and poor resource use, rather than real development.

Market-friendly Approach

accepts that there are imperfections in the economy, so the government is needed to step in with helpful interventions. The government should perform key roles like maintaining competition, redistributing income and wealth through social services, reallocating resources/dealing with externalities and market failures and stabilizing the economy in case of inflation and unemployment.

Traditional Neoclassical Growth Theory

This theory, linked to economist Robert Solow, explains how capital, labor growth, and technology drive a country's economic output or income.

Liberalization

means opening up markets to attract investment and increase capital.

Solow neoclassical growth model

explains that a country's income grows due to three main factors: labor, capital, technology.

Labor

the number of workers and their skills or education (human capital).

Capital

tools like machines, buildings, and infrastructure used to produce goods.

Technology

innovation and knowledge that improve production efficiency.

Openness

allows countries to access foreign ideas, technologies, and production techniques

Linear stages

crucial role of savings and investment

Two-sector model

transfer of resources from low to high productivity activities, linkages between traditional & modern

Dependence theory

importance of world economy and decisions of developed world affecting developing economies

Neoclassical

efficient production, proper price systems