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.
4-Apr-13 Prof. Prabha Panth 2

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

4-Apr-13 3

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?


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.


• 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.

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.


• 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.


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”.

Capital formation
Capital 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.


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.


• 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.


Theories of Development
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.

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.”


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 Society
b) The Pre-conditions for take-off into self-
sustaining growth – 10-50 years
c) The Take-off
d) The Drive to Maturity – stabilising growth rates
e) The Age of High Mass Consumption – luxury
standards of living for the population.

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.

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.


 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

Target
W LM  C
W H  LM
W H H

Initial conditions
W Pl  C
W Pl  Pl

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.


• 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.


Development models

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