ECONOMIC DEVELOPMENT MODELS

Prof. Prabha Panth, Osmania University, Hyderabad.

Growth vs. Development • Economic growth refers to increase in the

National Income of an economy, without structural changes, showing expansion of the economy.

• Economic Development refers to structural changes in production and consumption, with increase in total output of the economy.

• It refers to changes in the technology, modes of production, labour skills, education, health and also reduction in poverty and unemployment.

• Important to identify which sectors are growing.Apr 12, 2023 2Prof. Prabha Panth

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Large differences can be seen between the “Rich” and the “Poor” countries’ PCY

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Economic Development • What factors cause such differences in the

standard of living of people across countries?• First asked by Adam Smith, “An Inquiry into the

Nature and Causes of the Wealth of Nations.”• Since then, different economists have tried to

answer this question.• What factors lead to continuous economic

progress in some countries,• And continuous decline or stagnation in others?

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Difference between Developed and Less Developed countries

• Developed countries: High standard of living of the population, Mechanised techniques of production, High productivity of labour in agriculture and

industry. High levels of industrial development, High levels of education and health, Low levels of unemployment, Low population growth.

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• Less Developed countries: High incidence of poverty Low levels of mechanisation, labour intensive

production, Dominance of primary sector – agriculture, mining,

fishing, forestry. Low productivity Low level of industrial development, Unorganised labour, conservative societies, Low incomes, consumption, and savings, Illiteracy, contagious diseases. Malnutrition, high

level of maternal and child deaths. Unemployment and disguised unemployment. High rates of growth of population.

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Causes of Development • Historical:

Most less developed countries are in Asia, Africa and S. America.

Most of them were colonies of European and American powers.

Exploited by the sovereign powers, Industrial development not taken up here, Colonists saw them as markets for their final

products, and sources of raw materials.

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• Technological development: Industrial revolution in England – spread to Europe

and America. Increased labour productivity, New inventions and discoveries – e.g. steam

power, Medical discoveries and control of fatal diseases

like pox, cholera, plague, Political situation in the III World exploited by the I

world, colonies founded. Sources of huge supplies of raw materials, fuelled

industrial revolution.Prof. Prabha Panth

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Industrialisation• For economic progress, output has to increase.• Output can increase by increasing capital input,• Labour productivity increases.• But less developed countries are deficient in

capital.• Therefore industrial development is important

for economic development.• Called “capital formation”.

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Capital formationCapital formation includes the growth of: Light Machines (LM) that produce consumer goods

(capital goods that produce cars, TVs, ACs) Heavy Machines: that produce LM and reproduce

themselves. Also called “Mother Machines” (heavy machine tools)

Infrastructure: roads, railways, air, water, sewage, etc.

Basic industries: metals, minerals, power supply.

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Capital investment • Who should invest in capital formation?

Heavy sector requires huge investments which private sector cannot handle.

Also investment in Heavy sector is not profitable. If it does, it creates monopolies, too expensive for

development. To make profits it will sell heavy sector goods for

producing consumer goods. Wasteful use of scarce capital goods. Creates inequality in consumption.

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• Public Sector: Government can take up massive investments in the

Heavy sector – basic, heavy, and infrastructure Government is not motivated by profit, Subsidise, to encourage growth in related industries.

E.g. coal thermal power electric trains, etc. Government can bear losses in these sectors. Public sector motives: a) Growth and Development, b)

Welfare and c) price controls (no inflation). Planned development is possible, with priority given to

important sectors, and suppressing unwanted goods. Can provide employment as well.

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1. Structuralist Theory of Development:• Raul Prebisch was the first to explore causes of under

development, and solutions for it.• He realised that economic development requires

structural changes in production,• Less developed countries must change from primary

products producing countries to manufacturing and industrial development.

• Industrial development crucial to economic development.

• Less developed countries should use their export earnings to import capital for their own development.

Theories of Development

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2. Arthur Lewis:• Most less developed countries have surplus

labour in primary sector.• “Disguised unemployment.”• They can be diverted into industrial sector.• Can produce infrastructure with labour

intensive techniques – dams, roads, rail tracks. But does not show how Heavy Machines and Basic

industries should develop. No changes in techniques in the primary goods

sector. So no development in this sector. Leads to a “Dualist Economy.”

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3. Rostow’s model of development: Less developed countries can learn from the historical growth of the developed countries.

Economic development described as a series of steps through which all countries must proceed:a) The Traditional Societyb) The Pre-conditions for take-off into self-sustaining

growth – 10-50 yearsc) The Take-offd) The Drive to Maturity – stabilising growth ratese) The Age of High Mass Consumption – luxury

standards of living for the population.

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But: the historical growth pattern does not apply to all countries.

Many countries have jumped the stages.Japan, after II World war, jumped straight to

Take off.China and India aiming for High Mass

consumption, before achieving Take Off.Does not discuss how capital formation will take

place, how to invest, and which sectors to invest.

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4. Gautam Mathur: all less developed countries are not alike.

• Some have surplus labour, others are deficient in labour, some have achieved some level of development and capital formation.

• So a single development model cannot be applied to all less developed countries.

• Economic development consists of transforming a poor country using inferior techniques, and with low wages, to a developed country with superior technology, high wages and standards of living.

• This is the target of development.Prof. Prabha Panth

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Initial conditions: what are the characteristics of the less developed country at start of the development programme?

Target: what is the target of development? Path: which path of development should the

economy follow?• Depending on initial conditions and target, the

path of development can be decided.a) Choice of goods – which goods to produce, and b) Choice of techniques, which techniques to use on

the path• Planned economy

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Initial conditionsW Pl CW Pl Pl

TargetW LM CW H LMW H H

Path of development

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Mathur suggested various Strategies of development, based on initial conditions of different underdeveloped countries.

1. Wage Goods Strategy: for countries that have absolutely no industrial development at the starting point, and huge reserves of labour. Importance is given to labour intensive methods of producing capital

2. Mechanised Light Machinery Strategy: some economies have labour shortage, and some economic development. Can use mechanised methods of production on path. (e.g. former USSR)

3. Heavy Strategy: Some amount of labour surplus, here priority is given to growth of Heavy sector goods on the path, using labour intensive techs to produce C-goods.

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• All three strategies are steady growth paths.• Wage rate is kept constant, till the target is reached.• Equality in consumption is assured.• Balanced growth – with no shortages or surplus, full

use of capacity and goods.• No luxury goods production till after reaching the

target. • Maximum plough back of Heavy sector goods into

their own reproduction. • Maximisation of growth rate and minimisation of

time needed to reach the target.

Prof. Prabha Panth