Classical Theories of Economic Growth and Development

1. Rostow’s Stage-of-Growth Model of Development

− Introduced by Walt W. Rostow, an American economist.
− States that a developing country undergoes 5 stages of growth towards becoming a
developed country.

1st stage: Traditional Society

– people are living a primitive life, no technology, everything is agriculturally-based.

Working hard still results to low productivity due to lack of knowledge, lack of science and
technology.

2nd Stage: Preconditions to Take-off

- Slowly, the economy is changing into industrial sector.

3rd Stage: Take off

- Characterized by urbanization
- People are moving to the cities (rural-to-urban migration)

4th Stage: Drive to Maturity

- Characterized by economic growth

- Focuses on diversification and expansion.
- Workforce becomes more skilled due to technological demands.

5th Stage: Age of High Mass Consumption

- Characterized by economic development

- High-standard of living
- People can afford to buy luxury items.

2. Harrod-Domar Growth Model

- Introduced by Roy Harrod and Evsey Domar
- Argues that economic growth depends on 2 key factors: capital investment & level
of productivity
- Assuming a closed economy, the country does not engage in international trade.
- Focused on savings, investment, capital stock, and economic growth.
- Economic Growth (g) is calculated through Savings (s) divided by Capital-Output
Ratio (k).
- Interpretation:
o If actual growth rate < the required growth rate, the economy is not
generating enough output to absorb all available resources (capital & labor),
which may lead to unemployment or underutilization of resources.
 o If actual growth > the required growth rate, the economy is growing faster
than what is deemed necessary to maintain stability in employment and
prices, which may lead to inflation.
o If the growth rate = the required growth rate, this steady state helps in
maintaining stable employment conditions. Also, the economy is effectively
utilizing its resources- both labor and capital). Lastly, the economy is
sufficient to support the desired growth rate without causing imbalances,
ensuring that the capital stock grows at a pace that matches the growth of
output.
- Too idealistic since this cannot be applied in real-life.
3. Structural Change and Patterns of Development
- Change in the structure of economy.
- Movement of resources (capital and labor) from traditional and low-productivity
sectors (like agriculture) to more modern and high-productivity sectors (like
manufacturing and services).
- This shift is driven by technological advancements, changes in consumer demands,
and shifts in comparative advantage.
4. Lewis Theory of Development
- Part of structural change, but states that economic growth is initiated through a
structural shift focusing on the transfer of surplus labor from traditional to industrial
sector.
- Uses the dual-sector model: agricultural and industrial
- Surplus labor:
o The agricultural sector considers surplus labor as a large pool of
underemployed and unemployed labor due to low productivity.
o Industrial sector considers surplus labor should be transferred from
agriculture to industrial where it can be absorbed into higher-productivity
activities.
5. Neocolonial Dependence Model
− Focuses on how historical colonial relationships continue to influence economic
structures and dynamics in the post-colonial era.
− In the global economic system,
i. Colonies will be the suppliers of raw materials and agricultural products.
ii. Colonizers will take control of the industrial production and value-added
activities.
- Creates dependency relationship:
o Developing countries (colonies) will rely on exports of raw materials sold at
low prices.
o Developed countries (colonizers) will focus on importation and selling it at
higher cost.
6. The False-Paradigm Model
− Part of dependency relationship – argues that the colonies’ lack of development is due
to incorrect models and misguided advice from the colonizers.
 − the concept of “one size fits all” cannot be applied: strategies/policies implemented in
the developed country may not be effective to the developing country since the two has
different economic structures.
7. The Dualistic Development Thesis
- examines the existence of dual economic structures.
- There is a gap between the agricultural and industrial sectors, and that gap is
widening in terms of income levels, productivity, technological advancement, and
access to resources.
8. Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches
- challenges the traditional role of the state in directing economic activity.
o Free Market - there is minimal government intervention in the economic
activities. Private sectors can determine their prices considering the demand
and supply forces.
o Public Choice - political decision-making process, emphasizing self-interest,
incentives, and the behavior of individuals and groups within the
government. Politicians and voters are viewed as rational actors who
respond to incentives and seek to maximize their own utility or welfare.
2 Factors
1. Economic factors - capital, infrastructure raw material, labor, and the
market) - w/out these, business can’t grow and earn profit.
2. Non-Economic factors - (social and political) - culture or the law that
governs the economic activities.
o Market -friendly Approaches - seeks to integrate market principles into
policymaking while acknowledging the need for government
intervention to correct market failures and ensure fairness. -
encourages collaboration between government and private sectors to
achieve public policy goals efficiently.
9. Traditional Neoclassical Growth Theory
- it assumes the law of diminishing returns (states that as investment increases, the
rate of profit decreases, other variables remain at constant).