Theories of Development: A Comparative Analysis
Linear Stages Theory
1950s-1960s
This is the beginning of the idea of development economics as a special topic of interest to be used in the third world.
The first theories naturally looked to the experiences of the first world for guidance.
Rostow’s Stages of Growth
All countries proceed through five stages of growth. Growth will naturally occur if certain development rules are followed. These mostly concern saving and investment.
Harrod-Domar Growth Model
The growth rate of GDP is equal to the savings rate divided by the capital to output ratio.

s=savings/Y
k=K/Y
Main idea: A country with poor growth needs to increase its savings ratio. If not through domestic savings then through international aid flows. Growth could also come from reducing k: in other words making capital more productive.
Flaws: There is no guarantee the savings will be used efficiently. Unlike Western Europe, developing countries may not have:
 well-functioning goods and money markets
 highly-developed transport systems
 well-trained workforce
 motivated populace
 efficient government bureaucracy.
Supplies of capital and managerial skills may not be enough—are there external limits on developing countries’ abilities to develop?
Structural Change Models
Focus on the process by which economies move from being traditional agricultural societies to industrialization.
Lewis Theory of Development
Assumptions:
 2 sectors: agriculture (L) and manufacturing (K, L)
 Decreasing marginal product of labor in both, but MP of labor depends positively on the capital stock in manufacturing.
 Zero marginal product of labor in agriculture, where wages are determined by the average product of labor (not marginal) because of shared agricultural output.
 There is a perfectly elastic supply of labor to the manufacturing sector at a wage that is higher than in agriculture.
 Capitalists in the manu sector re-invest their output in more capital for the factories. This draws workers out of agriculture, where output does not decline but wages rise.
 Capital investment continues until all excess labor in the agri sector has been used and then the economy is structured like a developed one.
Flaws: Assumes capital in re-invested in the country, not consumed or taken elsewhere.
Assumes capital and labor are complements and not substitutes in the production function.
Based on the incorrect premise that there is surplus labor in the country but not in the city—actually the situation is typically reversed. Also incorrectly assumes wages in the manu sector are set in well-functioning markets, but evidence suggests wages in these sectors are manipulated by various institutional factors, such as unions.
Structural Change and Patterns of Development
More descriptive than theoretical, the main idea is that development is characterized by radical changes such as:
 agricultural to industrial production
 accumulation of physical and human capital
 consumers willing and able to buy more than just necessities
 growth of cities and urban areas
 smaller family size
Flaw: Describes bits of development but doesn’t tell us how to make it happen. Nonetheless, helpful in that it shows the breadth of changes in society and gives us some “markers” of development.
International-Dependence Revolution
Developing countries are hindered by the fact they are dominated by and dependent on developed countries. In this context they will not develop.
Neocolonial Dependence Model
(neo-Marxist) Whether intentional or not, developed countries take advantage of developing ones. The capitalist system naturally exploits the poor countries (which remain agricultural) to the advantage of the rich ones (which industrialize) . They are able to do this in part because a core group of locals benefit greatly from the relationships and are in control of the politics and economics of the country.
Prescription: Revolution and end to capitalism
False-Paradigm Model
The so-called experts don’t really know anything but they keep trying to help anyway, making the situation worse. They are “assisted” by the local elites who have been trained at Western educational institutions and who believe all that bunk. The main problem with the policy prescriptions is that they overlook:
 traditional social structures
 highly unequal ownership of land
 disproportionate control by elites of financial assets and access to credit
Flaw: Points out the problem but doesn’t give a solution.
Dualistic-Development Model
Four key elements to “dualism”:
 poor and rich seem to be able to co-exist
 this seems to be a steady-state—it is not temporary
 the disparities seem to be increasing
 the existence of the rich does not necessarily help the poor—it may even hurt them.
Is it necessary to equalize the situation through force?
The Neoclassical Counterrevolution
Proponents believe that developing country governments have so many bad policies that they are the primary cause of their own problems. Examples:
 protected markets
 public ownership of industry
 state planning
 government regulation
 corruption and inefficiency of governments
 distortion of prices and incentives
Variations: Free-market analysis (markets are perfect or close enough), public choice theory (governments can’t be trusted), market-friendly approach (markets are mostly good, though there are important imperfections).
Flaws: Overlooks important differences between developing and developed economies, especially market imperfections.
Relevant market imperfections in developing economies: investment coordination, environmental protection, incomplete information, externalities in skill creation and learning, economies of scale in production.
Traditional “Old” Neoclassical Growth Theory
Robert Solow’s model (1987 Nobel prize in economics)

Growth can come through K, L, or technological improvements. Higher savings rates or inflows or capital from other countries helps GDP.
Another argument for helping out other countries by giving them capital. Note this also suggests education may be helpful.
Flaw: Technological change is modeled as exogenous, not explained within the model.
New Growth Theory
Focuses on externalities and tries to make technological change endogenous.
Variations emphasize the importance of: infrastructure (roads, internet, satellite), education, R&D spillovers, returns-to-scale in production.
Flaw: Points out some key differences between developed and developing countries, but in many cases it is hard to see the policy prescription. Ignores poor institutional arrangements.
Where does this leave us?