Classic Theories of Economic Growth & Development
Classic Theories of Economic Development: Four Approaches
• 1. The Linear-Stages of growth model
• 2. Structural change pattern Theories
• 3. International-Independence
• 4. Neo-Classical (counter-revolution) Theory
1. Development as Growth and the Linear-Stages Theories
• 1.1.Rostow’s stages of growth
• 1.2. The Harrod-Domar growth model
• 1.3. Obstacles and constraints
• 1.4.Some criticisms of the stages model
Rostow Stages of Development
• Different countries are at different stages of development. Rostow has classified the stages of economic development into five categories as follows:
• Traditional Society
• Precondition take-off • Take-off
• Drive to Maturity or sustaining stage
• The stage of the large scale of mass consumption
Traditional Society
• Dominated by subsistence (defined as no economic surplus, meaning output being consumed by producers rather than traded);
• Trade being carried out by barter, meaning goods being exchanged directly for other goods;
• Agriculture is the most important industry; Production being labor-intensive using only limited quantities of capital.
Transitional Stage (the preconditions for takeoff)
• Increased specialization starting to generate surpluses for trading.
• an emergence of a transport infrastructure to support trade; External trade also occurs concentrating on primary products; Entrepreneurs emerge
• savings and investment grow.
Take Off
• Rapid Industrialization or Industrial Revolution
• Growth concentrated in a few regions of the country and in one or two manufacturing industries.
• The level of investment reaches over 10% of GNP.
• The economic transitions are accompanied by the evolution of new political and social institutions that support industrialization.
• The growth is self-sustaining: investment leads to increasing incomes in turn generating more savings to finance further investment.
Drive to Maturity
• Industrial Diversification; producing a wide range of goods and services; reliance on exports and imports may start decreasing.
High Mass Consumption • Domestic Aggregate Demand is the major determinant of Business (Cycles) • Consumer durable industries; Service sector
1.2.The Harrod-Domar Model:
(The idea that Capital and Saving is fundamental)
S sY I
K (1.1)(1.2)
1.2.The Harrod-Domar Model cont.
S I (1.3)
K kY (1.4)
sY kY K I (1.5)
sY kY (1.6)
k s Y Y (1.7)
1.2.Harrod-Domar Growth Model
• A model of “ capital fundamentalism”
• Where s =savings ratio =S/Y,
• and k= capital output ratio= K/Y
• Yg =growth rate of GDP= s/k
• Note: The more economies save and invest, the faster they grow.
• e.g. If s=6%, and k=3.0, Yg =6%/3 =2%
Another way of deriving the Harrod-Domar Model
• Let Y represent output,
which equals income, and let K equal the capital stock. S is total saving, s is the savings rate, and I is an investment. δ stands for the rate of depreciation of the capital stock. The Harrod–Domar model makes the following a priori assumptions: